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image of rusty alarm clock | accountingweb | UT dismisses HMRC's 'parasitical' investigation into three brothers re £40m dividend
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Decade of enquiries into £40m dividend dismissed

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HMRC has unsuccessfully attempted to keep long-running enquiries open into the tax affairs of three brothers and the fate of a £40m dividend.

30th May 2024
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After investigations into two brothers’ tax affairs that went on for “far too long”, HMRC has unsuccessfully attempted to avoid closure of numerous enquires dating as far back as the 2012/13 tax year. 

In HMRC vs Jonathan Hitchins & others [2024] UKUT 00114, the respondent taxpayers were two brothers (Jeremy and Jonathan) and the executor of the estate of their late brother, Stephen. HMRC’s enquiries related to an overseas trust settled by their father in 1999. The trust held a 100% indirect shareholding in RHG, a company that the brothers were directors but not shareholders of. HMRC’s interest was piqued when it discovered that, in 2003, RHG had paid a £40m dividend into the settlement. HMRC wanted to know who had received the money.  

Having a go

The dividend payment had been disclosed to HMRC between 2006 and 2008 during an enquiry, although the first tier tribunal (FTT) doesn’t specify whose tax return HMRC was enquiring into or for which tax year. That enquiry was closed in 2011 without amendment. 

Having another go

HMRC subsequently opened further enquiries into each of Stephen’s tax returns for the 2012/13 to 2019/20 tax years. HMRC also opened “parasitical” (to use the upper tribunal’s phrasing) enquiries into Jonathan and Jeremy’s tax returns for each tax year between 2017/18 and 2019/20. HMRC’s aim in doing so was to determine whether the brothers had received a benefit from the dividend that was taxable under the transfer of assets abroad anti-avoidance legislation in Part 13, Chapter 2, Income Tax Act 2007. 

Having (yet) another go

During its enquiries into Stephen’s tax returns, HMRC issued no fewer than six information notices. All had been successfully appealed or withdrawn by February 2020. HMRC then issued information notices under s 748 ITA 2007: first to Jeremy in October 2020 and then, in December 2021 to Jonathan and the executor of Stephen’s estate (Stephen had died in August 2021). 

Strikingly, the FTT formed the impression that the HMRC officer issued the s 748 notices because he had “become frustrated with the schedule 36 process: the fact that the taxpayer had rights of appeal, and that he had had to withdraw notices that he had previously given.”

The brothers refused to identify the ultimate recipient(s) of the dividend and applied to the FTT to direct HMRC to issue closure notices for the enquiries. HMRC claimed that the enquiries should remain open because it needed to know whether the brothers had used their position as directors of RHG to arrange for the right to receive the dividend to be transferred to someone overseas or, alternatively, whether any part of the dividend had been paid to the brothers. 

Go fishing

The FTT held that HMRC had been unwilling to acknowledge its errors and had instead rigidly adhered to its initial views of the matter. HMRC had misunderstood the circumstances in which the dividend had been paid in two important respects. 

First, the brothers were not shareholders of RHG nor were they shareholders or directors in any other company in the corporate structure within the settlement. In that light, the FTT found that there was no evidence that the brothers had arranged for the right to receive the dividend to be transferred to someone abroad in any of the relevant tax years. 

Second, the FTT found that HMRC had incorrectly refused to accept that the dividend had been paid to RHG’s UK parent company and not a company overseas. The taxpayers’ advisers had confirmed to HMRC that no benefits had been received from the settlement during the relevant tax years. There was no evidence that the brothers had received an undisclosed benefit taxable under the anti-avoidance provisions.

The FTT therefore directed HMRC to issue closure notices, noting in the process that the enquiries had gone on for “far too long” and agreed with the taxpayers that further enquiries would amount to a “fishing expedition”. 

Just one more go?

HMRC appealed to the upper tribunal (UT) on three grounds. 

First, HMRC argued that the FTT had not explained how it had reached its decision and had not properly considered in its judgment that the taxpayers had refused to provide information about the ultimate recipient of the dividend. The UT thought this was pedantic: just because the FTT didn’t expressly mention in its judgment a factor HMRC considered relevant did not mean that the FTT had not considered it. In any event, the UT concluded that there was no basis to disturb the FTT’s judgment. 

Second, HMRC argued that the FTT had not considered that the taxpayer’s advisers might have been mistaken in telling HMRC that the taxpayers had not received any benefit. The UT understood HMRC’s legal argument to be that the FTT had attached too much importance to the taxpayers’ advisers’ correspondence with HMRC. The UT disagreed – the relevance of the correspondence was a matter for the FTT to determine.

Third, HMRC argued that the FTT had misunderstood the relevant legislation and had therefore not appreciated the relevance of HMRC’s further enquiries. The UT thought that this mischaracterised the FTT’s decision. The FTT had considered HMRC’s view of the law but had been entitled to take the overall view that the enquiries had gone on for too long and should be closed.

The UT dismissed the appeal. The taxpayers will no doubt hope that this ends nearly two decades of continued investigation by HMRC into their tax affairs

Replies (9)

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By FactChecker
30th May 2024 13:46

"HMRC appealed to the upper tribunal (UT) on three grounds" ... all of which can be characterised as "But don't you know who I am?!?"

Thanks (10)
Replying to FactChecker:
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By richard thomas
30th May 2024 15:59

To which the UT's reply was:

"Government Department here doesn't know who it is. Can anyone help it?"

It's not just the UK Revenue. A recent decision of the Irish FOI Commissioner found that an FOI request was handled by 3 different departments of the Revenue Commissioners, which led to one department saying that the information had to be withheld because of all sorts of reasons, while another happily disclosed the same information.

Thanks (6)
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By More unearned luck
30th May 2024 16:42

The enquiry was largely predicated on the inspector's misinterpretation of the information contained in the company's annual return concerning changes in shareholders. See para 27 et seq of the FTT decision.

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By Marlinman
31st May 2024 08:56

Such incompetence and inefficiency should not be tolerated and is probably deliberate so they can charge more interest on any tax due.

Thanks (2)
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By Gerry Brown
31st May 2024 09:05

This long running dispute must have run up a fortune in legal and accountancy fees. We, as taxpayers, will have funded HMRC's costs. Will the taxpayers have had to met their own costs event though they have been "successful"? My very limited experience of dealing with HMRC is that even though it "messes up" on a fairly regular basis, compensation for the financial (and other) impacts of its errors is rarely paid and even when it is, the amounts offered are trivial.

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7om
By Tom 7000
31st May 2024 09:45

On the other hand a lot if tax on 40m.....

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By Slippy
31st May 2024 09:55

But now I want to know who did receive the dividend!

Thanks (2)
Replying to Slippy:
By Nick Graves
31st May 2024 11:18

Accountants and Lawyers. Probably.

Thanks (1)
Replying to Slippy:
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By Deez Nuts
03rd Jun 2024 13:19

Likewise.

If everything was above board you have to wonder why they didn't just share the full information rather than digging their heels in for 20 years. Must have cost them a fortune in representation (but a lot less than tax on £40m dividend income) and who wants 20 years of aggro from HMRC.

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