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Closing windows, opening doors

31 January is significant for a number of reasons, among them being the execution of Guy Fawkes (1606); the launching of the Great Eastern (1858) and the requirement to file tax returns under self-assessment (annual). However it is also significant in that has been (in most cases) the date on which the "enquiry window" for an Income Tax year closes. "Has been", because if the return relates to 2007/8 or later the window closes not on 31 January next but one after the end of the tax year, but (usually) a year after the date on which the return was filed with HMRC. Thus in 2010, for the first time, the enquiry window had in general already closed before 31 January arrived.

What about enquiry notices which are delayed in the post? Are they validly served when they are posted? Or when they arrive? The question was raised at the Special Commissioners as long ago as 1999 in Holly v CIR and happily it was held that if it can be shown that the notice was received outside the enquiry window (though posted within it) the enquiry notice is out of time. With a well-kept record of post received one may therefore smugly tell HMRC in appropriate cases that one is terribly sorry, but the notice was too late to be effective.

However, that may be less of a protection nowadays than it used to be. Formerly, if the enquiry window was closed there was very limited scope for enquiries to be made: HMRC's only recourse was to make an assessment, and that could not be sustained unless the Inspector "discovered" (that is, came to the conclusion on the basis of some evidence) that profits had been understated. And in many cases the Inspector would not be in any position to make a "discovery" until he had made his enquiries into the case. Therefore, the closure of the enquiry window gave (in many cases) real finality and a real degree of protection.

That finality is now illusory. The enquiry powers which our supine Members of Parliament afforded to HMRC in enacting in Schedule 36 to FA 2008 include inter alia a general power to require a person to provide any information which is reasonably required for the purpose of checking the taxpayer's tax position for any year. This effectively means that although the enquiry window may be closed, the back door (as it were) is left permanently open! If HMRC are out of time to make an enquiry into a tax return under the provisions of s9A, they are nonetheless in principle able to serve a notice under Schedule 36 and, should that lead them to "discover" that additional profits should be assessed, to assess them. However, the Schedule 36 notice can be issued only if the information is "reasonably required": can it be "reasonable" to issue a Schedule 36 notice for a year for which the enquiry window has closed and HMRC has no prima facie reason to suppose that profits have been omitted...?

We recall that some years ago there used to be a crime prevention poster warning that "A window is always open to a thief... unless it's locked". Perhaps it should be dusted off...

For help in fending off unwelcome fiscal intruders, contact the the boys in blue at BKL Tax.