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  • Tinkler v HMRC: ‘Walking the Line’ and estoppel

    2 August 2021

    Andy Wood

    Background

    In ‘Walk the Line’, Johnny Cash sang:

    “I keep the ends out for the tie that binds
    Because you’re mine, I walk the line”

    Now, between you and me, I don’t think ‘the man in black’ was talking about ‘estoppel by convention’ in a tax dispute. But he could have been.

    The ‘ties that bind’ can refer to a ‘shared belief’. In the Supreme Court case of Tinkler v HMRC, the parties found themselves in a straight shoot out. This concerned whether the conduct of Tinkler’s tax agent, BDO, was such that it shared a belief – a false shared belief with HMRC – that a valid enquiry had been opened.

    Crucially, was this shared belief and the conduct of the parties sufficient to prevent Mr Tinkler arguing that the enquiry was not opened validly? In other words, was he was estopped?

    Facts

    Mr Tinkler appointed BDO as his tax agents in Jan 2005. As is usually the case, they sent Mr Tinkler HMRC’s standard form 64-8 to authorise them to liaise with HMRC on his behalf. He duly signed this and it was sent to HMRC.

    At some point, and for reasons that are not clear, within the next six months, Mr Tinkler’s address was changed on HMRC’s computer system to an old residential address. It was accepted that his change was not following any interaction with the taxpayer or his agent.

    Unfortunately, HMRC wrote to Mr Tinkler at this erroneous address with a formal enquiry notice.  However, he did not receive this.

    A ‘copy’ notice was sent to his agents, BDO. 

    BDO engaged with HMRC in the enquiry process, exchanging correspondence and holding a series of calls with HMRC.

    In 2012, HMRC closed the enquiry by issuing a closure notice denying a loss claimed by the taxpayer.

    However, just 2 months before the appeal to the Tribunal in January 2015, the taxpayer amended his appeal against the closure notice on the basis that it was invalid.

    Earlier judgements

    General

    Mr Tinkler had been unsuccessful in his appeals to both the The First-tier Tribunal (“FTT”) and Upper Tribunal (“UTT”)

    As such, Mr Tinkler appealed to the Court of Appeal where two issues were in point:

    1. whether opening of the enquiry was valid despite being ‘opened’ by a copy of the enquiry notice sent to BDO, his tax agents (“First issue”); and
    2. if that enquiry was not validly opened, whether Mr Tinkler was ‘estopped by convention’ from asserting that the notice was invalid (“Second issue”)

    First Issue – Copy notice to BDO

    This First Issue could be broken down in to three separate grounds:

    1. BDO neither had actual nor apparent authority to receive the enquiry notice on Mr Tinkler’s behalf.
    2. Alternatively, where BDO did have such authority, an enquiry notice must be given to the “taxpayer”. This cannot be satisfied by issuing it to the agent unless expressly agreed;
    3. Alternatively, if it was held that such a notice could be given the agent, then it was not satisfied here as it was merely a ‘copy’ notice which did not claim to be a formal enquiry notice.

    The Court of Appeal determined that there was no valid enquiry notice by virtue of the copy sent to BDO.  

    Form 64-8, the standard form allowing an agent to liaise with HMRC on behalf of a client, did not give the tax agent authority to receive a notice of enquiry on the taxpayer’s behalf. Further, it also referred to HMRC’s website that made it abundantly clear that formal notices of enquiry such as this must be sent to the taxpayer.

    As such, in relation to the First Issue, Mr Tinkler’s appeal was allowed.

    The Second Issue – Estoppel issue

    Estoppel by convention is a difficult concept. As such, it is first worth setting out the requirements that must be satisfied before one can be ‘estopped’ in a non-contractual matter.
    The most relevant case here is HMRC v Benchdollar Limited and Others.This is further amended by the subsequent case of Blindley Heath Investments Ltd & Anor v Bass.

    The facts in Benchdollar can be summarised as follows:

    • HMRC had been seeking to stop the clock on a Limited Period in respect of a large number of recovery claims for Employers’ NICs;
    • In order to achieve this, HMRC sought to obtain specific written acknowledgments (basically a DIY ‘tolling’ agreement) from the relevant employers. HMRC mistakenly believed these would ‘stop the clock’ for limitation purposes. The belief was incorrect as each employer expressly denied liability for the debt claimed;
    • As HMRC and the parties had continued to correspond in relation to some of the employers on the matter, HMRC successfully argued that ‘estoppel by convention’ applied in some of the cases such that the deficiencies in the acknowledgements could not be argued by the employer

    The Court in Benchdollar (plus amendment by Blindley Investments) set out the following principles:

    1. It is not enough that the common assumption upon which the estoppel is based is merely understood by the parties in the same way. The assumption must be shown to have ‘crossed the line’ in a manner sufficient to manifest an assent to the assumption;
    2. The expression of the common assumption by the party alleged to be estopped must be such that he may properly be said to have assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely on it;
    3. The person alleging the estoppel must in fact have relied upon the common assumption, to a sufficient extent, rather than merely upon his own independent view of the matter;
    4. That reliance must have occurred in connection with some subsequent mutual dealing between the parties;
    5. Some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position.

    When the Court of Appeal applied these principles to Tinkler, they found that the conditions for estoppel by convention were not satisfied on the basis that:

    1. BDO had not assumed the requisite element of responsibility got the common assumption; and
    2. The required point around unconscionability was not satisfied

    Further, the Court expressed that:

    “This is a case in which HMRC have only themselves to blame for what occurred. They were at fault in sending the notice of enquiry to the wrong address. They misled BDO into assuming that an enquiry had been validly opened. BDO did nothing to cause the adoption of the mistaken assumption. In all the circumstances of the present case, any acquiescence by BDO in HMRC’s mistaken assumption is insufficient to found unconscionability.”

    As such, in relation to this Second Issue, Mr Tinkler’s appeal was successful.

    The Supreme Court

    General

    Here, HMRC only appealed the Court of Appeal’s decision around ‘estoppel’

    As such, the SC was broadly left to determine whether the Court of Appeal had applied Benchdollar correctly to the facts in Tinkler.

    Applying Benchdollar in Tinkler

    The Supreme Court accepted that HMRC did misrepresent the fact that an enquiry notice had been opened to BDO. As such, it was HMRC that HMRC initiated the mistake.

    However, the SC pointed out that the fact HMRC initiated the mistake is not a bar to estoppel. It found that the Court of Appeal gave too much weight to this point in its decision. Indeed, the SC thought it irrelevant that HMRC initiated the common mistake.

    However, more fundamentally, the SC did not agree that BDO had not affirmed the truth of the statement as determined by the Court of Appeal.

    Importantly, BDO’s conduct had ‘crossed the line’ by its reply and was acting as if a valid enquiry had been opened from its initial replies, telephone conversation and general conduct until HMRC issued its closure notice some 7 years later. Indeed, it wasn’t until January 2015 that the validity of the enquiry was questioned – almost a decade later.

    As such, in relation to the first three principles (as re-summarised by Burrows, LJ in this judgement at Para 52):

    PrincipleRequirement
    1Both parties shared a common assumption
    2BDO made manifest to HMRC that it was sharing that common assumption by engaging with HMRC in relation to the ‘enquiry’ – as such, BDO ‘crossed the line’
    3HMRC thereafter relied on the affirmation of the common assumption in relation to its subsequent dealings with BDO

    The SC also found that the fourth Benchdollar principle – “That reliance must have occurred in connection with some subsequent mutual dealing between the parties” – was also satisfied. HMRC’s reliance on the common assumption that a valid enquiry notice had been issued was satisfied by the fact that BDO had answered HMRC’s questions and, in light of those answers, HMRC had issued a closure notice.

    There was no dispute that HMRC’s reliance was detrimental because, clearly, had it not thought a valid enquiry notice had been issued it would have issued a ‘new’ notice within the time limit. Further, it was calculated that Mr Tinkler would gain £635k if estoppel was denied.

    As such, the SC allowed HMRC’s appeal on the facts of the case. In other words, although the enquiry may not have been procedurally valid, through HMRC and BDO’s shared conduct, Mr Tinkler was ‘estopped’ from denying that a valid was opened.

    Conclusion

    I think this represents another sensible decision by the Supreme Court. Where it can be seen that both the tax agent and taxpayer engage with HMRC on the basis that there is a valid enquiry – it would seem wrong that, almost a decade later, the taxpayer could appeal against the closure notice on the basis that the opening of the enquiry was procedurally invalid.

    Further, this raises two practical points.

    Firstly, I think the case shows the value of checking that any enquiry is properly opened by HMRC when notification is received by the agent and / or client before dancing to HMRC’s tune.

    Secondly, it shows that one cannot rely on an argument ‘after the event’ that there was a procedural error where the case meets the Benchdollar requirements.

    In other words, there is no get out of jail free card… or should that be Fulsome Prison?

    If you have any queries about this article or tax matters in general then please get in touch.

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