Invalid HMRC notices and estoppel by convention

The Supreme Court has held that a taxpayer can be prevented from relying on the failure of HMRC to properly serve notice of an enquiry by estoppel by convention: Tinkler v HMRC [2021] UKSC 39. The Court accepted that the actions of the taxpayer’s authorised representative in accepting and engaging with the enquiry prevented the taxpayer later arguing that the enquiry was not valid.

The decision is an important one in the context of tax disputes and highlights the importance of raising objections (particularly to formalities) at an early stage. The dangers of allowing a shared assumption to go unchallenged is that this may give rise to a defence of estoppel by convention in some (albeit perhaps limited) circumstances.

Background

The case concerned the tax affairs of Mr Tinkler, who had provided HMRC with a Form 64-8 confirming that HMRC were entitled to engage with his accountants, BDO, in relation to his tax affairs.

Following the submission of his tax return for 2003/4, HMRC decided to open an enquiry in relation to that return. Unfortunately, the letter notifying the taxpayer of the decision to open an enquiry was sent to a previous address of Mr Tinkler and not the one that had been provided to HMRC by Mr Tinkler and BDO. As such, the taxpayer did not receive the letter. However, HMRC also sent a copy of the letter to BDO informing them that an enquiry had been opened. BDO responded by acknowledging receipt of the letter to it and confirming that BDO would respond to the questions raised.

HMRC subsequently issued a closure notice requiring payment of £700,000 in tax, which the taxpayer appealed.

Before the FTT, in addition to the arguments made in respect of the substantive appeal, the taxpayer argued that the enquiry was not validly opened since he did not receive the necessary notice of the enquiry as required by TMA 1970 s.9A. This issue was not however raised until shortly before the FTT hearing. On this issue, HMRC argued that:

• Notice had been validly given to his accountants and they were his agent pursuant to the Form 64-8.
• In any event, the taxpayer was prevented by the principle of “estoppel by convention” from arguing that he had not received notice of the enquiry.

The FTT held that, since the taxpayer had actual knowledge of the enquiry within the timeframe for the issue of the enquiry notice that was sufficient for the purposes of s.9A, but, in any event, the taxpayer was prevented by the principle of estoppel by convention and it would be unconscionable for him to go back on the shared mistaken assumption that a valid enquiry had been opened.

The Upper Tribunal reversed the decision of the FTT on those two points, holding that although estoppel by convention did not apply, valid notice had been given to BDO as the taxpayer’s agent.

The Court of Appeal allowed the taxpayer’s appeal. It held that Form 64-8 did not entitle HMRC to give valid notice of the enquiry to BDO as the taxpayer’s agent. Form 64-8, taken together with other HMRC materials, made it clear that valid notice must still be given directly to the taxpayer. The Court also agreed with the UT that estoppel by convention did not apply. In particularly, the shared mistaken belief had been induced by HMRC’s incorrect representation to BDO that a valid enquiry had been opened and in those circumstances neither BDO nor the taxpayer had accepted the necessary responsibility for the common assumption and it would not be unconscionable to allow the taxpayer to go back on that assumption.

Decision of the Supreme Court

Before the Supreme Court, HMRC’s only ground of appeal was that the taxpayer was not estopped, under estoppel by convention, from denying that a valid enquiry under section 9A TMA 1970 had been opened.

As a preliminary point, the Supreme Court considered the impact of the Form 64-8 arrangements. The Court noted that, irrespective of the issue of whether BDO had actual or apparent authority to receive the notice of enquiry, so far as HMRC were concerned BDO clearly had apparent authority to represent Mr Tinkler in the enquiry. Accordingly, for the purpose of estoppel by convention, the actions and beliefs of BDO were to be properly attributed to the taxpayer.

The Court reviewed the case law on estoppel by convention and in particular its application in a non-contractual context in the case of Benchdollar [2009] EWHC 1310. The Court has reaffirmed the principles set out in that case, as amended by Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023.

The Court indicated that the main requirements for the operation of the principle are that the person raising the estoppel (C) must know that the person against whom the estoppel is raised (D) shares the common assumption and must be strengthened, or influenced, in its reliance on that common assumption by that knowledge; and D must (objectively) intend, or expect, that that will be the effect on C of its conduct crossing the line so that one can say that D has assumed some element of responsibility for C’s reliance on the common assumption.

Applying those principles to the facts of this case, the Court held that HMRC were entitled to rely on estoppel by convention. The Court noted from the earlier case law that, it is not a bar to estoppel that HMRC initiated the mistake or was careless in relation to that mistake or induced the other party’s mistake by a misrepresentation. The Court of Appeal had regarded those factors as highly relevant to its decision and the Supreme Court held that, in doing so, this gave those factors far too much weight. On the facts, it was largely irrelevant that HMRC may be said to have initiated the common mistake by a misrepresentation and to have been careless in doing so.

More fundamentally, the Supreme Court disagreed with the Court of Appeal that BDO did not endorse or affirm the truth of the statement. HMRC believed, mistakenly, that it had opened a valid enquiry because the necessary requirement of giving the taxpayer a notice of enquiry had been complied with. When BDO replied to HMRC, it was making the same mistake as HMRC in thinking that a valid enquiry had been opened because it too thought, by reason of the copy letter, that the necessary requirement of giving the taxpayer a notice of enquiry had been complied with. There was therefore a common mistaken assumption that a valid enquiry had been opened. BDO’s conduct crossed the line because, by its replies and conduct, it was indicating to HMRC that it too believed, and was acting on the belief, that a valid enquiry had been opened. This was not a case where BDO was simply repeating back to HMRC the mistake/misrepresentation (that the notice had been validly served). BDO’s conduct went further than that and BDO had wide apparent authority to deal with HMRC on behalf of the taxpayer. In doing so, BDO had “assumed some element of responsibility” for the common assumption and for HMRC’s reliance on it.

The Court also considered that it would have been unconscionable for the taxpayer to rely on its defence. “The [taxpayer] knew of HMRC’s enquiry in November 2005. At that time, Mr Tinkler could have informed HMRC that no notice of enquiry had been received by him. That would have left HMRC with sufficient time, within the 12-month deadline, to issue a replacement notice of enquiry. But [the taxpayer] did not do that. In those circumstances, it may be thought particularly unconscionable for him to raise this point for the first time over nine years later.”

Nevertheless, the taxpayer submitted that, even if estoppel by convention was in principle applicable, it could not apply in this case because it would “outflank the protection given to taxpayers by the requirement to give the taxpayer notice of an enquiry laid down by section 9A TMA”. The Court rejected this argument on the basis that the provisions of the TMA are merely permissive as to the method of giving notice of an enquiry. As such, an estoppel by convention, by which HMRC and the taxpayer operated on the basis that a valid enquiry had been opened, did not undermine the purpose of the Act.

Comment

The decision of the Supreme Court is an important one that reiterates and clarifies the application of the principle of estoppel by convention in non-contractual contexts. In particular, it highlights that it is no bar to the defence that the shared mistaken assumption has been caused by the initial mistake of the person seeking to rely on it.

It is perhaps too early to say whether we will see an increasing use of this defence by HMRC in other areas. However, in highlighting the availability of the defence, the decision also highlights the importance for taxpayers and advisers to tread carefully where there are concerns over the validity of HMRC’s actions so as not to give rise to the required shared mistaken assumption at the heart of the estoppel principle.