HM Revenue and Customs v Bristol and West Plc

A statutory notice is construed objectively, in the context known to a reasonable recipient. Context may invalidate a document which appears valid in isolation. A closure notice under paragraph 32 of Schedule 18 to the Finance Act 1998 must communicate both that HMRC has completed its enquiry and HMRC’s conclusions. It takes effect when issued and cannot be issued on a unilaterally suspended basis.

The intra-group disregard in paragraph 28 of Schedule 26 to the Finance Act 2002 applies only where both transferor and transferee are subject to the Schedule 26 regime. The paragraph must operate as a whole. Its purpose is tax neutrality between group companies, achieved by matching treatment and the statutory fiction that they are the same company.

Bristol and West plc transferred a portfolio of profitable interest-rate swaps to another company in its group for a £91 million premium. The transferor’s accounting period was governed by Schedule 26 to the Finance Act 2002, but the transferee’s was not. The First-tier Tribunal and Upper Tribunal held that the intra-group disregard in paragraph 28 did not apply.

A separate issue arose after HMRC mistakenly generated and posted a document stating that its enquiry was complete and that no amendment was required. Before the document was posted, HMRC emailed the taxpayer to explain that it had been issued in error. The Upper Tribunal held that the email suspended the document and that a later letter lifted the suspension, producing a valid closure notice. HMRC appealed that ruling, while the taxpayer cross-appealed on the paragraph 28 issue.

The questions were whether HMRC had issued a valid closure notice and whether paragraph 28 could apply when only one company was within the Schedule 26 regime.

1. HMRC’s appeal was allowed. A notice is construed objectively, as a reasonable recipient with knowledge of the relevant context would understand it. The email sent before the mistakenly generated document was posted formed part of that context. It instructed the taxpayer not to treat the forthcoming document as communicating that HMRC had completed its enquiry and reached the conclusions stated in it. The document was therefore not a valid closure notice: Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749 and Barclays Bank v Bee [2002] 1 WLR 322 applied.

2. There is no principle that context may validate an apparently defective document but cannot invalidate an apparently valid one. Bee established that contextual material may produce the latter result. Saxon Weald Homes Ltd v Chadwick [2011] EWCA Civ 1202 was explained as a case where the earlier inconsistent communication was not part of the relevant context because the sender might have changed its mind.

3. The email and the taxpayer’s brief response created no agreed suspension. Nor could HMRC unilaterally issue a closure notice on a suspended basis. Paragraph 32(1) of Schedule 18 to the Finance Act 1998 provides that the notice takes effect when issued. The statutory scheme requires HMRC first to complete its enquiry, form its conclusions and then communicate both matters. Closure is an important procedural stage which ends HMRC’s enquiry powers, confines any amendment to the conclusions stated and starts precisely timed statutory steps.

4. The later letter was not itself a valid closure notice. Even applying practical common sense, it left the reasonable reader confused about HMRC’s conclusions. It referred to the earlier document’s conclusion that no amendment was required but stated that HMRC intended to amend the return without specifying the amendment. It also failed to state any conclusion on another live issue. It could not restore validity to the earlier document.

5. The taxpayer’s cross-appeal was dismissed. Paragraph 28 of Schedule 26 to the Finance Act 2002 operates only where both transferor and transferee are subject to Schedule 26. Paragraph 28(3) determines the credits and debits for both companies and deems them to be the same company. These requirements permit no unilateral application to one company. Paragraph 28 must be read and applied as a whole.

6. The purpose of paragraph 28 is tax neutrality for intra-group transfers, not the prevention of every charge arising from such a transfer. Its matching treatment achieves that purpose. There was no drafting error merely because the provision did not extend the disregard to a transaction in which only one company was subject to Schedule 26.

• Court of Appeal (Civil Division): HMRC’s appeal on the closure-notice issue was allowed and the taxpayer’s cross-appeal on the statutory disregard was dismissed: [2016] EWCA Civ 397.
• Upper Tribunal (Tax and Chancery Chamber): Peter Smith J held that paragraph 28 of Schedule 26 to the Finance Act 2002 did not apply, but held that the mistaken closure notice had been suspended and later became effective. No neutral citation for that decision is stated.
• First-tier Tribunal: The tribunal held that the paragraph 28 disregard did not apply and that HMRC had not issued a disabling closure notice. No citation is stated.