How to end a tax investigation (and when to do it)

When tax disputes go on too long, clients understandably want to bring them to a close. One method is to apply to the tax tribunal for a closure notice. Taxpayers are able to apply to the tax tribunal for the issue of a full closure notice covering all aspects or a partial closure notice on a single aspect. Deciding when an application is likely to be successful involves both proactive management of a case, and judgement of where to draw the line.

How courts normally approach closure notice applications is well established in case law:

1.     A taxpayer is protected against unduly protracted enquiries by HMRC- it is for HMRC to show why its enquiries should continue.

2.     The onus is on HMRC to demonstrate proportionality, and that a taxpayer is not being unfairly burdened.

3.     The period required to close an enquiry will vary with the circumstances and complexity but the longer the enquiry, the greater the burden on HMRC to show reasonable grounds for continuing.

4.     A closure notice may be appropriate even if HMRC has not pursued to the end every line of enquiry. What is required is that the enquiry has been conducted to a point where it is reasonable for the officer to make an “informed judgment”.

5.     The Tribunal will judge the extent to which HMRC’s reasonable questions have been answered. If further relevant facts are likely to be available then a closure notice may not be appropriate. The position will turn on the facts and circumstances of each case.

6.     There is an onus on HMRC to balance showing fairness to the taxpayer with reaching a clearly stated conclusion which identifies any tax payable.

Recent Tax Tribunal decisions such as the case of Hitchin have reinforced these principles. Where a tribunal is able to conclude that HMRC’s enquiries have been conducted to a point where it is reasonable for the officer to make an informed decision, HMRC will normally be directed to bring its investigations to a close. This may apply even if HMRC contends that not all of its questions have been answered. If a tribunal finds that a case has already gone on for too long, then it may well find that ‘enough is enough’. Any impression of overall delay will add to the sense that a case should be closed.

Managing HMRC investigations, and when to request their closure is about finding the right balance between cooperation and direction. There can be an art to responding to power.