HMRC enquiries - will the Court of Appeal save partial closure notices?

Background

HMRC have a statutory right to enquire into self-assessment tax returns made by individual and corporate taxpayers. An enquiry is only considered completed when HMRC formally issue a ‘closure notice’ but the legislation does not provide a specific time limit for HMRC to do so. Therefore, a key area of disagreement between taxpayers (and their advisers) and HMRC is the length of time taken by the latter to conclude their enquiries, which can often become protracted affairs (and, as a result, disruptive and expensive).

Where a taxpayer considers that HMRC already have sufficient information to conclude an enquiry but are refusing to do so, it may apply to the First-tier Tribunal (FTT) for a direction requiring HMRC to issue a closure notice within a specified period. At that point, the burden is on HMRC to demonstrate (on the balance of probabilities) that there are reasonable grounds not to do so. If a closure notice is issued, the taxpayer then has the ability to appeal an unfavourable conclusion to the FTT. Closure notices therefore offer an important safeguard, balancing the public interest in HMRC being able to verify self-assessment returns with the right of taxpayers to seek finality. This weapon should, however, be wielded with care – a premature closure notice application, if not simply dismissed, carries the risk of bouncing HMRC into an unfavourable decision.

The appeal

In this case, the taxpayer (Mr Embiricos) considered himself to be domiciled outside the UK and therefore claimed the remittance basis for the tax years ending 2015 and 2016 (meaning he would only be liable for UK tax on any overseas income or gains to the extent remitted to the UK). HMRC subsequently opened enquiries into the relevant tax returns and concluded that he was, in fact, domiciled in the UK for the relevant periods.

Mr Embiricos applied to the FTT for a partial closure notice (PCN). PCNs (as opposed to ‘final’ closure notices) are a relatively recent innovation that allow an enquiry to be concluded in respect of a specific ‘matter’, giving the taxpayer the ability to appeal that conclusion whilst other ‘matters’ continue to be investigated. They are particularly useful, therefore, where a person’s tax affairs are complex. One potential advantage to Mr Embiricos was that, if the issue of his domicile were resolved in his favour on appeal, he could avoid the necessity of having to calculate and disclose his overseas income and gains.

However, HMRC considered that they could not issue a PCN until they had first quantified the amount of tax which would be due if the remittance basis was denied. For that, they would require details of the overseas income and gains not included in Mr Embiricos’ returns and therefore issued a formal information notice under Schedule 36 to the Finance Act 2008 to obtain such information. HMRC relied heavily on the Court of Appeal’s decision in R (Archer) v HMRC [2017] EWCA Civ 1962, which provided that a closure notice is not valid unless it states the amended amount of tax for which the taxpayer is liable as a result of HMRC’s conclusions.

The FTT disagreed with HMRC, issuing a direction for a PCN to be issued (and, as a consequence, granted Mr Embiricos’ appeal against the information notice on the basis that such information was not reasonably required). The FTT considered that a person’s domicile was capable of being a ‘matter’ for the purposes of the PCN legislation, and that HMRC could make the necessary tax return amendments by simply withdrawing the claim for the remittance basis.

Moreover, the FTT held that the decision in Archer concerned legislation prior to the introduction of PCNs in 2017, and was therefore restricted to ‘final’ closure notices. Before the appeal had reached the Upper Tribunal, however, a differently constituted FTT reached the opposite conclusion in the case of The Executors of Mrs R W Levy v HMRC [2019] UKFTT 418.

The Upper Tribunal favoured the decision in Levy, allowing HMRC’s appeal and resolving the conflicting case law position. The Upper Tribunal also expressed concern at defining the term ‘matter’ too broadly – the concern being that taxpayers could unnecessarily obstruct HMRC by requesting a PCN in respect of each finding that might be made over the course of an enquiry.

The Upper Tribunal has now granted Mr Embiricos permission to appeal to the Court of Appeal.

Comment

The Upper Tribunal’s decision in this case would have been a disappointment to any taxpayers currently dealing with or expecting a domicile enquiry, as they currently face having to spend (perhaps unnecessary) time and expense disclosing details of their overseas income and gains to HMRC in advance of their domicile being finally determined.

The Upper Tribunal’s decision on quantification also arguably undermines the purpose of the PCN regime, which is to make the enquiry process more flexible by allowing specific issues to be concluded while others continue to be investigated. This is because it may not be possible to quantify the tax due on a particular ‘matter’ in a vacuum without determining other ‘matters’ first. The Court of Appeal’s upcoming decision will therefore have importance not only for domicile enquiries but also for the broader rights of all taxpayers to bring enquiries to a close.