Policy paper

Tax enquiries: closure rules

Published 5 December 2016

Who is likely to be affected

Some individuals, partnerships and businesses whose tax affairs are under enquiry where there is complexity, avoidance or large amounts of tax at risk.

General description of the measure

The measure allows HM Revenue and Customs (HMRC) and its customers to conclude discrete matters in an enquiry into a self-assessment (SA) or Corporation Tax self assessment (CTSA) tax return (and, in due course, the equivalent digital obligation), where more than one issue is open. This will be done by issuing a new Partial Closure Notice (PCN) which can be issued ahead of the final closure of an enquiry. HMRC will issue PCNs in enquiries where a customer’s tax affairs are complex or where there is avoidance or large amounts of tax at risk.

From the date the legislation comes into force, for both existing and new enquiries, HMRC will be able to issue PCNs. Customers will also be able to ask HMRC to issue a PCN or ask the Tax Tribunal to direct HMRC to issue a PCN.

The issue of PCNs by HMRC will be overseen by existing governance procedures, for example the Dispute Resolution Board.

Guidance on the use of PCNs will be issued in advance of the legislation coming into force.

Policy Objective

The measure will give HMRC and its customers greater certainty about tax owed on individual discrete matters without having to wait for all matters in a tax enquiry to be resolved. It will make it harder for individuals to delay proceedings and will level the playing field so that all customers are treated equally and fairly. For example, a customer who uses multiple avoidance schemes will be treated in the same way as a customer with less complex affairs. In addition the measure will help customers to more effectively plan their cash flow through earlier certainty and result in earlier payment to the Exchequer of tax due.

Background to the measure

The measure was announced at Autumn Statement 2014 and consulted on 18 December 2014.The consultation proposed a power for HMRC to close discrete aspects of a tax enquiry. As summarised in a responses document published on 28 September 2015, customers requested a reciprocal power on the basis of fairness. The government will provide customers with the right to ask for a PCN.

Detailed proposal

Operative date

The measure will have effect from Royal Assent to Finance Bill 2017.

Current law

Current law relating to enquiry closures is contained in sections 28A and 28B Taxes Management Act 1970 for individual and partnership tax returns, and in section 32, Sch18 Finance Act 1998 for company tax returns.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to enable HMRC to issue a PCN in relation to discrete matters in an open tax enquiry. HMRC will be able to issue a PCN either in agreement with the customer, at its own discretion, or when directed to do so by the First Tier Tax Tribunal (FTT) on application by a customer.

A PCN will almost always be followed by HMRC making an amendment to the tax return that may mean more tax is payable. Customers will have a right of appeal to the FTT to both the PCN conclusions and the amendment to a tax return. Customers will also be able to apply for postponement of any of the additional tax payable where they think it is excessive. Tax repayments arising from a PCN need not automatically be repaid, e.g. where tax is due in respect of other issues not covered by the PCN.

Where HMRC is directed to issue a PCN by the FTT on application of a customer, the PCN and amendment will also be appealable to the Tribunal. Postponement of additional tax may also be sought. When the enquiry is completed, HMRC will issue a Final Closure Notice and make a final amendment to the return (or, in due course, the equivalent digital obligation) amendment, taking into account any PCNs and amendments to returns already issued.

Summary of impacts

Exchequer impact (£m)

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022
-115 -20 +50 +170 +215 +180

These figures are set out in Table 2.1 of Autumn Statement 2016 as ‘HMRC: Administrative and operational measures’. These figures incorporate the Exchequer impact of ‘Tax enquiries: Closure rules’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

The measure is not expected to impact on family formation, stability or breakdown.

It is not expected that there will be any impact on individuals or households.

Equalities impacts

It is not anticipated that any particular group with protected characteristics will be adversely affected by this measure.

Impact on business including civil society organisations

HMRC intends to use the partial closure power sparingly into tax return enquiries of individuals, partnerships and companies only where there is complexity, avoidance or large amounts of tax at risk. This measure is expected to have a negligible impact on other businesses subject to tax enquiries and is not expected to increase administrative burden for normally compliant businesses.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure is not expected to lead to any additional resource requirements and will enable HMRC to progress more efficiently enquiries where there is complexity, avoidance or large amounts of tax at risk.

Other Impacts

Justice Impact Test: a small increase in the number of appeals received by the FTT is expected, depending on customer behaviour. A Justice Impact Test has been sent to the Ministry of Justice.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected parties.

Further advice

If you have any questions about this change, please contact Jim Fedigan on Telephone: 03000 547075 or email: jim.fedigan@hmrc.gsi.gov.uk.