In Scott Knight v HMRC [2026] TC09962, the First Tier Tribunal (FTT) refused HMRC's application to strike out an appeal against a closure notice which gave rise to a Capital Gains Tax (CGT) charge on an undeclared capital distribution.
A capital distribution was made to Mr Knight by Dirty Harry's Waste Management Limited (DHWML) during the period of liquidation. Mr Knight failed to report the distribution on his Self Assessment return, leading HMRC to open an enquiry and subsequently issue a Closure notice.
- DHWML was incorporated on 24 October 2008 with Mr Knight as 60% shareholder and sole director.
- The company went into liquidation on 29 March 2021.
- HMRC wrote to Mr Knight opening an enquiry after noting on Companies House that a capital distribution totalling £986,413 had been made to him during the liquidation process.
- HMRC believed the distribution should have been declared on Mr Knight's Self Assessment return in the 2020-21 tax year.
- A closure notice was issued to Mr Knight on 5 April 2024 for the tax year 2020-21 showing an additional charge to Capital Gains Tax (CGT) of £194,272.40.
- Mr Knight believed that he met all the conditions for Business Asset Disposal Relief (BADR) to apply, but HMRC had not applied it.
- HMRC applied to strike out Mr Knight's appeal on two separate grounds: 1) that the Tribunal lacked jurisdiction to hear the BADR issue, and 2) that the remaining grounds had no reasonable prospect of success.
- HMRC believed the First Tier Tribunal (FTT) should not consider the BADR issue as it was not part of the 'matter in question', as it had not been claimed on the original return (Issue One).
- Mr Knight claimed that HMRC afforded his brother BADR; HMRC argued another individual's tax status was irrelevant (Issue Two).
- Mr Knight believed there had been a duplication in tax due to an issue with an earlier loan write-off. HMRC stated even if the same underlying funds give rise to a liability under different provisions, this is not a duplication of tax (Issue Three).
In respect of Issue One, BADR jurisdiction, the FTT found that:
- HMRC's closure notice concluded that CGT was payable and, although not expressly stated, also concluded that no reliefs were available.
- HMRC's conclusion did not include any consideration for whether BADR applied to the distribution, as it had not been claimed at the time the closure notice was issued.
- The BADR claim was within the 'matter in question' as HMRC concluded no reliefs were available. This was not affected by whether a claim had been made at the time the closure notice was issued.
- The BADR issue was therefore within the 'matter in question' and the FTT declined to strike it out.
Whether there was a valid claim for BADR, or not, was not fully developed during the hearing due to there being no written submissions to materially advance the argument. The matter of whether a valid claim arose will be addressed at a separate hearing.
In respect of Issue Two, Mr Knight's brother's BADR treatment, the FTT found that the treatment of another taxpayer who is in the same or materially similar position cannot form part of the conclusion of a closure notice.
- On this basis, the FTT struck out this ground for lack of jurisdiction and, in the alternative, held that even if it did have jurisdiction, Mr Knight would still need to independently establish his own entitlement to BADR, so the ground had no reasonable prospect of success either way.
In respect of Issue Three, the duplication of tax, the FTT found that:
- This ground had no realistic prospect of success. The 2017-18 closure notice concerned a loan write-off and beneficial loan, both chargeable to Income Tax, whereas the 2020-21 capital distribution was chargeable to CGT. These related to different tax years, different tax heads, and different transactions.
Useful guides on this topic
Closure notices
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Discovery Assessments
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How to appeal an HMRC decision
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Statutory Review
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