Andrew Cockman looks at the implications of the Upper Tribunal decision in R & C Commrs v Embiricos [2020] UKUT 0370 (TCC) in relation to partial closure notices.
Over the last two years a series of cases have sought to establish whether a taxpayer can request a partial closure notice (PCN) to determine their domicile status, where there is an ongoing dispute with HMRC. Following the latest decision, we seem to have landed at a place that is not entirely satisfactory.
Background
HMRC can require an individual to complete and submit a tax return which must include a self assessment of the amount of income and capital gains taxes due. HMRC may then enquire into anything contained in the return, or which should be contained in it, and this includes any claim or election (s9A, Taxes Management Act 1970 (TMA 1970)). While the enquiry is ongoing, HMRC and the taxpayer may jointly refer any question arising in connection with the subject matter of the enquiry to the tribunal for its determination (s28ZA, TMA 1970).
Up until Finance (No. 2) Act 2017 (F(No.2)A 2017) an enquiry was completed by issuing a closure notice which would then finalise all aspects. To avoid protracted enquiries F(No.2)A 2017 introduced PCNs which allow discrete aspects of the enquiry to be resolved efficiently and quickly. The recent cases all involve attempts by taxpayers to curtail enquiries involving the remittance basis of taxation, by seeking to determine whether the taxpayer was legally domiciled outside the UK as a threshold issue.
Embiricos [2019] UKFTT 0236 (TC)
Mr Embiricos was originally from Greece. He had lived in the UK before moving to Monaco. He considered himself to be non-UK domiciled and claimed to be taxed on the remittance basis. HMRC considered he had acquired a domicile of choice in the UK. He wanted to appeal against this but was unable to do so until HMRC issued a closure notice.
A claim for the remittance basis does not require a taxpayer to quantify the amount of claim. However, HMRC took the view that it first had to determine the revised amount of tax payable before it could address the question of his domicile based on R (on the application of Archer) v HMRC [2017] EWCA Civ 1962. Archer had been decided in relation to the original closure notice rules and provided that before a closure notice could be issued, the tax at stake had to be established. Having reached an impasse, Mr Embiricos first applied to the First-tier Tribunal (FTT) for a PCN in relation to his domicile/remittance basis claim.
This all could have been resolved in a simpler fashion. Under s28ZA, TMA 1970 it is possible to bring matters for determination to the tribunal, but it requires HMRC’s agreement and HMRC refused to provide it. Counsel for HMRC accepted that the cost of providing information about the taxpayer’s overseas income and gains may be substantial but argued that it was necessary for HMRC to establish whether the tax at stake would justify the cost of the tribunal determining whether the taxpayer was domiciled outside the UK.
James Kessler QC, acting for Mr Embiricos, took the view that it would be a waste of both time and money to require the taxpayer to provide those details prior to determination of his domicile status. It was disclosed that the taxpayer had incurred costs of £150,000 prior to the hearing in dealing with HMRC’s enquiry and would incur costs of between £30,000 and £40,000 to provide the initial information requested by HMRC. Continuing costs thereafter at the rate of £40,000 a year were possible.
The FTT found that a PCN could be issued, and accordingly the return could be amended. There was no requirement in this instance for the tax at stake to be calculated. The FTT recognised that this gave a wide interpretation to the PCN regime but considered that this conclusion was in accordance with Parliament’s intention in introducing the option of a PCN application. It enabled enquiries to be dealt with more flexibly and potentially with greater efficiency.
Executors of Mrs Levy [2019] UKFTT 0418 (TC)
Between the FTT publishing the Embiricos decision and HMRC’s appeal being heard in the Upper Tribunal, the Levy case was decided by the FTT. The Levy case concerned enquiries into self assessment tax returns submitted by Mrs Levy for two years prior to her death where she had claimed the remittance basis. An application was made seeking a closure notice on the basis that the enquiry had run on long enough. In the alternative, the tribunal was asked to direct that a PCN be issued in respect of Mrs Levy’s domicile status for the two tax years concerned.
The FTT refused. Judge Andrew Scott considered that there were reasonable grounds for refusing to give a final closure notice and that he did not have jurisdiction to direct that there should be a PCN in relation to Mrs Levy’s domicile. This was because the amount of tax due had not been quantified. Judge Scott felt that he was bound by the decision in Archer. As a matter of statutory construction, he considered that Parliament must be considered to have been aware of the case when making the later statutory changes. These changes were fairly minimal and simply slotted PCNs into largely the same statutory scheme as full closure notices. The result was that Parliament should not be presumed to have decided that any type of closure notice could be issued without first having established the amount of tax potentially at stake.
R&C Commrs v Embiricos [2020] UKUT 0370
Here the Upper Tribunal (UT) followed the analysis of the FTT, but emphasised that the path chosen by Parliament to introduce the PCN regime was not to create a new set of provisions or adapt the joint referral mechanism under s28ZA, TMA 1970. It was to amend the existing closure notice rules and then only so far as necessary.
In coming to this conclusion, the tribunal highlighted the existence of the joint referral mechanism under s28ZA. The judges considered that it was highly unlikely that Parliament can have intended there should be two parallel mechanisms for dealing with the referral of threshold questions to the tribunal but with only one of them requiring the consent of both parties. However, the UT recognised that as s28ZA requires the consent of the taxpayer and HMRC, a refusal by HMRC to consent will disadvantage the taxpayer. Accordingly, after having reviewed the statutory background and context, the UT concluded that based on the authority of Archer a PCN could not be issued until the tax at stake had been quantified, and the appeal was determined in favour of HMRC.
Comment
The law in this area was recognised by the UT as being imperfect but workable. What is less easy to follow is why threshold issues such as the determination of an individual’s domicile status are not being actively referred to the tribunal using the joint referral mechanism of s28ZA. HMRC refused to do so in the Embiricos case.
What counsel for HMRC said at the FTT stage was that he was not aware that HMRC had ever made a joint referral in a domicile case. This is puzzling. The FTT was of a similar view. A preliminary determination would ensure that HMRC did not allocate scarce resources over what could involve many years in pursuing a charge to tax that ultimately failed. As a result, it is to be hoped that HMRC will publish its criteria as to when it will agree to a joint referral of the determination of an individual’s domicile status. Such an approach would seem to be a much more efficient and cost-effective way of proceeding for both parties.
It is understood that leave to appeal the case has been granted.
About the author
Andrew Cockman, Director, AMC Tax Consulting Ltd, and member of the Tax Faculty’s Private Client Committee