UT (Tax & Chancery) UT-2024-000024 - [2025] UKUT 00156 (TCC)

We shall adopt the principles described above as to the nature of the test to be applied in considering the validity of the notices of enquiry. In doing so, we are satisfied that the FTT did not err in finding that there was no ambiguity in the letters dated 8 June 2011 to the Appellants and their agent. They were effective notices of enquiry into Return A and Return C.

The intention of paragraph 12 Schedule 10 FA 2003 is plainly that taxpayers should know that HMRC is opening an enquiry into a particular return so that they may put their case to the Revenue (See Sword Services at [71] and Mabbutt at [44]). The document giving notice must enable the reasonable recipient in the position of the taxpayer to understand which return HMRC are intending to enquire into.

No particular form of notice is prescribed by the legislation. A letter does not need to state that it is a notice of enquiry, nor does it need to refer to the relevant legislation – see, for example, Flaxmode (referred to by the FTT)and Portland Gas v HM Revenue and Customs [2014] UKUT 270. This is to be contrasted with other statutory contexts where a particular form is required.

The objective test is to be considered by reference to the particular circumstances of the taxpayer with their wider knowledge of the relevant background facts. There are examples of an otherwise valid notice being invalidated by context, for example Bristol & West and Barclays. There are also examples of an otherwise invalid notice being validated by context, for example Mannai and Mabbutt. All depends on the factual and legal context of the particular case.

Where a taxpayer receives more than one document, the documents should be considered together to see if they would clearly inform the reasonable recipient that an enquiry was being opened into a specific return. Mabbutt provides a useful illustration at [47] of the need to read a document sent to the taxpayer in light of all documents sent. In that case there was one letter to the taxpayer and one to his accountants, Dickinsons:

“…As the Special Commissioner pointed out at para 30 in Flaxmode the intentions of the issuing HMRC officer are irrelevant. The question is whether a reasonable taxpayer receiving the two letters of 17 January 2011 would have understood them as having to be read together and from that composite communication would have understood that they were intended to give the taxpayer notice of HMRC’s intention to open an enquiry into a return. Mr Mabbutt, or to be more precise a reasonable taxpayer, could not reasonably have thought that the copy of the Dickinsons letter sent to himwas a separate document, unrelated to the enquiry and provided for some other purpose. Any dispassionate and reasonable reader of the Mabbutt letter would recognise that it could be fully understood only if read together with the Dickinsons letter; the latter was incorporated by reference into the former…”

An earlier letter may be incorporated by reference into a later letter and vice versa, where the reasonable recipient would recognise that the letters could only be fully understood if read together.

The objective knowledge or understanding of the taxpayer that HMRC intend to open an enquiry must relate to a specific return or specific returns. It is not necessary for the purported notice to identify the return using a reference number that has been allocated to the return. However, it must be sufficiently clear from the document(s) that a specific return is intended as the subject of an enquiry.

There must be sufficient clarity as to the type of notice that the sender intends to give and if that is not clear then the notice will be invalid.

The reasonable recipient can be treated as having a basic understanding of the legal context in which the notice is sent. This does not mean that they have sought or need advice from a lawyer. For example, in Mannai, the recipient was treated as understanding the contract and its clauses. By the same token, the reasonable taxpayer is taken to be aware of the statutory scheme – see Eastern Pyramid Group Corporation SA v Spire House RTM Company Limited [2020] UKUT 199 at [38].

In reading and seeking to understand the notice, the reasonable recipient must consider the documents before them in the context of all the circumstances. They will reject any interpretation of the documents which is too improbable.

Where there are two different interpretations and therefore a potential ambiguity, the ambiguity may be resolved by reference to the factual and legal context so as to remove any reasonable doubt. Ultimately, each case is unique and must be decided on its own facts.

Applying these principles, we are satisfied that the FTT was right to conclude that a reasonable recipient of the 8 June 2011 letters would have understood without doubt that the intention of HMRC was to enquire into Return A and Return C.

The relevant factual and legal context which would have been known to the reasonable recipient of the letters includes:

Mr Chacko submitted that the letters sent to the Appellants on 8 June 2011 could, theoretically, be read in three different ways, each involving an error, mistake or ambiguity in at least one of the letters which could not be resolved:

The Appellants’ case is essentially that the reasonable recipient would know that there was an error in one or both of the letters, but they would not know what the error was or which return(s) were the subject of HMRC’s enquiry.

We accept Mr Elliott’s submission that interpretation (3) is an untenable understanding of the letter to the agent. The agent letter states that the notices are being issued “today” and that “copies of the notices are attached”. The agent letter in referring to enclosing “notices” to the taxpayer was correct because more than one notice can be given by the same document. The reasonable recipient would not expect more than one document to be sent simply because HMRC were opening an enquiry into two returns. They would have no reason to think that HMRC might have made a mistake in failing to enclose a second document.

In our view, interpretation (2) is the only realistic interpretation of the letters, but not that the letter to the agent was wrong when it referred to “notices”. Mr Chacko’s submissions rely on reading the letters in isolation and without the benefit of the context known to the reasonable recipient. The reasonable recipient would have no doubt that an enquiry was being opened into both returns. It would be at the forefront of the mind of the reasonable recipient that, as part of the scheme, they had filed two returns in relation to the purchase and both those returns were the subject of the enquiry.

The letter addressed to the Appellants clearly contains an error or ambiguity as to which of the two returns was the subject of the enquiry. Mr Elliott rightly accepted that this letter in isolation could not be a valid notice of enquiry because it did not identify which return was the subject of the enquiry. However, the recipient would go on to read the letter to the agent, which is incorporated by reference and which referred to both returns. In the circumstances, interpretation (1) is not a realistic interpretation.

Mr Chacko argued that there would still be an ambiguity as to which of the two inconsistent letters could be relied upon by the reasonable recipient: the taxpayer letter referring to “this return” or the agent letter referring to “returns”. We disagree. The FTT rightly rejected the Appellants’ argument that the reasonable recipient would be left in reasonable doubt as to HMRC’s intention. There was an inconsistency between the taxpayer letter and agent letter but the reasonable recipient would understand that the agent letter should be relied upon as communicating that HMRC were enquiring into both returns.

The agent letter was complete and unambiguous on its own terms in that the enquiry was being opened into the “land transaction returns”. It referred to “notices” because there must be a separate notice in relation to each return, but the reasonable recipient would know that a single document could open an enquiry into more than once return. In our view, there is no error in the FTT’s conclusion at [93] quoted above.

Mr Chacko also argued that the FTT erred at [93] in assuming that the reasonable recipient knew that HMRC were likely to challenge the Arrangements and were likely to enquire into arrangements for the acquisition of the property as a whole. He argued that taking into account the taxpayers’ understanding of likely challenges is not a legitimate approach. It is not possible to resolve an ambiguity or fill in information either by reference to inferences about what the recipient would have been expecting the sender to do, by assuming that the sender understands the process and does not make mistakes, or by assuming that whatever the sender should do was actually being done by the letter. He relied on Stobart Group v Stobart [2019] EWCA Civ 1376 for the proposition that a notice should not be construed on the basis of such assumptions.

The issue in Stobart was whether a notice of claim had been made under paragraph 6.3 or paragraph 7.1 of a Share Purchase Agreement (“SPA”). The SPA had a covenant pursuant to which the vendor would pay the company’s tax liability incurred prior to sale but recognised after the sale. Paragraph 6.3 provided that the vendors would not be liable unless the purchaser had given written notice of the claim within 7 years of completion of the SPA. Paragraph 7.1 set out a claims procedure whereby the purchaser or the company had to give 10-days’ notice of becoming aware of a claim by the tax authorities. The High Court at first instance had held that a letter was not an effective notice under paragraph 6.3 but was a notice under paragraph 7.1.:

“40.

As noted above schedule 4 of the SPA draws a distinction between claims that are made by HMRC against SRL and claims that are made by SGL against the vendors. The former may lead to the latter, but they are treated differently in the SPA. Thus, the giving of a paragraph 7.1 notice may give rise to a paragraph 6.3 claim, but it does not necessarily mean that a paragraph 6.3 claim will be made, see for a similar distinction in the nature of the contractual obligations those identified by Cooke J in the Laminates case (above) at [32] and [33].”

The Court of Appeal observed at [43] that the vendors might have expected a paragraph 6.3 claim, but that did not throw “decisive light” on whether the letter was to be construed as a paragraph 6.3 claim. It went on to quote the High Court Judge:

“Whilst no doubt fully expecting a notice under paragraph 6.3, it was not inconsistent with that expectation to receive a notice or a further notice under paragraph 7.1… receiving the paragraph 7.1 notice might only increase the anticipation that a paragraph 6.3 notice would be received soon thereafter.”

In the present case there can be no suggestion that HMRC might have been sending anything other than notices of enquiry pursuant to paragraph 12 Schedule 10 FA 2003. The provision was specifically referred to in the letter to the agent.

The Court of Appeal in Stobart applied Laminates Acquisition v BTR [2003] EWHC 2540, noting at [48] that a compliant notice of claim must make clear that a claim is being pursued, rather than indicating a possibility that a claim may be made in the future.

Mr Chacko also relied on the decision of Judge Elizabeth Cooke in Eastern Pyramid Group Corporation SA v Spire House RTM Company Limited [2020] UKUT 0199 (LC). Judge Cooke explained at [38] that there is no assumption that the sender of a notice has got the procedure right and will not make mistakes:

Mr Chacko also submitted that the FTT essentially resolved the contradiction in a way that would give effect to what HMRC were likely to want to do. Further, as Arden LJ stated in Barclays, a notice should not be approached on the basis that the recipient is taking legal advice on their situation. There was no particular reason to assume that HMRC would challenge every return filed in the context of this transaction. For example, it was never suggested in Project Blue that there was an error in the return by the financial institution, in this scheme, Return B made by Vale.

We are satisfied that in construing the June letters at [93] the FTT was not making assumptions as to what HMRC were likely to be doing or ought to have been doing in sending the letters. The FTT was not relying on what the reasonable recipient would have assumed to be the nature of HMRC’s enquiry and challenges to the Arrangements or the reasons for the enquiry. It might have been better if the FTT had not used the word “assume”, but it was not saying that the reasonable recipient would have supposed that HMRC was intending to give notice of enquiry into both returns. When [92] and [93] are read as a whole, it is clear that the FTT applied the proper test of what a reasonable recipient of the letters in the circumstances of the Appellants would have understood regarding which returns were being enquired into. The reasonable recipient would have been aware of the background, including the Arrangements entered into and the two returns that had been filed by the Appellants. This was the factual context on which the FTT expressly relied at [92]. The FTT opened [93] by stating “Against this background”. When it used the word “assume” the FTT was explaining what the reasonable recipient would automatically have understood the letters to mean in light of the background and that they would have had no doubt about this meaning. This did not depend on assumptions about HMRC’s intentions or what HMRC might have been expected to do.

For the reasons set out above, when considered together and in context, the only tenable reading of the correspondence is that the letters were communicating that HMRC was enquiring into both returns. Taking into account potential or likely intentions or challenges by HMRC was not part of the FTT’s analysis. Nor was the FTT making any assumption that no mistakes had been made by HMRC. Indeed it accepted that there was a mistake in one letter, but found that the reasonable recipient would resolve the inconsistency by looking to the wider factual circumstances.

As to legal advice, the reasonable recipient would be aware of the statutory scheme. Indeed, the circumstances of these Appellants included that they had taken legal advice from ELS. HMRC were aware of that fact and were also writing to ELS as the Appellants’ agent.

Mr Chacko put forward what he described as an analogous situation involving similar mistakes to support his argument. However, this is not an area where argument by analogy provides any assistance. It is necessary to look at the particular circumstances of the Appellants and the particular context in which the letters were received.

In summary, we agree with the FTT’s reasoning and conclusion that a reasonable taxpayer receiving the June 2011 letters would have had no doubt that HMRC were intending to give notices of enquiry into both returns.

Mr Chacko further submitted that the FTT erred at [94] where it relied on the correspondence after the June 2011 letters in seeking to resolve ambiguity in the letters. He submitted that the later correspondence was irrelevant in construing the letters. He also argued that the FTT was wrong in its findings as to the parties' subsequent conduct.

It is unnecessary for us to determine this point because it is clear to us that the FTT did not rely on the subsequent correspondence or conduct of the Appellants and their agents. It specifically stated that this was ‘not strictly relevant’ and it only referred to this material to ‘fortify’ a conclusion it had already reached. The FTT was clearly sense checking that its conclusion was consistent with the reality of how the letters had actually been understood. The Upper Tribunal in Mabbutt had adopted a similar approach at [66]. The FTT cannot be criticised in this regard. In any event, to the extent that Mr Chacko sought to challenge the FTT’s findings of fact in this regard, that would only be permissible applying the principles in Edwards v Bairstow [1956] AC 14. No permission has been given for such a challenge.

For the reasons given above, Ground 2 does not establish any error of law by the FTT.