When can a partial closure notice be required?

In Embiricos v HMRC [2022] EWCA Civ 3, the Court of Appeal confirmed that where HMRC's conclusion in respect of a matter enquired into has computational consequences for the taxpayer's return and self-assessment, a closure notice issued by HMRC in respect of that enquiry must give effect to the conclusion by amending the self-assessment.  That is true whether the closure notice in question is (a) a partial closure notice in respect of a matter to which the enquiry relates (a "PCN"), or (b) a final closure notice in respect of the enquiry (a "FCN").

In Embiricos, the relevant enquiry was one into the taxpayer's domicile status.  HMRC had reached a conclusion as to Mr Embiricos' domicile status (viz, that he was domiciled within the UK hence not entitled to the remittance basis of taxation) but required further information from the taxpayer (regarding his foreign income and gains) in order to ascertain the computational consequences of that conclusion.  In those circumstances, the Court of Appeal held that HMRC could not be required to issue a PCN in respect of their conclusion regarding Mr Embiricos' domicile status (which PCN the taxpayer had hoped to challenge in advance of being required to provide information about his foreign income and gains).

Background

An individual who is resident and domiciled within the UK is assessed to UK tax on their worldwide income and gains on the arising basis. For those who are resident but not domiciled within the UK, there is an option to claim the benefit of the remittance basis of taxation, which means that they are liable to pay UK tax on their foreign income and gains only to the extent they are remitted to the UK.

In recent years, there have been an increasing number of instances where HMRC have enquired into and challenged the taxpayer's claim that they are domiciled outside the UK and therefore entitled to pay tax on the remittance basis.  As a consequence, HMRC have issued information notices requiring the taxpayer to produce extensive information about their non-UK affairs in order to assess the UK tax payable on the arising basis.  (See our previous blog post on Henkes v HMRC here.)

Facts

The taxpayer, Mr Embiricos, was born in Greece with a domicile of origin there. Although he was resident in the UK, Mr Embiricos continued to consider himself domiciled outside the UK and claimed the remittance basis for the tax years 2014/15 and 2015/16.

HMRC enquired into Mr Embiricos' claim to be domiciled outside the UK during the relevant period and concluded that he was not. In consequence, HMRC asked Mr Embiricos to provide information on his foreign income and gains in order to assess the amount of tax payable on the arising basis.

Mr Embiricos disagreed with HMRC's view on his domicile and, wishing to challenge this conclusion before providing information on his foreign income and gains, he invited HMRC to make a joint referral to the First-tier Tribunal (the "FTT"), which invitation was declined by HMRC.

• The procedure for making a joint referral is set out in section 28ZA of the Taxes Management Act 1970 (the "TMA").
• A joint referral may be made in respect of any question arising in connection with the subject matter of an enquiry.  However, the referral must be agreed by both the taxpayer and HMRC: it cannot be made unilaterally by the taxpayer.

Instead:

• HMRC issued a taxpayer information notice requiring Mr Embiricos to provide the information which HMRC considered necessary to close their enquiries; and
• Mr Embiricos applied to the Tribunal for a direction that HMRC be required to issue a PCN in relation to their conclusion regarding his domicile status and remittance basis claim, and appealed against the information notice on the basis that the information sought was not reasonably required (pending final determination of his domicile status).

Law

Section 8 TMA requires an individual to make and deliver a tax return to HMRC if required to do so by HMRC. Such a tax return must include a "self-assessment" (unless HMRC is to calculate the tax on the taxpayer's behalf) which is a calculation of the amount payable by the taxpayer by way of income tax and capital gains tax for the year of assessment (section 9 TMA).

Section 9A TMA gives HMRC power to enquire into a section 8 return (within specified time limits) by giving notice to the taxpayer.

An enquiry is completed by HMRC serving a closure notice to the taxpayer under section 28A TMA.

• HMRC can issue a PCN upon completion of enquiries into a matter to which the enquiry relates (section 28A(1A) TMA).
• The enquiry itself is completed when a final disclosure notice (ie, an FCN) is issued by HMRC (section 28A(1B) TMA).
• A PCN or FCN must state HMRC's conclusions and either state that no amendment of the return is required, or make such amendments as are required to give effect to HMRC's conclusions (section 28A(2) TMA).

Decisions in the FTT and the Upper Tribunal ("UT")

The key issue in the case was the correct interpretation of the word "matter" in section 28A(1A) for which a PCN could be issued:

"28A Completion of enquiry into personal or trustee return

(1A) Any matter to which the enquiry relates is completed when an officer of Revenue and Customs informs the taxpayer by notice (a "partial closure notice") that the officer has completed his enquiries into that matter."

The question was, essentially, whether the taxpayer's claim for the remittance basis of taxation was a separate "matter" to which HMRC's enquiry related, so that a PCN could be issued in respect of it.

The FTT agreed with Mr Embiricos and held that HMRC could be required to issue a PCN concluding the enquiry into the validity of the remittance basis claim without quantifying the tax due as a result. Mr Embiricos' appeal against the taxpayer information notice was also allowed on the basis that the notice was not reasonably required pending determination of the taxpayer's domicile status.

In coming to its decision, the FTT distinguished R (Archer) v HMRC [2016] EWHC 296, which determined that a FCN was not valid unless it stated the amount of tax due, on the basis that Archer had been decided before the PCN regime had been enacted (which regime had brought about a fundamental change to the closure notice legislation).

The FTT's decision was reversed by the UT on appeal by HMRC.

The UT considered that the FTT was wrong in deciding that Archer had no application to PCNs. The manner in which the PCN regime was introduced (ie, as a modification to, and as part of the existing closure notice regime) gave rise to an inference that existing law in relation to closure notices continued to apply unless there was a clear indication to the contrary. Accordingly, the principles set out by the High Court in Archer (as endorsed by the Court of Appeal) held true in relation to PCNs also.

Further, the UT considered that it could not have been the intention of Parliament for the PCN regime to operate as a mechanism whereby a taxpayer could unilaterally instigate an early determination of an issue in the enquiry since that would cut across the bilateral, joint referral mechanism in section 28ZA TMA .

Mr Embiricos appealed to the Court of Appeal.

Decision

The Court of Appeal upheld the decision by the UT and dismissed Mr Embiricos' appeal.

In the Court of Appeal, the taxpayer argued that the word "matter" should bear its ordinary meaning, namely a subject that was being dealt with or considered, or a subject matter.  At the same time, however, the taxpayer noted that not every question arising in connection with the subject matter of an enquiry was a "matter" within section 28A (though it could form the subject matter of a joint referral pursuant to section 28ZA TMA): a question would only be a "matter" within the meaning of section 28A if it was, or was required to be, contained in the return. The taxpayer argued that this interpretation was consistent with section 28A(2) TMA in that a return could be amended to give effect to the conclusion - for example, by removing from a return an invalid claim for the remittance basis . This interpretation also meant that the amount of tax payable following disallowance of a claim would be a separate "matter" in its own right (because the tax payable was a matter which of itself was, or was required to be, contained in the return and could be amended).

HMRC maintained the arguments advanced before the UT. In essence, HMRC argued that "matter" in section 28A(1A) TMA must mean a matter in respect of which HMRC could issue a FCN if it were the only issue being enquired into. In this regard, HMRC continued to rely on:

• Archer;
• the FTT decision in Levy v HMRC [2019] UKFTT 2369 (a first instance decision in which the FTT had taken the opposite view to the FTT in Embiricos on the question of whether a person's domicile status and remittance basis claim could constitute a "matter" for the purposes of the PCN regime); and
• consultation documents which preceded the introduction of the PCN regime, which HMRC argued demonstrated that the legislative intent behind the enactment of the PCN regime was to enable HMRC and taxpayers to achieve finality on the "matter" which was the subject of the PCN by securing the early payment of tax brought into charge. HMRC argued that to achieve such finality, HMRC's conclusion on a "matter" must enable it to make all of the necessary amendments to an individual's tax return which arose from its conclusion, including a statement of the amount of any tax brought into charge by the amendment. As such, HMRC did not have power to issue a PCN at a time when the tax effect of a particular conclusion was unknown.

In addition, HMRC argued that a claim for the remittance basis was a claim for a certain basis of taxation to apply. This was therefore inextricably linked to the amount of tax payable. If HMRC concluded that the remittance basis did not apply then giving effect to that conclusion (as HMRC was required to do under section 28A(2) TMA) would involve making all the consequential amendments to the return to bring into account all the taxpayer's taxable worldwide income and gains.

The Court of Appeal considered that the statutory scheme of the TMA supported HMRC's arguments. In particular, the Court of Appeal noted that:

1. The focus of an enquiry is on what is (or is required to be) contained in the return in order to assess the correctness of the calculation of tax payable in the self-assessment submitted by the taxpayer.
2. PCNs and FCNs are intended to operate in the same way and subject to the same restrictions. The statutory scheme draws no distinction between PCNs and FCNs, either in section 28A TMA or at all. In both cases HMRC are required to make the amendment required to give effect to their conclusions. In addition, section 28A(8) TMA provides that references in the Taxes Acts to a "closure notice" under section 28A TMA refer to a PCN or FCN with no distinction drawn between the two. This is further supported by the fact that Parliament introduced PCNs as part of the closure notice regime (and not as part of the referral mechanism).  Further:
   1. A PCN (just as an FCN) "takes effect when it is issued", which is consistent with both forms of closure notices being in the nature of an assessment by HMRC, taking effect directly by altering the taxpayer's self-assessment.
   2. Amendments were made to the TMA to accommodate the substantive tax effect that PCNs have.
3. The joint referral mechanism in section 28ZA TMA is a parallel mechanism designed to operate alongside but very differently to the closure notice regime.
   1. Unlike a closure notice (which has effect when issued), a determination by the tribunal following a joint referral does not have any immediate consequences. Instead, the determination (which is binding) must be taken into account by HMRC in reaching their conclusions on the enquiry and in formulating any amendments to the return. This is a step prior to issuing a PCN or FCN.
   2. The different language of "any matter" in section 28A TMA and "any question arising in connection with the subject matter of the enquiry" in section 28ZA TMA makes it clear that not every question arising during an enquiry is a "matter" within section 28A TMA. The approach to section 28A TMA suggested by the taxpayer blurred the distinction between the mechanisms in section 28A and section 28ZA TMA and risked making the joint referral mechanism redundant in practice.
4. In addition, the operation of the PCN regime suggested by the taxpayer (resulting in the removal of the remittance basis claim without quantifying the tax payable as a result) did not provide any finality as regards the substantive tax effect of that conclusion. It risked prejudicing HMRC's collection powers through delays in challenging the domicile issue and in providing documents and information on non-UK affairs.

Whilst the Court of Appeal found that the relevant "matter" for the purposes of section 28A(1A) TMA was Mr Embiricos' claim to benefit from the remittance basis of taxation (to which his domicile status was relevant), it concluded that the real question was what a valid PCN was required to address: was it sufficient for the PCN to disallow the remittance basis claim by deleting it or was an amended tax calculation also required to give effect to the conclusion? In this regard, the Court said that the remittance basis was not a claim to relief but a basis of assessment. This meant that the rejection of the remittance basis claim would lead inevitably to an assessment to UK tax on the arising basis. In the circumstances that the taxpayer did have foreign income and gains, simply removing the remittance basis claim did not give effect to the conclusion and did not comply with the requirements in section 28A(2) TMA. A valid PCN would have to state the conclusion that the remittance basis claim was disallowed, and make the amendments to the return to bring into charge the relevant foreign income and gains. Only then would the desired early resolution and finality be achieved and early payment be made.

Comments

The Court of Appeal's decision brings much needed certainty in this area. Unless the decision is overturned, taxpayers in the position of Mr Embiricos will not be able to force the issue of a PCN in a domicile dispute before HMRC has had a reasonable opportunity to quantify the tax payable by the taxpayer on the arising basis.  Indeed, even beyond domicile disputes, taxpayers will have more limited options for resisting information requests issued by HMRC for the purposes of calculating the tax payable as a result of conclusions reached in an enquiry.

It may be that taxpayers will continue to be able to take the approach in Henkes, by raising the question of domicile as a preliminary step in assessing the reasonableness of HMRC's refusal to issue a PCN (or an information request). Neither the UT nor the Court of Appeal commented on Henkes. Though, as set out in our blogpost on Henkes (see above) this approach comes with its own risks, and should not be adopted lightly.

More generally, it is disappointing that there remains no straightforward means for challenging an unreasonable refusal by HMRC to agree a joint referral pursuant to section 28ZA TMA.  Were such a mechanism available, the need for the ingenuity on display in cases like Embiricos and Henkes would fall away.