When can HMRC partly close down a tax enquiry?by
Certain matters in a complex tax enquiry may be concluded by HMRC issuing partial closure notice (PCN), and a Court of Appeal case has clarified the circumstances in which a PCN can be used.
PCNs were introduced in 2017, to allow a taxpayer to force HMRC to issue a formal conclusion on a particular "matter" in an enquiry, so that it can then be the subject of an appeal at the tax tribunal if the taxpayer disagrees.
Embiricos v Revenue and Customs Commissioners involved an enquiry by HMRC into Mr Embiricos’ domicile status. He was resident in the UK, but born in Greece, and considered himself as being domiciled in Greece as a non-dom. Under the remittance basis, Embiricos would only pay UK tax on his foreign income and gains to extent that these are remitted to the UK.
As is common for remittance basis taxpayers, Embiricos had not provided details of his foreign income and gains when filing his tax returns for 2014/15 and 2015/16.
HMRC opened an enquiry into those tax returns under TMA 1970 s 9A to examine Embiricos' claim that he was not domiciled in the UK. In September 2018, HMRC determined that he was domiciled in the UK during the relevant period but it was not yet able to make any decision about Embiricos' tax liability, and asked him to provide information that would assist them in making this decision.
Application for PCN
Embiricos applied to the tribunal for a PCN on his domicile alone, and refused to provide information about his foreign taxable income and gains before he was able to challenge HMRC's determination about his domicile status.
By contrast, HMRC argued that Embiricos needed to provide the information before a PCN could or should be issued. At the behest of Embiricos, HMRC issued him with an information notice under FA 2008, Sch 36 requiring him to provide the necessary information it needed to close specific aspects of the enquiry into his returns.
The central issue was whether HMRC should or could issue him with a PCN. Embiricos applied to the FTT for a direction that HMRC be required to issue a PCN in relation to the remittance basis and domicile claims for the relevant period.
The FTT decided that HMRC could issue a PCN for his remittance basis and domicile claims without a calculation of the tax that was due following disallowance of the remittance basis claim.
The Upper Tribunal reversed this decision, concluding that HMRC could not issue a PCN in relation to a taxpayer's claim for the remittance basis without making a determination about the tax that was due.
The central issue on appeal was the circumstances in which HMRC can issue a PCN under TMA 1970 s 28A(1A).
The Court of Appeal considered Section 28A in its statutory context and the consultation documents about the introduction of PCNs. It concluded that both PCNs and final closure notices were intended to operate in the same way, and to be subject to the same restrictions.
A matter which could be the subject of a PCN could only be a matter in respect of which HMRC could issue a valid final closure notice.
Was ‘domicile’ a matter for a PCN?
In this case it was not. As HMRC had found that Embiricos was domiciled in the UK, it would then have to make a determination about the amount of tax he was due to pay on an arising basis. The Court decided that HMRC could not issue a valid PCN in the absence of the information that it needed in order to make a determination about the tax due, following its rejection of the remittance basis claims.
The Court also concluded that separating the matter of the rejected remittance basis from the issue of the tax arising risked prejudicing HMRC, because it would allow a taxpayer to delay providing the information and documents that HMRC needed to decide how much tax was due to be paid. Issuing a PCN in these circumstances could, the Court concluded, delay HMRC's enquiries into the amount of tax that was due until any appeal against the PCN was concluded.
The Court of Appeal's decision impacts taxpayers with domicile enquiries, and sheds light upon the rights of all taxpayers in conjunction with HMRC's ability to issue information notices.
Historically, the aim of the PCN regime was to strike a balance between HMRC's right to obtain information and progress an enquiry, alongside the taxpayer's right to have certainty and finality to the enquiry process. It is essential for taxpayers to know when HMRC's enquiry stage ends, so they are aware of when their right of appeal is available, as well as ensuring that the information being sought by HMRC is not unreasonable.
Overall, this is a disappointing decision for taxpayers as it removes an important weapon in the context of a domicile enquiry. If Embiricos had been successful, both he and others in similar circumstances would have had the advantage of being able to resolve the question of domicile, before the additional burden and cost of working out the quantum of foreign income and gains and disclosing these to HMRC was required.
While the Court of Appeal's decision provides further clarity to the intention of PCNs and the importance of flexibility when making enquiries, taxpayers should proceed with caution, and be mindful of facing difficulties when resisting PCNs as a result of this decision (which may lead to a further appeal to the Supreme Court, given the importance of this issue).
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Timothy Folaranmi is a managing associate and professional support lawyer in the dispute resolution department at Mishcon de Reya. He has also advised on Anti-money Laundering, Client Due Diligence and Counter Terrorist Financing policies, procedures and controls.