The First Tier Tribunal (FTT) made the decision after hearing an appeal from Michael Mabbutt about the circumstances which led up to HMRC sending a closure notice as to the effectiveness of a DOTAS registered tax scheme. [Michael Mabbutt and the Commissioners for Her Majesty’s Revenue and Customs, [2016] UKFTT 306, TC05075].

The sole issue under consideration was whether a valid enquiry notice was served under Section 9A Taxes Management Act 1970 (TMA 1970). While HMRC maintained there was a minor error in the notice which was insufficient to invalidate it, Mabbutt’s legal team sought to argue the error was fatal.

The tribunal heard that on 29 January 2010 Mabbutt submitted his tax return for the year ended 5 April 2009. In response, HMRC sent a letter to him and a similar letter to his agent, both dated 17 January 2011, which included the words: ‘Thank you for your tax return for the year ended 6 April 2009. I am writing to tell you that I intend to enquire into this return.’

Mabbutt’s lawyer argued that HMRC’s letter appeared to attempt to open an enquiry into a non-existent return, because there was no such tax year as the year ended 6 April 2009.

For its part, HMRC said this error was minor and that it did not affect the validity of the notice of enquiry, since it was only one day out and also referred to the correct year. HMRC pointed out that there was surrounding correspondence, particularly correspondence with the promoter of the scheme, which suggested that it must have been clear to Mabbutt which return was under enquiry.

The tribunal judge said the burden of proof was on HMRC to show that a valid notice of enquiry was served, with the tax authorities relying on subsection 114(1) TMA 1970 to correct the error in the letter of 17 January 2011.

While it was clear from the letter that the intention was to open an enquiry into a tax return, the judge said that where a date is fundamental to a  document then that date must be correct. It does not matter whether the error is to refer to another year altogether or to refer to a period which makes no sense in the context of a tax return.

The judge went on to state: ‘For a notice of enquiry to meet the requirements of Section 9A TMA 1970, the return into which the enquiry will be opened must be stated accurately and with sufficient detail for it to be clear which return is intended. The detail as to the relevant return must be correct. ‘The return which was described in the letter of 17 January 2011 is for a tax year which does not exist. We conclude that the disputed notice of enquiry is not in substance and effect in conformity with the intent and meaning of the Taxes Acts.’

As a result, the judge concluded that the letter did not constitute a valid notice of enquiry under Section 9A TMA 1970 into Mabbutt’s tax return for the tax year ended 5 April 2009. Section 114 TMA 1970 does not apply to save the disputed notice of enquiry. Without a valid enquiry notice, there was no enquiry and the purported closure notice has no standing.

Since no enquiry had been opened, and HMRC is now out of time to raise a discovery assessment, Mabbutt’s tax liability for the year ended 5 April 2009 will be settled on the basis of the calculations set out in his tax return for that year. The tribunal heard that the difference between the parties’ calculations of the tax due is approximately £653,000.

In a statement HMRC said: ‘We are disappointed with the tribunal’s decision and are considering whether to appeal. HMRC wins around 80% of avoidance cases that are taken to litigation by the taxpayer and many more settle with us before reaching that stage.

‘We protected over £1bn in April this year alone. We tackle avoidance wherever we see it and litigate where necessary to ensure schemes are defeated and the tax due is paid.’

The FTT ruling Michael Mabbutt and the Commissioners for Her Majesty’s Revenue and Customs, [2016] UKFTT 306, TC05075 is here