England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
The Honourable Mr Justice Henderson
[2008] EWHC 2387 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/02/2010

Lord Justice Moses :

1. The introduction of self-assessment was a dramatic change in determining a taxpayer's liabilities. The Budget Notes 1994 described it as "the most fundamental reform of personal tax administration for 50 years". This appeal raises the question how far those changes affected the jurisdiction of the Special and General Commissioners and now the First-Tier Tax Tribunal. Under the old regime a taxpayer was required to complete a return disclosing his categories of income and chargeable gains. But his return did not determine his legal liability to tax or entitlement to relief. The power to raise assessments was vested exclusively in the Revenue. Its assessment was the final determination of a taxpayer's liability to tax for the year in question.
2. Under the regime introduced in 1996/7 the taxpayer not only submits a return of his income and gains but makes a single self-assessment of the amount of income tax from all sources and capital gains tax chargeable on him on the basis of the information contained in the return. In those cases where the Revenue makes an assessment, for example, if a return is delivered on or before 30 September preceding the filing date or the taxpayer fails to submit the tax return, the Revenue's determination is treated as a self-assessment. The taxpayer's self-assessment is the final determination of his taxable income and chargeable gains for a particular year of assessment subject to three exceptions. One of those exceptions arises when the Revenue gives a Notice of Enquiry into a return and concludes the enquiry by issuing a Closure Notice and amending the return pursuant to s.28(A) or s.28(B) of the Taxes Management Act 1970 (TMA). The Closure Notice must state the Inspector's conclusions and must make such amendments to the taxpayer's return as are required to give effect to his conclusions.
3. A taxpayer may appeal against any conclusion stated or amendment made by a Closure Notice. He must specify his grounds of appeal. The question then arises as to the extent to which the conclusion stated in the Closure Notice and the appeal against that conclusion limits the jurisdiction of the Commissioners exercised according to the procedure identified in s.50 TMA.
4. Tower MCashback LLP 1 (LLP 1) and Tower MCashback LLP 2 (LLP 2) claimed first year capital allowances pursuant to s.45 of the Capital Allowances Act 2001 (CAA 2001). LLP 1 and LLP 2 had claimed First Year Allowances in respect of the full amount of first year qualifying expenditure on completion of Software Licence Agreements entered between them and MCashback Ltd on 31 March 2004.
5. The Revenue opened enquiries into the partnership tax returns and self-assessments submitted by LLP 1 for the tax year 2003/4 and by LLP 2 for the tax year 2004/5. Following investigation and correspondence, the Revenue rejected the claim on the grounds that the expenditure had been incurred with a view to granting another person the right to use or otherwise deal with the software in question and, thus, LLP1 and 2 were not entitled to the allowance by virtue of s.45(4).
6. On the third day of an eight-day hearing before the Special Commissioner the Revenue abandoned that contention but contended that the LLPs had not incurred expenditure in buying the software licences because their members had borrowed 75% of the funds against security provided by the vendor, MCashback, on uncommercial terms.
7. There were also other issues, in particular an issue as to when LLP 1 had begun to trade, which are no longer of relevance to this appeal.
8. The Special Commissioner concluded that he had jurisdiction to consider other grounds rather than the ground on which the Inspector had relied in refusing the First Year Allowance. Freed, as he thought, from any restriction as to the basis upon which the First Year Allowance could be refused, he concluded that LLP 2 was limited to a First Year Allowance in respect of 25% of the first year qualifying expenditure it had incurred [2008] STC (SCD) 1.
9. Henderson J took a contrary view ([2008] EWHC 2387). He concluded that the scope of any appeal was confined to the question whether s.45(4) applied and thus restricted to the factual issue as to whether the LLPs had incurred expenditure with a view to granting another person a right to use or to deal with it [122]. Accordingly, he concluded that the Special Commissioner was not entitled to refuse the First Year Allowances on any other basis than that for which s.45(4) provides.
10. In the event that it became relevant, Henderson J concluded that LLP 1 was not trading in 2003/4 but that LLP 2 had incurred expenditure in the full amount it claimed. The Revenue appealed and during the course of this appeal LLP 1 abandoned its point as to the year in which it commenced trading.
11. Accordingly, two issues arise. Firstly, whether the Special Commissioner should have limited the appeal to the ground upon which the Inspector refused the First Year Allowance and declined to permit the Revenue to advance further grounds for refusing the allowance. Secondly, if the Special Commissioner rightly allowed the Revenue to advance the argument as to the extent of expenditure incurred, whether Henderson J was wrong to conclude that LLP 2 had incurred expenditure in the full amount of the consideration it paid for the software licensing agreements.

The Statutory Scheme

12. The changes in the statutory scheme introduced by the Finance Act 1994, with effect from the year 1996-97, are thrown into clearer relief against the background of the previous legislative mechanism for assessment. Under the old regime, with certain irrelevant historical exceptions, the power to raise assessments to tax was confined to an Inspector (s.29(1)TMA (opening words). If the Inspector was satisfied with a return he would make an assessment in accordance with that return (s.29(1)(a)). If it appeared to the Inspector that chargeable profits had not been included in a return or he was dissatisfied with any return, he was entitled to make an assessment to the best of his judgement (s.29(1)(b)).
13. The Inspector or the Board of Inland Revenue's power to make "discovery" was wide and is to be contrasted with the more limited powers of discovery under the new regime. Prior to 1996-1997 an Inspector or the Board had the power to make an assessment or make an assessment in a further amount in cases where profits which ought to have been assessed had not been assessed, and an assessment to tax was or became insufficient or any relief given was or became excessive (s.29(3)(a)-(c)). That power could be limited if an appeal had been settled by agreement pursuant to s.54 in relation to the same year of assessment, expressly or impliedly covering the point in issue.
14. Subject to any appeal, the Inspector's assessment was the final determination of a taxpayer's liability to tax for the year in question (s.50(6)).
15. As I have already remarked, under this statutory scheme the submission of a tax return did not itself determine the taxpayer's legal liability to tax or to relief. Further, no tax became due and payable until after the assessment had been made.
16. For the purposes of this appeal, it is important to emphasise that under the old regime assessment would often be estimated by an Inspector pursuant to his power under s.29 and often made in the absence of any information. Thus appeals against assessments would often raise new issues which had never previously been canvassed (I am, like Henderson J, indebted to the Special Commissioner, Dr Avery Jones, for his tour d'horizon in D'Arcy v R & C Commissioners [2006] STC (SCD) 543 (at paragraph 9)). Everything covered by an assessment was within the scope of the appeal and an assessment could be increased on account of something not in contemplation at the time it was made. The only inhibition would be that imposed by case management (see Glaxo Group Limited v IRC [1996] STC 191 and in particular the judgment of Robert Walker J [1995] STC 1075 at 1088 and 1090). As that judge pointed out, the tax computation of a large trading company could bristle with many points of possible dispute, none of which might be identified in a Notice of Assessment or a Notice of Appeal. Identification of the real issues depended upon the co-operation of taxpayers and of the Revenue and on suitable case management.
17. As Dr Avery Jones remarked, self-assessment made a major change to the system of appeals. The requirement to deliver a return for the purposes of establishing the amounts charged to income tax and capital gains tax is contained in s.8 of the TMA 1970. S.9, substituted by the Finance Act 1994, introduced, with effect from the year 1996-1997, the obligation to include in the return a self-assessment of the amounts chargeable to income tax and capital gains tax on the basis of the information contained in the return. As I have indicated, the taxpayer's self-assessment is the final determination of his taxable income and chargeable gains for a particular year of assessment, subject to three exceptions. Ss.59A(1) and (2) and 59B(1) impose a requirement to make payments on account and balancing payments on specified dates in accordance with those self-assessments.
18. There are only three circumstances in which the self-assessment does not constitute the final determination of liability: firstly, when a taxpayer amends his return within twelve months of the filing date (ss.9Z(a), 9Z(b) and 12A(b)(a) TMA 1970); and secondly, when the Revenue gives Notice of Enquiry into the return and either the taxpayer amends his return during the enquiry pursuant to s.9B or s.12A(d) or the Revenue amends the return in accordance with a Closure Notice under s.28A or s.28B, or amends the self-assessment during the enquiry to prevent loss of tax pursuant to s.9C. The third exception occurs when the Revenue makes an assessment in accordance with powers conferred under a new s.29 substituted by FA 1994 with effect from the year 1996-1997.
19. The issues in this appeal require focus on Notices of Enquiry and the new, more limited, powers of discovery. One of the most striking changes to the new regime of self-assessment lay in the power conferred on the Revenue to enquire into a return on giving Notice of Enquiry (s.9A and, in relation to partnerships, s.12AC). Subject to limited exceptions, an Inspector has but twelve months from the filing date to give notice of enquiry (s.9A(2) and s.12AC(2)). Unless the taxpayer himself amends his return pursuant to s.9ZA or, in the case of a partnership return, s.12ABA, the return which has been the subject of one enquiry may not be the subject of another (s.9A(3), s.12AC(3)). If a return is amended by the taxpayer, the Revenue has until the first quarter day following the first anniversary of the amendment to give a Notice of Enquiry. If the ordinary time limit has expired by the time of the Notice of Enquiry, the scope of the enquiry is limited to the matters to which the taxpayer's amendment relates, or which are affected by that amendment (s.9A(5)(b), s.12AC(5)). Absent a Notice of Enquiry, the Revenue has restricted powers to amend a self-assessment, for example, only to correct obvious errors or omissions pursuant to s.9ZB(1) or s.12ABB(1).
20. It is the machinery of enquiry and completion of the enquiry which, generally, empowers the Revenue to impose additional tax liabilities or to recover excessive reliefs. If the Revenue does not invoke the powers conferred by s.9A or 12AC, it is left only with a restricted power of discovery under the new s.29.
21. During the course of an enquiry, "any question arising in connection with the subject matter of the enquiry may be referred to the Special Commissioners for their determination" (s.28ZA(1)). The effect of any determination of a question referred to the Special Commissioners is binding on the parties in the same way and to the same extent as a decision on a preliminary issue in an appeal (s.28ZE(1)). That determination must be taken into account when the Inspector reaches his conclusion on the enquiry and formulates amendments of the return (s.28ZE).
22. S.28B echoes provisions relating to completion of an enquiry into a personal return contained in s.28A. The provisions relevant to this appeal are:-

"S.28B Completion of Enquiry into Partnership Return

1. An enquiry under s.12AC(1) of this Act (i.e., an enquiry into a partnership return) is completed when an officer of the Board by notice (a 'closure notice') informs the taxpayer that he has completed his enquiries and states his conclusions

…

2. The Closure Notice must either –

a) state that in the officer's opinion no amendment to this return is required, or

b) make the amendments to the return required to give effect to his conclusions.

3. A Closure Notice takes effect when it is issued."

23. It is important to note that a taxpayer may apply to the Commissioners for a direction requiring an officer of the Board to issue a Closure Notice within a specified period (s.28A and s.28B). The application is heard and determined in the same way as an appeal and the Commissioners are required to give the direction unless they are satisfied that there are reasonable grounds for not issuing a Closure Notice within a specified period (s.28A(5) and (6) and s.28B(6) and (7).
24. As I have already observed, apart from a Closure Notice, and the power to correct obvious errors or omissions, the only other method by which the Revenue can impose additional tax liabilities or recover excessive reliefs is under the new s.29. That confers a far more restricted power than that contained in the previous s.29. The power to make an assessment if an Inspector discovers that tax which ought to have been assessed has not been assessed or an assessment to tax is insufficient or relief is excessive is now subject to the limitations contained in s.29(2) and (3) (s.29(1)). S.29(2) prevents the Revenue making an assessment to remedy an error or mistake if the taxpayer has submitted a return in accordance with ss.8 or 8A and the error or mistake is in accordance with the practice generally prevailing when that return was made. S.29(3) prevents the Revenue making a discovery assessment under s.29(1) unless at least one of two conditions is satisfied (s.29(3)). The prohibition applies unless the undercharge or excessive relief is attributable to fraudulent or negligent conduct (s.29(4)) or having regard to the information made available to him the Inspector could not have been reasonably expected to be aware that the taxpayer was being undercharged or given excessive relief (s.29(5)). There are statutory limitations as to the time at which the sufficiency or otherwise of the information must be judged. These provisions underline the finality of the self-assessment, a finality which is underlined by strict statutory control of the circumstances in which the Revenue may impose additional tax liabilities by way of amendment to the taxpayer's return and assessment.
25. The provisions governing the right of appeal must be analysed in that statutory context. S.31(1)(b) confers a power to appeal against:-

"any conclusion stated or amendment made by a Closure Notice under s.28A or s.28B…"

S.31A requires notice of appeal to be given in writing within thirty days after the date on which the Closure Notice is issued and that the notice of appeal must specify the grounds of appeal (s.31A(5)). At the time of this appeal s.31A(6) conferred power on the Commissioners to permit an appellant to put forward grounds not specified in his notice if satisfied that the omission was not wilful or unreasonable. That provision is no longer in force.

26. The provisions of s.50 TMA 1970 set out the powers of the Commissioners on the hearing of an appeal. Notwithstanding the changes to the procedure for assessing a taxpayer's liability, they bear a striking similarity to the provisions which applied for 1996-1997. The relevant provisions in s.50 are:-

"(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other …evidence, -

a) that…the appellant is overcharged by self- assessment;

b) that…any amounts contained in a partnership assessment are excessive; or

c) that the appellant is overcharged by an assessment other than a self-assessment,

the assessment or amounts shall be reduced accordingly, but otherwise the assessment or statement shall stand good.

7) If, on an appeal, it appears to the Commissioners –

a) that the appellant is undercharged to tax by self-assessment…,

b) that any amounts contained in a partnership statement…are insufficient; or

c) that the appellant is undercharged by an assessment other than a self-assessment,

the assessment or amounts shall be increased accordingly."

S.50(9) deals with notice to partners of consequential amendments following a decision either to reduce or increase the amount charged.

27. The predecessor to s.50 read, prior to its amendment in FA 1994:-

"(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other…evidence, that the appellant is overcharged by any assessment, the assessment shall be reduced accordingly, but otherwise every such assessment shall stand good.

(7) If on any appeal it appears to the Commissioners that the person assessed ought to be charged in an amount exceeding the amount contained in the assessment, the assessment should be increased accordingly.

(7A) If, on appeal, it appears to the Commissioners that a claim or election [which was the subject of a decision contained in a closure notice under section 28A] of this Act should have been allowed or disallowed to an extent different from that specified in the notice, the claim or election shall be allowed or disallowed accordingly to the extent that appears to them appropriate, but otherwise the decision in the notice shall stand good.

(8) Where, on an appeal against an assessment which -

a) assesses an amount which is chargeable to tax, and

b) charges tax on the amount assessed,

it appears to the Commissioners as mentioned in sub-section (6) or (7) above, they may, unless the circumstances of the case otherwise require, reduce, or as the case may be, increase only the amount assessed; and where any appeal is so determined tax charged by the assessment should be taken to have been reduced or increased accordingly."

The Scope of an Appeal

28. The retention of s.50 in terms which closely follows that of its predecessor is a powerful indication that Parliament did not intend to change the jurisdiction of the Commissioners in as dramatic a fashion as the introduction of a system of self-assessment might have suggested. As Henderson J remarked, the public interest is that taxpayers pay a correct amount of tax (see [115]). In the exercise of their statutory functions the Commissioners are not deciding a case inter partes; they are determining the amount on which, in the interests of the public, the taxpayer ought to be taxed (see R v Income Tax Commissioners ex-parte Elmhurst [1936] 1 KB 487 at 493). That public interest has in no way been altered by the introduction of self-assessment.
29. But the impact of the retention of s.50 in a form which follows closely its predecessor must not be over-emphasised. It is trite to observe that s.50 must be read in the context of the new provisions. Those provisions impose particular restriction on the Revenue in relation to enquiring into and amendment of the taxpayer's own assessment of the amount which he should be charged to tax. The taxpayer is protected by strict time limits within which an enquiry into a return may be opened by the fact that only one enquiry is permitted (Henderson J [117]). The provisions relating to referral of questions during enquiry (s.28ZA) may prevent a question remaining too long unnecessarily in issue. The right of a taxpayer pursuant to s.28A(4) to apply for a direction that an Inspector issue a Closure Notice protects the taxpayer from an oppressively prolonged enquiry. The impact of the statutory words themselves "completion of enquiry" affords some comfort to a taxpayer that an enquiry is finished and cannot, subject to s.29, be reopened.
30. It is s.29 itself, in its new form, which amply demonstrates Parliament's intention to protect a taxpayer from an unjustifiably long enquiry and uncertainty. As I have already observed, the substituted s.29 prevents an Inspector from amending a return by making "a discovery" generally, save in the event that the taxpayer is guilty of fraudulent or negligent conduct.
31. It is not to be supposed that Parliament intended those protections to be overridden by the retention of a system of "thoroughly uninformative notices of assessment and notices of appeal" (see Robert Walker J in Glaxo Group Limited (q.v. supra)). I join with Henderson J in embracing Park J's summary in Langham v Veltima [2002] EWHC 2698 (Ch) [2004] 76 TC 259 [10], cited by Henderson J at [117]:-

"The new burdens were balanced by new protections for taxpayers who conscientiously complied with the system, in particular by new and tighter time limits on the power of the Revenue to make further tax assessments."

32. The Revenue recognised that the preservation of the powers of the Commissioners under s.50 should not be permitted to override these checks and balances; it accepted some restriction on the jurisdiction of the Commissioners in this appeal. In D'Arcy Dr Avery Jones recorded and rejected counsel for the Revenue's submission that once there is an appeal the Commissioners' jurisdiction is unconfined and they may determine a figure, whether or not it had any relationship to the conclusion or amendment, the subject matter of the appeal (552a-b). That submission is no longer pursued. Mr Prosser QC, on behalf of the Revenue, accepts the impact of s.31(1)(b) which confers power to bring an appeal against any conclusion stated or amendment made by a Closure Notice. He adopts Dr Avery Jones' conclusion in D'Arcy that it is implicit in the statutory scheme that an appeal pursuant to s.31(1)(b) is confined to the subject matter of the conclusions and any amendments stated in the Closure Notice (see D'Arcy [118]).
33. I do not detect, in that submission, any disagreement with the principles expressed by Henderson J or, indeed, the arguments advanced by Mr Goodfellow QC on behalf of the taxpayers. But, if I may adopt the mantle of Professor Joad, it all depends what one means by the "subject-matter".
34. Henderson J pointed out that the only statutory requirement in a Closure Notice was that the Inspector should inform the taxpayer that he has completed his enquiries and state his conclusions (s.28A(1)). There is no requirement to set out or state the reasons for those conclusions [113]). But he rejected any suggestion that an appeal against a Closure Notice should permit what he described as a general roving enquiry into the return and continued:-

"The scope and subject-matter of the appeal will be defined by the conclusions stated in the Closure Notice and by the amendments (if any) made to the return." [116]

35. The provisions of s.31(1)(b) in the context of the restrictions imposed on the Revenue's power to amend a self-assessment drive me, as they drove Henderson J to the same view. The subject-matter of this appeal is defined by the subject-matter of the enquiry and the subject-matter of the conclusions which close that enquiry. But that statement of principle serves only to give rise to further questions and problems. As this appeal demonstrates, there is likely to be controversy as to how one draws the boundaries of the subject-matter of the conclusions stated in the Closure Notice. Are reasons for the conclusion to be distinguished from the conclusion stated, and if so, how?
36. In this appeal, Henderson J, with the continued support of the taxpayer, was of the view that the correspondence demonstrates that the subject-matter was the restricted issue of whether s.45(4) of the 2001 Act applied. The Revenue contends that the subject-matter of the Closure Notice and thus of the appeal is the entitlement of the taxpayer to a First Year Allowance under s.45. Accordingly, it was entitled to deploy any argument relevant to entitlement to First Year Allowances under s.45 before the Special Commissioner.
37. Parliament has not chosen to identify some legal principle defining the limitations on the scope and subject-matter of an enquiry and consequently an appeal. In those circumstances, I think it would be wrong for the court to attempt to do so. Any statement of principle is likely to condemn both taxpayer and the Revenue to too rigid a straitjacket. It might prevent a taxpayer from advancing a legitimate factual or legal argument which had hitherto escaped him or deprive, on the other hand, the public of the tax to which it is entitled.
38. With those nebulous observations, I would leave it to the Commissioners and now the First-Tier Tribunal to identify the subject-matter of the enquiry and thus the subject-matter of the conclusions. In doing so, the First-Tier Tribunal will have to balance the need to preserve the statutory protection for the taxpayer afforded by notification that the Inspector has completed his enquiries and the need to ensure that the public are not wrongly deprived of contributions to the fisc.
39. I am fortified in the propriety of leaving to the fact-finding tribunal the task of identifying the subject-matter of an enquiry, conclusions and appeal by reference to the procedural regulations which previously applied to Special and General Commissioners and now apply to the First-Tier Tribunal. The Special and General Commissioners Regulations, made pursuant to ss.46A and 56B of the TMA, came into effect on 1 September 1994. The Special Commissioners had a general power to give directions before or during any hearing, either on application or of their own motion (Regulation 4). They had a power to give all necessary or desirable directions at a preliminary hearing "so as to enable the proceedings to be disposed of expeditiously, effectively and fairly" (Regulation 9(3)). The Special Commissioners had a wide power, under Regulation 17(2), to conduct the hearing in the manner most suitable to the clarification and determination of the issues before it and generally to the just handling of the proceedings. They had power to receive evidence of any fact which appeared to be relevant to the subject-matter of the proceedings (Regulation 17(6)). Their power to award costs was limited to circumstances where a party acted wholly unreasonably in connection with the hearing (Regulation 21). There was no express power to allow or strike out appeals for failure to comply with directions although they had a power to impose penalties. The powers of General Commissioner's Regulations were until 28 January 2008 more limited. There were no relevant changes in either the Special or General Commissioners' powers between the original enactment of ss.28A and 28B in 1994 and their amendment in 2001.
40. The powers of the First-Tier Tax Tribunal, once the Special and General Commissioners were abolished with effect from 1 April 2009, are more extensive. They are governed by the Tribunal Procedure (First-Tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273). Although it is not relevant to this appeal, and still less to the construction of the relevant statutory provisions, it is worth noting that the FTT, unlike the Commissioners, has power to strike out an appeal for breach of a direction where it is indicated that failure to comply might lead to such a sanction. The strike-out rules apply to both appellant and to respondent. We were entertained to these details by a helpful note from both parties. In the course of that note leading Counsel for the Revenue informed the court that the Revenue in one case before the Special Commissioners had been allowed to advance an alternative case requiring additional evidence after a long hearing. The Special Commissioners applied CPR principles and allowed the application on terms including as to costs.
41. In those circumstances, I am of the view that it is to the Special Commissioner and now to the First-Tier Tribunal that the statute looks to identify what s.28ZA describes as the subject-matter of the enquiry. The Closure Notice completes that enquiry and states the Inspector's conclusions as to the subject-matter of that enquiry. The appeal against the conclusions is confined to the subject-matter of the enquiry and of the conclusions. But I emphasise that the jurisdiction of the Special Commissioners is not limited to the issue whether the reason for the conclusion is correct. Accordingly, any evidence or any legal argument relevant to the subject-matter may be entertained by the Special Commissioner subject only to his obligation to ensure a fair hearing.
42. Protection of the public requires, at the least, that other issues arising from the subject-matter of the enquiry ought to be considered, if necessary, by the fact-finding tribunal. In D'Arcy, the Special Commissioner ruled that the scope of an appeal against a conclusion or amendment made by a Closure Notice will depend on the facts [11]. The conclusion in that case was, as described by Dr Avery Jones, very specific and relied upon the Ramsay principle. But the Special Commissioner permitted other issues arising from the facts to be advanced since the Tribunal must form its own view on the law without being restricted to what the Revenue stated in their conclusion or the taxpayer states in the Notice of Appeal [13]. I see no reason for confining that view merely to legal issues. Provided a party can be protected from ambush, the only limitation on issues which might be entertained by the Special Commissioner is that those issues must arise out of the subject-matter of the enquiry and consequently its conclusion, and be subject to the case management powers to which I have referred.
43. In the instant appeal Henderson J rejected the Revenue's argument that the scope of the Closure Notices and accordingly, the appeal, was wide enough to embrace all issues of fact and law which might arise under s.45. He concluded that in the light of the Closure Notice and the correspondence to which it referred the appeal should have been limited to matters arising under s.45(4) [128].
44. To determine whether his conclusion is correct it is, unfortunately, necessary to recall the correspondence and the Closure Notice which concluded the enquiry. Henderson J summarised that correspondence at [103-106].
45. On 30 June 2005 the Inspector issued an enquiry notice to LLP 2 (there is no need to refer to identical correspondence to the other taxpayer) and requested documents including a copy of the full business plan. On 15 August 2005 the taxpayer enclosed some documents but indicated that the business plan would follow. In a letter dated 7 December 2005 KPMG, on behalf of the taxpayers, gave an account of the background including full comments on s.45(4) which, in conversation and at a meeting, the Inspector had indicated applied to prevent the taxpayers claiming First Year Allowances.
46. On 13 February 2006 the Inspector noted that there was very little first-hand evidence to support what he described as the many assertions made by the accountants. He then turned to what he described as the significant part of the letter recording his view that s.45(4) prevented the First Year Allowances. In a letter dated 22 March 2006, the Inspector reiterated this view and added:-

"Due to other pressures, as well as the materiality of the s.45(4) point, I have not had the opportunity to examine Mr Feetum's (representing the taxpayers) letters as thoroughly as your own."

He noted that he had not yet received business plans. On 24 May 2006 KPMG responded to the Inspector's arguments relating to s.45(4) but it also enclosed additional information with their own comments. It recorded the concern of the partners as to the repayments they had claimed and concluded that if they did not receive confirmation that the amounts were agreed or detailed reasons for not doing so by 20 June 2006, the taxpayers would apply to the Commissioners for a directive under s.28A(4) TMA. The Inspector responded, on 2 June 2006, that he hoped to respond fully before 31 July. On 14 June 2006 KPMG reiterated its intention to apply for a direction if no response was received by 20 June 2006.

47. On 19 June 2006 the Inspector wrote to KPMG informing them that he had been able "to partly consider" their letter, in particular in relation to the s.45(4). He told KPMG that because he had reached a firm conclusion as to s.45(4) he thought "it proper that you have that part of my reply sooner rather than later as I planned". He concluded by suggesting that the taxpayers withdraw their claim to First Year Allowances, "as further correspondence on the issue of FYA does not appear to be an option". One day later he served the Closure Notice which, as the judge records, read:-

"I have now concluded my enquiries into the partnership tax return for the year ended 5 April 2005. As previously indicated, my conclusion is:-

The claim for relief under S.45 CAA 2001 is excessive.

The partnership return for the year ended 5 April 2005 is amended as follows:

Capital Allowances £ Nil

Capital Allowable Loss £ Nil…"

The letter went on to state that the Inspector's amendments resulted in a reduction of losses available to the individual partners for the year ended 5 April 2005 and notified the partnership of the right to appeal against this amendment or conclusion within 30 days of the notice.

48. On the same date the Inspector wrote to KPMG recording that he was satisfied that the scheme failed on the s.45(4) point alone. He noted that he would prefer to have had longer to examine the full record but that any fiscal points would make no difference to what he described as "the bottom line".
49. Henderson J construed the Closure Notice, by the use of the words "as previously indicated" as incorporating a conclusion which the Inspector had already informally indicated [120]. That correspondence clearly identified the reason for the refusal of First Year Allowances as being the prohibition contained in s.45(4). Accordingly, Henderson J ruled that the scope of any appeal was confined to the question whether s.45(4) did apply. No wider question was to be permitted:-

"Because the appeal would then no longer be an appeal against the conclusion stated in the Closure Notice." [122]

50. I have the misfortune to differ from Henderson J. For the reasons I have given earlier, it was a matter for the Special Commissioner to identify the subject-matter of the appeal. He did so at [22] and, in my view, correctly identified the stated conclusion as being to deny the allowances under s.45 and the income losses (see first bullet point, [22]). He then considered whether there was any unfairness in allowing the Revenue to challenge the claim to the First Year Allowance on other grounds. I agree with Henderson J that the fact that the taxpayers had pressed the Inspector to issue the Closure Notice had no relevance to the identification of the subject-matter of the appeal. It was, as he remarked, open to the Inspector to delay until he had considered, for example, the business plan. He chose not to do so. But the fact that the Inspector had indicated that there might have been other issues which arose, was relevant to the exercise of the Special Commissioner's case management powers. The taxpayer was not deprived of an opportunity fairly to marshal evidence as to the other grounds subsequently advanced by the Revenue on the appeal.
51. There is a second basis on which I differ from Henderson J. Apart from the importance of leaving it to the fact-finding tribunal to determine the subject-matter of the Closure Notice, in my view the Closure Notice itself does not allow of so restricted a view of the subject-matter of the appeal. Whilst it did refer to previous correspondence which clearly focussed on s.45(4), the Closure Notice itself was, in plain terms, a refusal of the claim for relief under s.45 CAA 2001. That was the conclusion stated pursuant to s.28B(1). There is neither statutory warrant nor any need to look further.
52. Mr Goodfellow QC contended that the only issue at the time of the Closure Notice was that which arose under s.45(4) and that in choosing to close his enquiry the Inspector did so on the basis of that one point.
53. It is true that that was the issue which prompted the Inspector to issue his Closure Notice; it was the reason he did so. But that issue was not the subject-matter of the enquiry, nor the conclusion stated in the Closure Notice and, accordingly, the Closure Notice did not have the effect of limiting the appeal to that single issue. The Closure Notice did what the statute required it to do; it stated the Inspector's conclusion that the allowance under s.45 was refused. Identifying the subject-matter of the Closure Notice and the appeal in the manner I have preferred, has the merit of affording some protection to the taxpayer against unnecessarily prolonged enquiry. As Mr Prosser QC pointed out, had the Inspector declined to issue the Closure Notice, an appeal might have been delayed for many years whilst he examined the other issues which were raised on appeal to the Special Commissioner. Since those other items required further investigation, it is unlikely that the Special Commissioner would have ordered the Closure Notice to be served.
54. In the instant appeal the only live issue now is whether LLP 2 incurred expenditure of £27.5m. The taxpayer contended that this was not an issue arising under s.45 at all but was rather an issue as to whether the taxpayer had incurred "qualifying expenditure" as identified in s.11(1). I disagree. The taxpayer's claim was a claim for First Year Allowances under s.45. If it has not incurred the expenditure for which it contends, the claim is, as the Closure Notice states, excessive. The subject-matter of the appeal, accordingly, was whether the claim under s.45 was excessive.
55. Henderson J's judgment concludes with a moral, namely, that the Revenue should ensure that it has considered all the points on which it may wish to rely before a Closure Notice is issued [128]. For the reasons I have given, that, in my view, may not always be what the taxpayer wants and may lead to unhelpful delay. The Special Commissioner was entitled to conclude that the subject-matter of the conclusion stated in the Closure Notice was the claim to a First Year Allowance and that he was entitled to consider other issues relevant to entitlement to that allowance under s.45.

Expenditure

56. On 31^st March 2004, LLP2 entered into a Software Licence Agreement with MCashback pursuant to which LLP2 acquired a right to use certain computer software in consideration of the sum of £27.5million. Pursuant to that agreement, LLP2 acquired a right to receive 2½% of gross revenues from the software. Henderson J at [30]-[61] clearly set out the necessary facts and contractual provisions for the purposes of identifying the issue which this court must resolve, once the scope of the appeal has been determined.
57. Of the £27.5million, only £5 million was funded by the investor members of the partnership from their own resources. The balance of £22.5 million was funded by non-recourse loans made to those members by Tower MCashback Finance UK Limited No.2. The source of that £22.5 million was a series of circular transactions whereby £22.5 million of the consideration paid to MCashback was funded by MCashback out of the consideration itself. It is accepted that LLP2 incurred capital expenditure to the extent of 25% of the consideration paid for the Software Licensing agreements. But the issue is whether, in light of the uncommercial terms on which LLP2 borrowed the balance of 75%, LLP2 incurred expenditure to that extent for the purposes of s.45 CAA 2001.
58. Henderson J thought there was no real doubt about the answer to this issue [72]. He concluded that LLP2 had incurred expenditure of £27.5 million on the software for the purposes of its trade [81], [82] and [86]. In reaching that conclusion he drew from the decision of the Court of Appeal [2002] EWCA Civ 1853, [2003] STC 66 and from the opinion of the Appellate Committee of the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684 the proposition that the borrowing arrangements were irrelevant, "so long as the purchaser actually incurs expenditure on acquiring the plant for the purposes of his trade".
59. This appeal is focussed on whether BMBF stands for that proposition in circumstances where the terms on which the investor members borrowed £22.5 million and thereby enabled LLP2 to pay the full price for the software were plainly not commercial. In BMBF both the Court of Appeal and the House of Lords accepted the commerciality of the terms on which BMBF borrowed the price it paid for the pipeline it purchased. Does the commerciality of that loan in contrast to the terms on which the investor members borrowed 75% of the consideration in the instant appeal, make, as the Revenue contends, all the difference?
60. The correct approach to statutory interpretation of what she described as tax saving transactions as explained in MacNiven v Westmoreland Investments Limited [2001] UKHL 6, [2003] 1 AC 311, Carreras Group Ltd v Stamp Commissioner [2004] STC 1377 and BMBF was summarised by Arden LJ in Astall v HMRC [2009] EWCA Civ 1010, [2009] All ER (D) 100 [20] to [35]. A further attempt to enunciate the principles of interpretation to be adopted is likely to sully the crystalline quality of her analysis. I content myself merely with an attempt to apply them.
61. BMBF at [36] poses two questions: first, on a purposive construction what transaction will answer to the statutory description and secondly, whether the transaction in question does so.
62. The relevant statutory provisions were summarised by Henderson J between [15] and [30]. It is unnecessary to set them out again. The allowance sought by LLP2, as a small enterprise, was ICT (information and communications technology) expenditure, which it contended was first-year qualifying expenditure (Class C) within the meaning of s.45 of the 2001 Act. By virtue of s.71, the right to use and deal with computer software is deemed to be plant.
63. There is no room for debate as to what s.11 CAA 2001 requires, now that the Committee in BMBF has analysed its predecessor (s.24(1) Capital Allowances Act 1990) :

"The object of granting the allowance is, as we have said, to provide a tax equivalent to the normal accounting deduction from profits for the depreciation of machinery and plant used for the purposes of a trade. Consistently with this purpose, section 24(1) requires that a trader should have incurred capital expenditure on the provision of machinery or plant for the purposes of his trade". [39]

64. As Lord Nicholls explained, in giving the opinion of the Committee, statutory entitlement to capital allowances depends on the acts and purposes of the purchaser of the plant [40]. In BMBF the Revenue relied on the circular financing arrangements by which the gas company vendor and lessee of the pipeline used the purchase price it received to fund the source of the loan by which the purchaser, BMBF, was able to pay for the pipeline. Lord Nicholls commented :

"But these matters do not affect the reality of the expenditure by BMBF and its acquisition of the pipeline for the purposes of its finance leasing trade". [41]

65. The feature in BMBF which the Revenue stresses is the commerciality of the arrangements by which BMBF borrowed the money from Barclays Bank to buy the pipeline. Lord Nicholls described as "happenstances" the fact that Barclays also provided the cash collaterised guarantee to BMBF for payment of the rent by the gas company:

"None of these transactions, whether circular or not, were necessary elements in creating the entitlement to capital allowances" [42].

66. The Committee described its reasons as substantially the same as those of the Court of Appeal. Peter Gibson LJ stated at [37] that, for the purposes of the test in s.24 (now s.11) it was irrelevant how the trader acquired his funds, subject to the anti-avoidance provisions now contained in sections 214-218. In this appeal, the Revenue has never sought to rely upon the anti-avoidance provisions, which preclude a first-year allowance where the sole or main benefit which might have been expected to accrue was the obtaining of an allowance (ss.215 and 217).
67. To like effect, Carnwath LJ regarded as sufficient to dispose of the appeal in favour of the taxpayer, the fact that BMBF obtained ownership of the pipeline and incurred an obligation to pay for it, an obligation discharged by the expenditure of £91m :

"There is nothing in the section to suggest that it matters what is the source of the £91m, or alternatively what is to be done with the £91m by the recipient, once the obligation has been discharged."[59]

68. But, despite those expressions of the view that the fact that the consideration was borrowed was irrelevant to statutory entitlement to the allowance, both Peter Gibson and Carnwath LJJ chose to comment on the commerciality of the borrowing arrangements. Peter Gibson LJ distinguished Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655, because there was nothing comparable to what he described as the artificial self-cancelling payments found in that case :

"There is no non-recourse or other uncommercial loan nor any immediate payment back to the purported lender. Each step taken was properly commercial….there was real expenditure by BMBF… [41].

69. The reason why Peter Gibson LJ drew attention to the commerciality of the loan arrangements was emphasised by Carnwath LJ; the commerciality of the borrowing arrangements might be relevant to the question as to whether there was real expenditure:-

"There might be more room for argument as to whether there was 'expenditure', given the apparent circularity of the payments. However, once one accepts the transfer of ownership, it is difficult to question the reality of the expenditure by which the purchase price was discharged. [58]" (my emphasis)

He commented that the loan from the parent bank was on standard terms.

70. These references by both judges to the commerciality of BMBF's loan arrangements, and the reality of its expenditure of the borrowed funds, form the foundation of the Revenue's argument in the instant appeal. In contrast to the arrangements in BMBF the Revenue is able to point to five features of the terms on which LLP2 borrowed 75% of the consideration, all of which were found by the Special Commissioner, to be "extraordinarily uncommercial" [124]. In those circumstances, it contends that it did not, in reality, incur expenditure to any extent greater than the 25% of the purchase price provided by the investor members from their own resources.
71. Firstly, the loans were repayable only out of 50% of the fees received from exploitation of the technology (primarily so that the investor members could fund income tax due on the revenues to which they were entitled). Secondly, the loan was funded by the vendor, MCashback. Thirdly, it was interest-free. Fourthly, MCashback earned no interest. Fifthly, the loans were for ten years and, on the basis of MCashback's own projections, insufficient revenues would be received to re-pay the non-recourse loans in full: over 10% would be written off at the end of ten years.
72. The Revenue point out that whilst the Court of Appeal (in BMBF) referred to and distinguished Ensign Tankers, and that authority was cited to the House of Lords, the Committee made no reference to it and certainly did not suggest that it would, in the light of the more recent explanations of the principles of interpretation, have reached a different conclusion.
73. In Ensign Tankers, the House of Lords looked at the financial consequences of the transactions viewed as a whole and applied the taxation allowances and liabilities to those financial consequences (665E). Victory Partnership (VP), a partnership between a subsidiary of the film producers and the limited partners, claimed a 100% First Year Allowance on the grounds that it had incurred 100% of the total cost of the film made by the producers, I.E., on behalf of the partnership in return for 100% of the net receipts from exploitation of the film. It claimed $14m, although the balance over and above $3¼m was lent by L.P.I. The House of Lords concluded that VP had neither incurred expenditure in the amount claimed nor did it acquire a right to 100% of the net receipts. It held that VP was entitled to a First Year Allowance of $3m, the sum it had paid out of resources other than the loan from L.P.I., on the acquisition of the right to receive 25 per cent of the net receipts of the film (Lord Templeman at 665H, Lord Goff 683 D and F-G).
74. It is important to recall the features of the scheme, described by Lord Goff as a conjuring trick (683H). L.P.I., the film producers and lender had the right to participate in 75% of the net receipts, whereas VP was never entitled to more than 25% of those profits, however profitable the film might have been. Although VP did purchase the film negative, the distribution arrangements deprived that legal ownership of any legal effect; the net profits were never to be shared other than in accordance with the parties' respective contributions (Lord Goff 682C, and 684B).
75. Moreover, the provisions of the "loan" which funded the disputed expenditure were non-recourse and the loan was not repayable by the partnership or any one else. L.P.I. received its participation in the profits instead of repayment of the loan :-

"A creditor who receives a participation in profits in addition to repayment of his loan is of course a creditor. But a creditor who receives a participation in profits instead of repayment of his "loan" is not a creditor".(667D)"

L.P.I.'s money remained at all times under its control whilst it was electronically transferred between Hollywood and London, serving no useful purpose and leaving no trace except entries on computer prints (667G). Thus Lord Templeman concluded that 75% of the expenditure was never expenditure incurred by the partnership. VP neither borrowed nor spent that 75%, it was L.P.I. which incurred the expenditure of $10¾m (674D,676E).

76. Lord Goff, whilst being prepared, but only just, not to call the arrangements a sham (682D), would not characterise the money paid by L.P.I. as a loan. Had it been an ordinary commercial loan, the loan and interest would have been repayable before the partnership recovered any part of its investment (683D). But it is important to recall an important qualification which Lord Goff made before considering the features of the transaction as a composite whole:

"…if one takes certain individual features of the transaction, and considers them in isolation, it is possible to give some colour to VP's argument. For, example it is no doubt correct that the mere fact that the taxpayer borrows money in order to incur capital expenditure does not prevent him from qualifying for a capital allowance under the section; likewise the mere fact that such a loan is a non-recourse loan in the sense that the taxpayer is not personally liable for its repayment, the loan being repayable out of property or proceeds in the hands of the taxpayer, will not of itself of itself prevent the transaction from constituting what is in truth a loan, or the expenditure so financed qualifying for a capital allowance." (681E).

77. There is persuasive additional authority for the proposition that a non-recourse loan is a loan if repayable out of the proceeds in the hands of the taxpayer borrower. The opinion of the Board, given by Lord Millett in Peterson v Commissioner of Inland Revenue [2005] UKPC 5, echoes Lord Goff's acceptance that even on non-recourse terms, where the borrower has no personal liability to repay, the borrowed funds belong to the borrower and not the lender, just as they would if the funds were given by a friend or relative [14] and [15]. Lord Millett accepted that the capital allowance depended upon the investors suffering the economic burden of the expenditure claimed before the tax deduction is taken into account [42]. He continued :

"The leverage obtained by use of a non-recourse loan meant that the investors did not sustain an economic loss after the tax deduction is taken into account. Their Lordships suspect that it is this feature of the scheme which has most exercised the Commissioner. But a moment's reflection shows that what Lord Templeman had in mind was expenditure or loss before any tax advantage is taken into account. Tax relief often makes the difference between profit and loss after tax is taken into account; and a transaction does not become tax avoidance merely because it does so. The fact that the investment was funded by a non-recourse loan did not alter the fact that the investors had suffered the economic burden of paying the full amount of $x + y. It was not and could not be suggested that either loan was on terms which meant that was unlikely ever to be repaid. The investors have repaid one of the loans in whole or in part albeit out of the film receipts; and they incurred a liability to repay the other if the film generated sufficient receipts, as it was hoped it would."[44]

78. It seems to me that Ensign Tankers and Peterson indicate the approach to be adopted in this appeal. Mr Goodfellow QC, on behalf of the taxpayers, suggested that the terms of the borrowing were simply irrelevant, basing that proposition on BMBF. I think he goes too far. The terms of the borrowing, in the context of all the facts, may be relevant in order to cast light on whether LLP2 had really incurred expenditure, as Carnwath LJ foresaw [58]. The source of the money was irrelevant in BMBF because the borrowing was on regular, commercial terms.
79. Rather than regarding the terms on which LLP2 borrowed 75% of the consideration as "simply irrelevant", the court should consider them in relation to the fundamental question whether the taxpayer suffered the economic burden of paying the full amount. By doing so, it is possible to decide whether there was "real" expenditure. In the passages I have already cited in this judgment from BMBF Peter Gibson LJ [41], Carnwath LJ [58], and Lord Nicholls all spoke of the reality of the expenditure in that case.
80. In disputing the applicability of the approach of the House of Lords in Ensign Tankers, the taxpayer sought to contend that "incurring expenditure", within the meaning of CAA 2001 was a legal and not a commercial concept. The Court of Appeal in BMBF had taken the view that that concept was analogous to the legal concept of "payment" in MacNiven, and thus the fact that the money was borrowed was irrelevant (Peter Gibson LJ [44],Carnwath LJ at [74]. Both Peter Gibson and Carnwath LJJ expressed difficulty in making the distinction [44] and [74]. Neither was comfortable at relying upon the application of the label "legal" or the label "commercial" as a means of resolving the statutory question of whether BMBF had incurred the expenditure for which it contended. Lord Nicholls counselled against any assumption that the answer lies in determining whether the statute in question is referring to a legal or commercial concept.
81. Henderson J clearly thought, like Peter Gibson LJ [44] and Carnwath LJ [74], that the concept of incurring expenditure is a legal and not a commercial one [85]. Making a payment and incurring expenditure are, they said, analogous concepts. Mr Prosser QC quarrelled with that view. I prefer not to resolve it but to concentrate on the question whether the terms of the borrowing were such that LLP2 cannot be said to have incurred real expenditure.
82. Mr Prosser QC contended that there was no real expenditure because, to the extent of the borrowing, payment for the software licensing agreement had cost LLP2 nothing. LLP2 had been given that amount by the vendor. I do not think that submission can be disposed of by LLP2's reminder that the non-recourse lending was to the members of the LLPs and not to the LLPs themselves. The members were required to pay the money they "borrowed" to the LLPs for the "payment" of the consideration. In any event s.118ZA deems all the activities of the partnership to be the activities of the members. Were it not so there could be no relief for the members from their share of the first-year allowances.
83. The terms of the borrowing in the instant appeal, in contrast to the alleged borrowing in Ensign Tankers, did provide for repayment of the loan out of 50% of the relevant income. LLP2 asserts that there was an expectation that that would be sufficient income to repay the loan in 10 years without recourse to the security provided by MCashback (there is a reference to that expectation in MCashback's own internal documents dated 8 March 2004, described as a basic assumption). On the other hand, after 10 years the balance of any of the outstanding debt was waived, whilst the predictions of the returns, calculated by experts but on a conservative basis, showed that only 80% of the loans were expected to be discharged .
84. In this case I take the view that the borrowed funds paid by LLP2 to purchase the software licensing agreement were paid out of its own resources notwithstanding the terms of the loan agreement. Whilst there was an expectation, on the basis of conservative predictions, that the whole of the loan agreement would not be paid off in full over the period of ten years, it cannot be shown that the terms were such that the loan was never likely to be repaid. It all depended on success in marketing the software. In Ensign Tankers, the loan never had to be repaid whatever success the film achieved.
85. This brings me to another important feature of the facts which provide a clear contrast with those in Ensign Tankers. LLP2 acquired the full economic benefits of the software in return for the expenditure. LLP and its members owned free of any liability software which could generate a substantial proportion of an annual income which the projections showed to be approximately £38m. In Ensign Tankers, the partnership never acquired a right to more than 25% of the returns.
86. It is this feature which to my mind is the most important ground for distinguishing Ensign Tankers and this appeal. The ownership of the software agreement was transferred to LLP2. The question of transfer of ownership casts a clear light on the reality of the expenditure, just as it did in Ensign Tankers. It was unacceptable to contemplate that the Victory Partnership had incurred 100% of the expenditure on the film in acquiring a mere 25% of the rights. But the fact that LLP2 acquired the right to the full economic benefit of the agreement is a powerful, and, to my mind, a determinative feature of this appeal. It is worth repeating part of Carnwath LJ's judgment, which I cited earlier :

"However, once one accepts the transfer of ownership, it is difficult to question the reality of the expenditure by which the purchase price was discharged. [58]"

87. I conclude that the borrowed funds were funds which belonged to LLP2 and not to Tower MCashback UK 2 Ltd; that it expended those funds on the purchase of the software agreement and, accordingly, was entitled to a first-year allowance in respect of that expenditure. Even though I have been more susceptible to arguments based on the terms of the loan, I agree with Henderson J's conclusion on the issue of expenditure. Accordingly, I would dismiss the appeal in respect of LLP2's claim and allow the Revenue's appeal in respect of LLP1's claim.

Lord Justice Scott Baker:

88. I agree with the judgment of Moses LJ and the reasoning by which he reaches his conclusions. It seems to me that his analysis on the closure notice issue meets the point that in principle the taxpayer ought to be taxed to pay the correct amount of tax. A narrower construction of what is in play in an appeal against a closure notice is likely to create some situations in which the taxpayer is either unfairly penalised or is not taxed as the legislation intended.

Lady Justice Arden:

89. I am grateful to Moses LJ for setting out the background. However, I have come to a different conclusion from Moses and Scott Baker LJJ on the closure notice issue.

Closure notice issue

90. In this case, the inspector only reached a conclusion on one issue, namely the s 45(4) point. He did not consider it necessary to go further. As expressed in the closure notice, however, his conclusion is wide enough to cover other issues, such as whether the taxpayer had "incurred" any expenditure.
91. Accordingly this appeal raises a question as to the meaning of the word "conclusion" for the purposes of ss 28B and 31 of the Taxes Management Act 1970 ("TMA"). Must a "conclusion" be a proposition, or series of propositions, which the officer deduces from what he learns in the course of enquiry? Or is it enough that the matters relied on by the officer include a matter that on the officer's reasoning justifies the conclusion in the closure notice, and where appropriate, the amendment stated therein, so that the inquiry can be closed? If the latter is the correct meaning, then the conclusion may include supplementary arguments on which the Revenue might wish to rely if the reasoning leading to conclusion or amendment is successfully challenged. It would follow that the officer need not have formed any view as to the correctness of those supplementary arguments.
92. Section 28B of the TMA does not expressly require reasons to be given for a conclusion. What the taxpayer submits is that s 28B should be treated as implicitly requiring reasons to be given, for otherwise the Revenue could state a conclusion that was completely unsupported by the evidence. On the taxpayer's submission, a conclusion is the product of a process of reasoning. The taxpayer also submits that the closure notice should be clear so that the scope of the matters being put in issue is clear. The taxpayer also relies on the fact that the conclusion in this case began with the words "As previously indicated". The taxpayer submits that the conclusion is necessarily to be read down to accord with the only conclusion to which the officer had actually come.
93. There is considerable force in this argument. S 28B requires the officer to set out "his conclusion". Surely an officer must reach a conclusion before he can state it, and so the conclusion should be interpreted as limited to the conclusion to which he actually came, and no more. On this basis, the conclusion in this case would have to be read, as the judge held, as limited to the officer's conclusion on the s 45(4) point even if the words "as previously indicated" had not appeared.
94. There is no problem if the officer's actual conclusion is exactly the same as his stated conclusion. But where that is not, or may not be, the case, one has to ask whether Parliament contemplated that the taxpayer would be entitled to argue that the conclusion in the closure notice should be read as if it went no further than the actual conclusion.
95. On the one hand, it is counter-intuitive that an officer of the Revenue should be able to state that he came to a conclusion that he did not actually reach. Parliament cannot have intended that the officer should be able to do that, at least where the matter was decisive. On the other hand, to permit the taxpayer to argue that a conclusion was too widely stated would be to open up new areas of dispute as to whether the statement of the conclusion was sufficiently supported by the reasons. It would also prevent the closure of an enquiry on the practical basis that in the officer's view there is one matter that of itself justifies closure of the enquiry, and where appropriate amendment of the tax return, but that there are other relevant matters to be considered if that one matter is successfully challenged. The taxpayer would not be prejudiced if the conclusion was too widely stated in these circumstances because he would have a right of appeal. Further the objective of reducing the delays involved in enquiries would be impeded if an officer could not bring an enquiry to an end on the basis of a matter which justifies an amendment and reserving the right to take further points if that matter is successfully challenged.
96. In this case, in his letter of 20 June 2006, the officer had made it clear, and thus indicated, that there was one matter which of itself justified the amendment, but that there might be additional points which would cause the loss of relief. Cumulatively the section 45(4) point and the additional points were embraced within the statement in the closure notice of even date that "The claim for relief under s 45 CAA 2001 is excessive". Thus in my judgment the statement in the closure notice reflected what had previously been stated. There was no lack of transparency, just a lack of a conclusion on any issue other than the s 45(4) point.
97. Was it permissible for the Revenue to keep open its options in this way? It would of course be convenient to the Revenue if the required "conclusion" could be limited to a material matter needed to decide the case, and other matters left open. But I see nothing in the wording to support this approach as a matter of construction. While I do not consider that Parliament imposed on the officer any obligation to investigate and form a final view on matters that, as he saw the case, were academic, alternative arguments are not truly academic. If the main conclusion fails or is not pursued, the alternative arguments are for real.
98. What s 28B requires is a statement of the officer's conclusions, not his reasoning. There is nothing to indicate that Parliament required that there should be actual reasoning of the officer to support every aspect of his conclusion. Indeed, there is no express statutory requirement that any such reasoning should be stated. Accordingly it is most unlikely that Parliament could have intended that the court or a tribunal should have to consider whether every element in the conclusion was fully reasoned: this is confirmed by the fact that there is a right to appeal against any conclusion "stated" in the closure notice. The tribunal has to take the conclusion as it stands, provided of course that it is a conclusion. A statement of a possible result is not a conclusion.
99. A functional definition of a conclusion, as it seems to me, might entail only that it should be sufficient to bring the enquiry to an end. On this basis, the conclusion could include supplementary elements that might only exist as possibilities. It can be said that there is sufficient protection given to the taxpayer in the requirement that any conclusion must be stated in the closure notice. Thus the closure notice will define the issues between him and the Revenue, and it will be, or ought to be, clear to him from that notice what the conclusion is against which he is entitled to appeal.
100. But this does not provide him with protection against groundless enquiries or the prolongation of an enquiry by pursuing lines that have no real chance of success. Reading the provision as a whole, it seems to me likely that Parliament intended that he should be protected against these matters too. The way he was to be protected was by conferring the right to receive in the closure notice the Revenue's concluded view on each separate conclusion at the end of an enquiry.
101. In this particular case, by the proper and candid admission of the Revenue in the correspondence, at the time the Revenue chose to serve the closure notice there was one, and only one, conclusion on the part of the officer, namely on the s 45(4) point.
102. I would therefore dismiss the appeal on the closure notice issue.

The expenditure issue

103. In my judgment this issue does not arise, but had it arisen I would have agreed with the judgment of Moses LJ. As his judgment shows, the facts of this case are quite different from those in Ensign Tankers (Leasing) Ltd v Stokes [1992] AC 655.