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Determining domicile as a preliminary issue

Author: Andrew Cockman

Published: 03 Mar 2023

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Andrew Cockman reviews the continuing litigation by Epaminondas Embiricos concerning the point at which a taxpayer’s domicile should be established in the litigation process.

The First-tier Tribunal (FTT) decision in Embiricos [2022] UKFTT 464 (TC) represents a new chapter in the continuing litigation between Epaminondas Embiricos and HMRC. It concerns an application seeking a determination of Mr Embiricos’s domicile as a preliminary matter. I touched upon the arguments concerning the use of a partial closure notice (PCN) to determine his domicile at the FTT and Upper Tribunal (UT) level in my April 2021 TAXline article. I reviewed the Court of Appeal decision on the PCN point, in favour of HMRC, in my April 2022 TAXline article.

Factual background

To recap the position, Mr Embiricos was originally from Greece. He moved to live in Monaco, having lived in the UK. He considered himself to be non-UK domiciled, claiming to be taxed on the remittance basis on his foreign income and gains. 

HMRC disagreed, stating that he had acquired a domicile of choice in the UK, and opened enquiries into Mr Embiricos’s UK tax returns for 2014/15. Originally Mr Embiricos applied to the FTT for a final closure notice in respect of the 2014/15 enquiry. As explained below, this was subsequently amended to an application for a PCN in respect of his domicile status. 

HMRC then issued an information notice seeking details of his foreign income and gains for 2014/15 and 2015/16. Mr Embiricos countered by saying that the information was not reasonably required, essentially because his domicile position needed to be established first. HMRC would not agree to this, stating that it first had to determine the revised amount of tax payable before it could address the question of his domicile.

Having reached an impasse, Mr Embiricos applied to the FTT for a PCN to resolve matters. The FTT found that a PCN could be issued, and accordingly the return could be amended and the information notice was not required. When the case came before the UT, that tribunal concluded that a PCN could not be issued until the tax at stake had been quantified, and the appeal was determined in favour of HMRC. This decision then prompted Mr Embiricos’s appeal to the Court of Appeal, which reached the same conclusion expressed by the UT.

In the end, no enquiry was ever opened by HMRC into Mr Embiricos’s 2013/14 return. Instead, a discovery assessment was issued on the basis that Mr Embiricos had acquired a domicile of choice, so was not eligible to be taxed on the remittance basis. The amount assessed by HMRC was very significant – almost £10m – and was issued on a best judgement basis because Mr Embiricos had not provided HMRC with any details upon which it could base an assessment.

While all of this had been going on, Mr Embiricos had sought permission to appeal the PCN argument to the Supreme Court. The Supreme Court refused permission to appeal, and one of the side effects of that was that the original information notices came back into play and Mr Embiricos’s appeal against them was treated as being dismissed. As a result, he agreed to provide HMRC with the information it had sought. Then, in attempt to resolve matters, Mr Embiricos made an application for the domicile issue to be determined as a preliminary issue.

The Supreme Court refused permission to appeal, and one of the side effects of that was that the original information notices came back into play

Determination of the preliminary issue 

Both sides in the case agreed that the Upper Tribunal correctly set out the criteria to be applied when dealing with an application for a preliminary hearing in Wrottesley v HMRC [2015] UKUT 637 (TCC):

  • The power to deal with matters separately at a preliminary hearing should be exercised with caution and used sparingly.
  • The power should only be exercised where there is a ‘succinct knockout point’.
  • The point must be capable of being decided after a relatively short hearing (as compared with the rest of the case) and without significant delay. 
  • Regard should be taken as to whether there is any risk that determination of the preliminary issue could hinder arriving at a just result in a subsequent hearing of the remainder of the case. 
  • Account should be taken of any potential for overall delay.
  • The possibility that the determination might result in there being no need for a further hearing should also be taken into account.
  • Would hearing the preliminary point be likely to decrease costs or could it, in fact, increase costs overall?
  • There is an overriding obligation to take into account that the tribunal should deal with cases fairly and justly.

A further gloss to this was set out by Lindsay J in CJ O’Shea Construction Ltd v Bassi [1998] ICR 1130 that it was unlikely that there would be a succinct knockout point where a preliminary issue could not be separated entirely from the merits of the case, or if it would be necessary to consider a substantial body of evidence. This was endorsed in a more recent case (Ryder v Northern Ireland Policing Board [2008] NIJB 252). 

The judge went through the various tests. It was accepted by all parties that the domicile issue was a ‘knockout point’. The argument then became very refined, as to whether the domicile issue was a ‘succinct knockout point’. 

In arguing whether separate determination could adversely affect other issues, HMRC contended that there was a risk that directing the hearing of a preliminary issue could adversely affect HMRC’s continuing enquiries into Mr Embiricos’s returns. Kevin Prosser QC for Mr Embiricos argued that the tribunal had no jurisdiction as regards the open enquiries and the judge agreed, holding that the tests he had to apply did not weigh against directing a preliminary hearing. 

The tribunal accepted that a preliminary hearing in Mr Embiricos’s favour would resolve the appeal. While it would not necessarily resolve all relevant aspects, the judge decided that he did not have to prejudge matters so accepted that this particular test had been met.

The time estimates provided by Mr Prosser for Mr Embiricos, and those by counsel for HMRC differed significantly. On the whole, Mr Prosser’s estimates were more optimistic. After considering the relative estimates the judge found that the hearing of the preliminary issues would not be relatively short. An issue was that the tribunal would have to decide in the judges’ view mixed questions of fact and law. This introduced a material risk of overall delay, which could significantly delay the resolution of the appeal. 

A further issue was the finding by the judge that hearing the domicile question as a preliminary question was unlikely to reduce the time taken to determine the liability issue and carried with it the risk that cost might increase as well as overall delay. 

This meant that overall, the judge felt that there was a material risk of delaying the overall resolution of the appeal, and this weighed more heavily against holding a preliminary hearing as compared with the possible benefit to be gained by hearing the preliminary issue, which might deliver a knockout point. As a result, the application for a preliminary hearing was dismissed. The net effect is that the litigation process continues.

The bigger picture

As I mentioned in my earlier articles, the litigation cost in a case of this nature can be eye-watering. For example, it was disclosed in a prior hearing that the taxpayer had incurred costs of £150,000 in dealing with HMRC’s enquiry at that time. These costs will have increased substantially since the date of that hearing. Taken as a whole, it leaves open the question as to why it wasn’t possible to determine the taxpayer’s domicile at an earlier stage and why it was necessary for the litigation juggernaut to continue on this path.

It leaves open the question as to why it wasn’t possible to determine the taxpayer’s domicile at an earlier stage and why it was necessary for the litigation juggernaut to continue on this path

It was acknowledged in the hearing that the taxpayer might die before the matter is litigated, and it leaves open the question as to what purpose is served by a tax system that is allowed to operate in such an inflexible manner, especially as it was possible for the matter to have been determined at a very early stage by joint referral to the Tribunal under s28ZA, Taxes Management Act 1970.

Andrew Cockman, Director Personal Tax Advisory, Azets Birmingham, and a member of the Tax Faculty’s Private Client Committee

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