Under Section 28A(4) of the Taxes Management Act 1970, taxpayers whose returns are under enquiry may apply for a direction requiring HM Revenue and Customs (HMRC) to issue a closure notice. It is for HMRC to show that there are reasonable grounds for refusing the application. The Upper Tribunal (UT) recently ruled on an appeal by HMRC against such a direction.

HMRC had opened enquiries into the self-assessment returns of three brothers for several tax years. At issue was whether they had benefited from a dividend of £40 million paid in 2003 by a family company in a way that gave rise to an Income Tax charge under anti-avoidance legislation. Two of the brothers, together with the executor of the third brother's estate, applied to the First-tier Tribunal (FTT) for closure notices in respect of the enquiries.

It was common ground that HMRC could request information in relation to an earlier year if it was relevant to an individual's tax position in a later year. However, the FTT concluded that the dividend had not been paid to the brothers and there was no evidence that the funds had been transferred to them or that they had received any undisclosed benefit from them. The brothers had been advised by reputable and well-known advisers who had confirmed that there were no known errors or omissions relating to the dividend in the returns. Finding that HMRC's enquiries had reached a point where an informed judgment could be made, the FTT directed that closure notices be issued.

Challenging that decision before the UT, HMRC pointed out that the reason there was no evidence that the brothers had benefited from the dividend was that they had refused to give details of the recipient. According to HMRC, the logical conclusion of the FTT's decision was that it could not ask for information or conduct enquiries without evidence of undisclosed income. HMRC also observed that just because professional advisers were reputable did not mean they could not be mistaken.

The UT dismissed the appeal. The question was not whether HMRC could check a return, but for how long it could continue its enquiries. The FTT had not overlooked the brothers' failure to provide the information requested by HMRC, and its conclusion that HMRC's outstanding questions did not have a reasonable basis was one it was entitled to reach on the evidence. The weight to be placed on the advisors' reputation was also a matter for the FTT. Overall, the FTT's decision contained no error of law.