Andrew Cockman, Director, Personal Tax Advisory at Azets Birmingham, reviews the Court of Appeal’s decision in Epaminondas Embiricos v HMRC  EWCA Civ 3.
This longstanding litigation centres on the use of partial closure notices (PCNs). I touched upon the decision at the First-tier Tribunal (FTT) and Upper Tribunal (UT) level in my April 2021 TAXline article. Now the Court of Appeal has found in favour of HMRC and it is worth setting out the issues again.
As a recap, Mr Embiricos was originally from Greece. Before moving to Monaco, he had lived in the UK. He considered himself to be non-UK domiciled and accordingly claimed to be taxed on the remittance basis in relation to his foreign income and gains. HMRC disagreed, considering that he had acquired a domicile of choice in the UK. Mr Embiricos wanted to appeal against this, but he was unable to do so until HMRC issued a closure notice.
Up until Finance (No. 2) Act 2017 (F(No.2)A 2017), an enquiry was completed by issuing a closure notice. This would then finalise all aspects. In order to avoid protracted enquiries, F(No.2)A 2017 introduced PCNs that allow discrete aspects of the enquiry to be resolved efficiently and quickly.
HMRC took the view that it first had to determine the revised amount of tax payable before it could address the question of Mr Embiricos’ domicile based on R (on the application of Archer) v HMRC  EWCA Civ 1962. That case, decided in the context of the original closure notice rules, found that the tax at stake had to be established before a closure notice could be issued.
As anyone who is involved in this area of practice will appreciate, getting to that point in an enquiry can be an expensive process. During the course of proceedings, it was disclosed that prior to the hearing the taxpayer had incurred costs of £150,000 in dealing with HMRC’s enquiry. It was estimated that costs of between £30,000 and £40,000 would be incurred to provide the information requested by HMRC, and continuing costs at the rate of £40,000 a year were considered possible.
Having reached an impasse, Mr Embiricos first applied to the FTT for a PCN in relation to his domicile/remittance basis claim. The FTT found that a PCN could be issued, and accordingly the return could be amended. The Tribunal considered that there was no requirement in this instance for the tax at stake to be calculated. It was recognised that this gave a wide interpretation to the PCN regime, but it was felt to be justified in the circumstances.
When the case came before the UT, a different path was followed. The analysis emphasised that the path chosen by Parliament to introduce the PCN regime was not to create a new system. It was to amend the existing closure notice rules and then only so far as necessary. This meant that, after reviewing the statutory background and context, the UT 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’ appeal to the Court of Appeal.
The issues at stake
The leading judgement was given by Lady Justice Simler. She focused on the wording of the statute, trying to discern its intent. The question was to establish the circumstances where HMRC can give (or be required to give) the taxpayer a PCN. In particular, can HMRC be required to give a PCN without quantifying the tax due? She considered that the answer depends upon the correct construction of s28A, Taxes Management Act 1970 (TMA 1970).
Mr Embiricos submitted that HMRC can be required to give a PCN in these circumstances: whether the remittance basis claim is valid or not can properly be regarded as a ‘matter’ in its own right within s28A(1A), so that a PCN can be given to inform the taxpayer that the officer has completed his enquiries into that ‘matter’, with the amount of tax payable being a separate ‘matter’ in relation to which a further closure notice can be given subsequently once other issues have been resolved.
HMRC disagreed and argued that ‘matter’ in s28A(1A) must mean a matter in respect of which HMRC could issue a final closure notice (FCN) if it were the only issue being enquired into. To achieve that finality, HMRC considered that the amount of the tax payable would have to be first established.
Conclusion drawn by the Court of Appeal
Following a review of the case law, and consultation document and background to the 2017 amendments, Lady Justice Simler reached the same conclusion as expressed in the UT. The statutory scheme draws no distinction between PCNs and FCNs. In both cases, it is the closure notice that must achieve the amendments of the return that are required. The inference drawn from this and the way in which Parliament introduced PCNs as part of the closure notice code meant that PCNs were intended to operate in the same way and be subject to the same restrictions to FCNs.
This meant that where an enquiry has computational consequences for the tax return, the PCN must amend the taxpayer’s self assessment, thereby bringing into effect the tax consequences as a result. But that does not mean that a PCN must always make amendments to the return by quantifying the tax payable.
For example, if no immediate computational changes are involved because it does not affect the self assessment for that particular year of assessment, or that particular taxpayer, no amendment has to be made by the PCN to the calculation of tax due for that year of assessment. Lady Justice Simler gave the example of a claim to carry forward a loss to a future year that is made in the tax return. That would have no computational consequences for the tax year to which the return relates. Here, a closure notice could simply disallow the loss while having no substantive tax effect for the current fiscal year.
But the judge considered that was quite different from the current case where the claim by Mr Embiricos had a direct impact on the calculation for that fiscal year in question. In such circumstances, Lady Justice Simler considered that an accompanying calculation of the tax at stake was required.
The bigger picture
It is very disappointing that an important preliminary question such as the domicile status of a taxpayer cannot be established quickly and in a cost-effective manner as part of the litigation process. Lady Justice Simler contrasted the effect of a FCN or PCN with the joint referral mechanism available to taxpayers and HMRC under s28ZA. She considered that it is expressly treated in the same way as a decision on a preliminary issue in an appeal, and is a stage prior to a closure notice, whether partial or final.
It is puzzling then why HMRC seems to be so reluctant to engage in this process. Counsel for HMRC said at the FTT stage that he was not aware that HMRC had ever made a joint referral in a domicile case. It is understandable that HMRC will want to establish that undertaking an enquiry is ‘worth the powder and shot’, but surely that can be achieved by agreement between the parties so that they can then proceed to a rapid determination of a taxpayer’s domicile as a preliminary issue. That would seem to be a much more cost-effective way of dealing with such cases from the point of view of the litigants, as well as the taxpaying public as a whole.A
Andrew Cockman, Director, Personal Tax Advisory, Azets Birmingham, and a member of the Tax Faculty’s Private Client Committee