Closure notice wording did not prevent HMRC changing tack

Closure notice wording did not prevent HMRC changing tack

Mon 01 Dec 2014

Enquiries into self assessments are concluded by a closure notice with no adjustment required, or by HMRC stating their conclusions and amending the self assessment.  The taxpayer can appeal against amendments made by HMRC. In Fidex v HMRC the Upper Tier Tribunal (UTT) considered whether HMRC were permitted to challenge a self assessment on grounds not mentioned in the closure notice.

Background to the case

Fidex was a stand alone SPV used by BNP Paribas in creating derivatives.  It had some legacy assets and Swiss Re came up with a scheme which produced a very large loan relationship deficit which, by bringing Fidex into the BNP Paribas group, would be offset against BNP’s UK members’ profits.  Under the plan in 2004 Fidex issued classes of preference shares with rights linked to the legacy bonds held by Fidex.   In 2005 Fidex started to report under IFRS and because of the preference share rights, under IFRS only 5% of the value of these legacy bonds appeared in its balance sheet.  Fidex claimed that under the loan relationship transitional rules the 95% that “disappeared” should be a loss as at the beginning of 2005, its first IFRS period.  The FTT held that the transitional provisions operated as claimed by BNP Paribas.  HMRC abandoned their challenge against that decision.  Instead they asserted that the loan relationship unallowable purpose test applied.

Could HMRC expand its challenge?

HMRC challenged the claimed loan relationship debit and stated that the conclusion of their enquiry was that the treatment did not accord with a specific legislative provision (FA 1996 sch 9 para 19A).  The taxpayer appealed.  Whilst the case was underway at the First Tier Tribunal, HMRC sought to add another basis of challenge as an alternative: that the loan relationship unallowable purpose rule in FA 1996 sch 9 para 13 denied the debit because it was attributed to a main tax avoidance purpose. Fidex objected to HMRC raising new grounds for their challenge, claiming that the terms of the closure notice prevented HMRC from doing so.

However, The Upper Tribunal reviewed the FTT’s finding in favour of HMRC, and upheld it.  In the circumstances of Fidex HMRC were not barred from mounting a challenge using the unallowable purpose rule (in para 13(now CTA 2009 s441).  As an aside, being entitled to mount this alternative attack was vitally important to HMRC as their challenge on the para 19A point was thrown out by the FTT, with HMRC accepting the FTT decision on para 19A.

The leading case on the permissibility of HMRC expanding their grounds of challenge over and above that specified in the closure notice is the Supreme Court decision in Tower MCashback LLP.  In that case HMRC had challenged the scheme on the basis that the expenditure was incurred for the benefit of a third party.  Once the appeal was underway HMRC added another basis of challenge: that the claimed amount of expenditure had not been incurred.  The Court permitted this and the UTT analysed their reasoning and said the test was that the subject matter of the enquiry must not change – in Tower MCashback this was the LLP’s entitlement or otherwise to capital allowances.  That HMRC advanced a different basis of challenge was neither here nor there.

In Fidex the subject matter was the claimed loan relationship debit.  Although HMRC had not mentioned para 13 in the closure notice, the UTT stated that as the restriction on HMRC was by reference to the subject matter (the allowability or otherwise of the claimed debit), mounting para 13 arguments was not extending the closure notice, merely putting forward another legal or factual challenge supporting the amendment in the closure notice.

In addition, the closure letter itself also stated ‘Further analysis may reveal additional grounds supporting the conclusions I have reached.’  The UTT considered this wording was intended to act as a general reservation to allow HMRC to challenge on any other grounds on which the debit could be disallowed.


There are, however, limits on HMRC expanding the scope of challenge.  In Fidex the UTT was clear that an appeal against an enquiry notice “does not permit HMRC to launch a new roving enquiry into a return” (see paras 62 and 76 of UTT decision).

However the Fidex case shows that the wording of a closure notice does not impose a straightjacket on HMRC as regards the basis of HMRC’s challenge.

In contrast, a case where HMRC were unsuccessful and it was held they were going beyond the closure notice was the Bristol & West case.

For an analysis of the decision relating to Fidex’s case for a loan relationship debit see our separate article ‘A scintilla is enough to trigger a loan relationship unallowable purpose’.


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