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28 January 202217 minute read

Tax disputes in 2021: Beware the clever procedural skirmish

This article was originally published in Tax Journal, Issue 1557 on 10 December 2021 and is reproduced with permission from the publisher.

2021 was a year when a number of battles were fought in the courts about procedural, preliminary or jurisdictional matters. Let’s look at some of the winners and losers.

Preliminary issue hearings: Mehrban

It is common for a tax dispute to comprise a number of separate issues. In some cases, one issue on its own can be determinative of the whole case – in the sense that if a party wins that knockout point then the other issues simply do not matter. Seeking a trial of such a ‘preliminary’ issue on a standalone basis, with the rest of the case paused, offers an opportunity to save a lot of time and money. If the single issue does not dispose of the case, however, the rest of the issues then need to be heard, adding to the overall time frame for resolution and with some duplication of resources.

In Mehrban [2021] UKFTT 53 (TC), the taxpayer contested a number of discovery assessments. The First-tier Tribunal (FTT) noted that HMRC has the burden to prove that a proper ‘discovery’ had been made and, if successful, the burden then shifts to the taxpayer to disprove the amount of the assessments.

In respect of discovery, the taxpayer argued that the legislation required HMRC to act promptly on making a ‘discovery’, the apparent discovery in this case being ‘stale’ by the time HMRC came to act. The FTT agreed with the taxpayer that the discovery was stale, finding that such a conclusion meant ‘the other issues thrown up by this appeal’ did not need to be decided. In reflections at the end of the decision, the FTT noted that a lot of time and money would have been saved had the question of discovery been heard as a preliminary issue, rather than wrapped up with all the other issues in the case. It exhorted other tribunals to use such a case management tool more judiciously.

The problem for Mr Mehrban, however, was that the concept of ‘staleness’ itself was the subject of ongoing litigation in the higher courts. The Court of Appeal had decided it existed at this time, but the issue was subject to appeal in a case going before the Supreme Court – Tooth [2021] UKSC 17. Some three months later, the Supreme Court held that there was no warrant for reading a need for HMRC to act promptly into the discovery legislation, the only matter of time of relevance being the prescribed maximum time limits for making assessments. Mr Mehrban’s joy was short-lived.

This is not to say that the encouragement of the FTT in Mehrban to direct preliminary issue hearings was misplaced. It is however worth noting three things.

First, it is perhaps not wise to pursue a preliminary issue where the legal test to be applied is not yet settled law.

Second, the preliminary issue was on a procedural matter – one of time limits, not a substantive question in the case. The tribunal drew a parallel with the civil courts where preliminary issue hearings in respect of limitation are the rule, rather than the exception – but this does not mean that one cannot find good cause for splitting out a substantive issue to be heard as a preliminary issue.

Third, time limit disputes in tax often involve a reasonably detailed appreciation of the underlying tax liability – i.e. one needs to broadly identify the ‘insufficiency’ of tax to evaluate whether the taxpayer gave sufficient disclosure, or acted carelessly or deliberately in bringing about the inaccuracy. This can make it difficult to streamline the hearing by excluding evidence and argument on the underlying tax liability. This may however be managed by inviting the FTT to decide the issue on the assumption that HMRC’s best case has been proven on the facts.

Narrowing issues in enquiries: Eastern Power Networks

With many anti-avoidance tests in the UK tax code, there are two elements: the need to identify arrangements which meet formal conditions and the need to identify the purpose of those arrangements. The identification of purpose requires detailed fact-finding, going ‘behind the curtain’ to understand not just what the arrangements do but why they were put in place. This is an intrusive enquiry and can be very expensive for the taxpayer to deal with.

In Eastern Power Networks [2021] EWCA Civ 283, the taxpayer disputed the application of a targeted anti-avoidance rule which potentially chops the amount of ‘consortium relief’ available in half. HMRC sought information about the reason the arrangements were put in place. The taxpayer applied to the FTT for a direction that the enquiry should be closed on the basis that, on the taxpayer’s interpretation of that rule, the arrangements did not meet the conditions in the anti-avoidance rule, making the purpose behind the arrangements academic. If that interpretation was right, HMRC was not permitted to request any information as to purpose or prolong the enquiry any further.

The FTT decided that it had jurisdiction to decide the interpretation of the legislation as part of the closure notice application, based on its reading of Vodafone 2 [2006] EWCA Civ 1132. Although a dispute about whether HMRC could prolong its enquiries, determination of the appeal was in effect the same as a trial about a preliminary issue. Indeed, in a parallel world where the taxpayer had yielded to the request for information, and HMRC had closed the enquiry by invoking the anti-avoidance rule, it may have been open for the FTT to direct that the interpretation of the conditions should be tried on a preliminary basis. The taxpayer’s tactical calculation was that running these issues as part of a closure notice application meant that the taxpayer saved on the time and cost of disclosure around purpose, not just a trial over what that disclosure would reveal.

Having agreed to decide these interpretive points, the FTT decided them in favour of the taxpayer. The Upper Tribunal (UT) and Court of Appeal however sided with HMRC – with the Court of Appeal giving a very firm steer that the FTT should avoid using closure notice applications as a means of deciding points of law arising in the course of an enquiry. Whilst it agreed that the FTT had the jurisdiction to do so, it noted that Vodafone 2 was ‘a very particular instance’ and that taxpayers ‘should not be encouraged to pick and choose which information they provide and then ask the tribunal to decide the applicability of one element in the hope that a ‘quick win’ will bring the rest of the enquiry to a halt’.

The court made three main criticisms:

  • It wryly noted that a great deal of time and money had been expended by the taxpayer in what it had thought would be a faster path to final resolution of the enquiry – but HMRC had in the meantime identified arguments under other legislation to do the taxpayer down, so the interpretation of the conditions was no longer capable of being a knockout blow anyway.
  • It pointed out that the courts had been asked to apply the statutory provision in the absence of clear findings of fact – albeit, in the context of the decision, this observation likely goes more to the management of this case rather than being a reason not to have embarked on the case at all.
  • It warned of the ‘choppy waters’ of res judicata if the FTT had found against the taxpayer on the statutory interpretation and the taxpayer had tried to reopen the points in a substantive appeal based on facts emerging during the course of the rest of the enquiry.
Procedure with collateral purpose: Vitol Aviation Ltd

Vitol Aviation [2021] UKFTT 353 (TC) also concerned an application to the tribunal for a direction that HMRC must issue a closure notice. However, the taxpayer had an ulterior motive for applying for such a direction. Its principal dispute was over a potential charge under the diverted profits tax (DPT) regime, which has a rate of tax higher than that under the corporation tax (CT) regime. The DPT charge does not apply to any profits taken into account in an assessment to CT which is included in the taxpayer’s CT return before the end of the DPT charging notice ‘review period’.

If Vitol had amended its return itself to make such a transfer pricing (TP) adjustment, that would have amounted to it accepting final liability. However, it and HMRC were poles apart on what profits should be attributed to the UK under TP rules. Vitol identified an alternative route. If HMRC closes an enquiry, it must amend the taxpayer’s return in order to give effect to its conclusions. The DPT charge melts away, but with the crucial difference that the taxpayer is left with a right of appeal against the amendment, thus sidestepping the DPT regime without having to accept a final liability.

One of HMRC’s grounds for defending Vitol’s application to close the TP enquiry was that, if it were required to issue a closure notice prior to the end of the DPT review period, that would frustrate the clear intention of the DPT regime which, HMRC said, was designed to facilitate speedy resolution of TP disputes through the ‘threat’ of a higher rate of tax on profits which are capable of falling under both regimes. TP disputes are notoriously hard to conclude because the answer can be in a range, and if the parties take positions at either end of that range, how do you determine who is ‘right’?

The tribunal found no warrant, either in the DPT regime or in the corporation tax acts, for finding that an ongoing DPT review prevents HMRC from closing a CT enquiry, and found that HMRC had enough information to make up its mind on the TP so directed that HMRC close the enquiry. In an act of some speed, it was announced in Autumn Budget 2021 that – for anyone other than Vitol and any company that had already applied for a direction to close an enquiry before the decision in Vitol was published – the legislation would be amended with immediate effect to prevent CT enquiries being closed where a DPT review period remains ongoing. HMRC will therefore be able to use the DPT ‘loaded gun’ to push companies to make timely, binding TP adjustments, instead of risking that their profits fall under the DPT regime. It is not clear whether HMRC could or will try to appeal the decision in Vitol, so it appears that Vitol and acolytes may have, without the pesky kids there to stop them, got away with it.

With so many moving parts – even around closure notice requirements, time limits and review periods – taking a case on a narrow knockout blow is risky.

Procedural defects in an enquiry: Tinkler

The Tinkler case ([2021] UKSC 39) involved a preliminary issue on a ‘technical point’ over whether HMRC had properly given notice of enquiry under TMA 1970 s 9A where the notice had been sent to the taxpayer’s previous address.

Importantly, HMRC had copied the notice to the taxpayer’s tax agent, BDO, who had discussed the enquiry with the taxpayer prior to the enquiry window closing and engaged in correspondence with HMRC ostensibly acknowledging that the return was subject to a s 9A enquiry. In fact, it was not until a couple of months before the FTT hearing that Mr Tinkler amended his notice of appeal to argue that no enquiry had been properly opened (and thus that the closure notice and amendment to his return was of no legal effect). He sought and was granted a direction that this issue be decided at a preliminary hearing. The case eventually came before the Supreme Court. By that stage, HMRC had accepted that it was wrong in its first argument that a valid notice had been given because BDO had authority to accept notice on behalf of its client, and the only issue to be determined was whether the taxpayer could be ‘estopped’ from now relying on the absence of a valid enquiry under the principle of ‘estoppel by convention’.

The leading case in the development of the law of estoppel outside typical private law contractual disputes is Benchdollar [2009] EWHC 1310 (Ch). The Supreme Court differed from the Court of Appeal in its interpretation and application of the principles set out in that case. The core question was whether BDO (acting under a broad agency for the taxpayer under form 64-8) had by its conduct ‘crossed the line’ and positively affirmed HMRC’s mistaken assumption that an enquiry had been properly opened, with effect that the parties were by then operating under a common assumption that an enquiry had been validly opened. Once a party has crossed that line, it then becomes a question of whether the other party has relied to its detriment on that common assumption and whether it would be ‘unconscionable’ for the party crossing the line then to later resile from the common mistaken assumption, either because one party enjoys a benefit or the other party suffers harm. In his concluding remarks in a judgment finding for HMRC, Lord Burrows expressly highlighted that the law of estoppel is there to stop technical points like this one from succeeding, especially when being run by a party who has not suffered any prejudice.

Justiciability of matters raised after closure notices: Shinelock Ltd

The substantive issue in this appeal (Shinelock Ltd [2021] UKFTT 320 (TC)) was whether a payment made to Shinelock’s shareholder could be deductible as a non-trading loan relationship deficit (NTLRD) and used to offset a gain realised by Shinelock on the disposal of property. HMRC had sought a strike out of the taxpayer’s appeal on the basis that the NTLRD claim had been made after the closure notice had been issued so the FTT had no jurisdiction to take it into account in what was an appeal against the amendments made by the closure notice and that, in any event, the claim had been made out of time and HMRC had not exercised its discretion under CTA 2009 s 460(1)(b) to accept it being made late.

Dealing first with whether the claim had been made out of time, the FTT found that the taxpayer’s correspondence with HMRC about the NTLRD was enough to meet the requirements for the making for a formal claim, and that HMRC by its conduct had exercised its discretion to accept a late claim.

On whether the FTT had jurisdiction to consider the claim in the appeal, the FTT decided against HMRC primarily on the ground that the conclusions stated by HMRC should be read broadly. HMRC had concluded that the company was chargeable to tax, to which it was implicit that there were no reliefs or losses of any description available to offset the gain – so there should be nothing to stop the taxpayer from challenging the assessment to tax on the basis that the gain was offset by the NTLRD claim. The FTT also noted that the NTLRD claim had been made during the statutory review period following the closure of the enquiry. That regime requires HMRC to restate its ‘view of the matter’ before offering the taxpayer a right of review. The regime does not say that new points cannot be raised. The taxpayer had by then made the NTLRD claim and HMRC had expressly addressed the NTLRD arguments raised by the taxpayer when restating its view of the matter, so HMRC had taken the claim into account in the decision which then went before the review officer, who upheld it. It was thus part of the conclusion HMRC had reached at the end of its enquiry and a matter properly before the FTT in the appeal.

Avoiding parallel judicial review proceedings: Zeman

An area where some uncertainty still remains is when a taxpayer can raise public law arguments in a tax appeal before the FTT. One of the most common public law complaints of the taxpayer is that HMRC has engendered a ‘legitimate expectation’ that it would act a certain way, and it should be stopped from resiling from that position even if this might mean it fails to assess tax which might otherwise be due.

Public law points are capable of being raised in judicial review proceedings commenced before the Administrative Court. Such action is not ‘as of right’: the court must give the complainant permission to bring the action on the basis that it has an arguable case. This necessarily front loads a case because the substantive issues and evidence have to be fully articulated from the start. In standard ‘as of right’ litigation, issues and evidence are developed as the action proceeds.

In addition, judicial review must be commenced ‘promptly’ (and in any event within three months) and, being a remedy of last resort, the Administrative Court might deny permission or at least stay proceedings where the taxpayer’s principal remedy lies in disproving the liability in a tax appeal.Such time, cost and uncertainty would be saved if public law matters are capable of being raised in the tax appeal itself. Whilst it has been firmly established that the FTT does not have the Administrative Court’s general supervisory function (i.e. to look at whether HMRC’s conduct meets the expectations placed on all public bodies), close examination is needed in each tax appeal to see whether the relevant statutory provisions in that appeal give the FTT specific statutory jurisdiction to consider supervisory points.

Tinkler and Shinelock show that arguments on technicalities will not carry much truck unless there a serious sense of prejudice or an issue about fair play.

In two leading cases, Oxfam [2009] EWHC 3078 Ch and Noor [2013] UKUT 71 (TC), the taxpayers won and lost their respective wish for public law points to be heard. Reviewing these cases, plus two leading Court of Appeal authorities on use of ‘best judgement’ by an officer when making an assessment, the UT in KSM Henyrk Zeman [2021] UKUT 182 (TCC) held that the FTT has jurisdiction to consider public law points unless the statutory provisions expressly or by implication do not allow it (so slightly shifting the burden in the taxpayer’s favour). Zeman itself concerned VATA 1994 s 83(1)(p), which allows an appeal against ‘an assessment’ or ‘the amount of such an assessment’ – so necessarily involves looking at the exercise of the power to assess as a standalone issue. Furthermore, HMRC’s power to assess in the circumstances of this case was discretionary – and so the UT decided the FTT necessarily had jurisdiction to consider whether public law requirements, including legitimate expectation, had been met when that discretion was exercised. The UT made it clear that it was not finding that the FTT has a general supervisory jurisdiction, and of course the decision could be appealed, so for now a twin-track approach, even in a similar case, remains the safest option.


Tax enquiries and disputes take up enormous resource and, where available, ‘short-cuts’ to resolution should be pursued. But with so many moving parts – even around closure notice requirements, time limits and review periods – taking a case on a narrow knockout blow is risky. Tinkler and Shinelock also show that arguments on technicalities will not carry much truck unless there a serious sense of prejudice to a party or an issue about fair play. In most cases, the taxpayer and HMRC have no choice but to face up to each other on the core, substantive issues between them in their entirety.