In Limited & Julian Standen v HMRC [2021] TC08119, a company and its director failed to terminate a tax investigation with a Closure Notice. Enquiring into a suspiciously late capitalisation of intangible property after incorporation, the taxpayer had failed to provide HMRC with enough information to be able to raise valid assessments.

  • The company had Incorporated Mr Standen’s sole trader online business in 2011.
  • Three years later, a new firm of tax advisers, advised that the company could capitalize the market value of its Intangible property acquired on the incorporation.
  • This change resulted in the company backdating the capitalisation of £750,000 and credited the balance to a director's loan account and then claimed tax relief on amortization. Further back-dated adjustments were also made in 2014 reversing dividends by the amount of the amortization.
  • HMRC opened enquiries into both the company’s Corporation Tax return for 2015 and 2016 and its director’s Self Assessment return for 2014-15 and issued Regulation 80 Determinations to the company for 2014-15 and 2015-16.
  • HMRC found that there were no agreements in relation to the acquisition of the intangible property and on an investigation of the advisers, suspected that the dividend reversal had similarities to that firm's marketed tax avoidance products.
  • HMRC conducted a dawn raid on the advisers in connection with their tax scheme products and the advisers as a consequence failed to forward enquiry notices to their clients and were careful to avoid answering all HMRC’s detailed questions.
  • As a result, the enquiry rumbled on with variously delays from each side until the taxpayer attempted to end the enquiry by making an application to the FTT for a Closure Notice.

The FTT found that the circumstances of the adjustments to intangible property had never been properly explained by the taxpayers or their advisers. As a consequence, the forced issue of a Closure Notice was not an option as HMRC still required full answers to its enquiries in order to raise valid assessments. It was also apparent that other years were also under enquiry.

Striking out the application, the FTT placed much of the blame for the delays on the Appellants’ advisers for failing to provide full responses to HMRC's enquiries.

The FTT concluded that the burden was on the taxpayers to describe and explain the terms on which the intangible assets were transferred. This included the nature of the consideration, how the consideration was paid, to whom and when it was paid, any covenants assumed to be in place to justify the valuation and the tax consequences of 'unwinding' dividends.

Useful guides on this topic

Incorporating an existing business
How to transfer an existing sole trader's business by incorporation into a company.

Incorporation & Goodwill: Tax Issues
What are the tax issues in respect of goodwill on incorporation? What tax reliefs apply if you buy and sell goodwill? What are the valuation and clearance procedures?

Goodwill & the Intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Regulation 80 Determinations
When can HMRC assess an employer or an employee for unpaid Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs)? What is a regulation 80 determination? What is a regulation 72 determination? Who is assessed and what are the conditions?

Closure notices 
When does HMRC issue a closure notice? What is a partial closure notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Appeals: Grounds for Appeal Toolkit
What grounds are there to appeal a tax penalty? How can you word a tax appeal? Can you appeal HMRC errors? What is a reasonable excuse?

External link Limited & Julian Standen v HMRC [2021] TC08119

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