Partial closure notice could not be issued without specifying tax due

The case concerned an enquiry into whether Mr Embiricos, who was born in Greece, was non-UK domiciled and therefore entitled to use the ‘remittance basis’ of taxation.  Under the remittance basis, a non-UK domiciled individual is not subject to UK tax on overseas income and gains which are not remitted to the UK. Embiricos completed his tax returns on the basis that he was non-UK domiciled and so he did not provide details of his overseas income and gains.

HMRC enquired into the returns and decided he was UK-domiciled. HMRC asked for details of Embiricos’s overseas income, which he declined to provide, arguing that he should be able to challenge HMRC’s conclusion on his domicile status before providing the information.

Once an enquiry has been opened, the taxpayer can only appeal HMRC’s conclusion if HMRC has issued a closure notice. HMRC can issue a final closure notice in relation to the enquiry or a partial closure notice in relation to one ‘matter’. The taxpayer can apply to the First-tier Tribunal for a direction requiring HMRC to issue a final or a partial closure notice.

Embiricos applied for a partial closure notice on the basis that the domicile question and entitlement to the remittance basis was a separate ‘matter’ to the quantification of the tax due. The First-tier Tribunal directed that a partial closure notice be issued, but this was overturned by the Upper Tribunal.

The Court of Appeal agreed with the Upper Tribunal that HMRC did not have the power to issue a partial closure notice in respect of Embiricos' domicile and remittance basis claim without specifying the increased tax due in consequence of that conclusion.

The legislation provides that that a closure notice must either state that in the HMRC officer's opinion no amendment of the return is required or make the amendments of the return required to give effect to HMRC’s conclusions.  Since Embiricos had not provided information about his overseas income, the Court of Appeal said the partial closure notice could not be issued because the tax returns could not be amended to show the amount of tax due.

“This decision is unhelpful for taxpayers seeking to bring complex enquiries to a close,” said Steven Porter, a tax disputes expert at Pinsent Masons.

“The taxpayer’s advisers were trying to get a closure notice issued in relation to the domicile point, so that they could appeal this to the tribunal without having to go into the detail of the taxpayer’s overseas income and gains” Porter said.

In the Court of Appeal, Lady Justice Simler said that an issue can only be a ‘matter’ for the purposes of the partial closure notice rules if, were it the only issue being enquired into, HMRC could issue a valid final closure notice in respect of it.

She said this analysis “achieves the greater finality sought by this legislative amendment by early resolution of one or more discrete matters at the enquiry stage, together with accelerating payment of any tax due in consequence of the matter determined. And it avoids the unnecessary fragmentation of a single dispute into multiple ‘matters’ that would frustrate the purpose of the statutory scheme”.

In Embiricos’ case, Lady Simler said a partial closure notice would be required to state HMRC’s conclusion that the remittance basis is disallowed and make the amendments to the return required to give effect to this conclusion by amending the return to bring into charge the relevant foreign income and gains, with a calculation or assessment of the income and capital gains tax payable. This could not be done because Embiricos had not provided HMRC with information about his offshore income and gains.

However, she said that this did not mean that a partial closure notice must always make amendments to the return by specifying the tax payable. If HMRC’s conclusion does not have computational consequences because it does not affect the self-assessment for the year or the taxpayer in question, then no amendment would be required to be made by the partial closure notice to the calculation of tax due in the self-assessment. One example of this would be a claim to carry forward a loss to a future year that is made in the tax return but has no computational consequences for the fiscal year to which the return relates. In that case a closure notice could simply disallow the loss claim by amending the return to disallow or remove it.

“The Court of Appeal’s narrow interpretation of what constitutes a ‘matter’ capable of being the subject of a partial closure notice reduces the usefulness of these notices for those seeking to bring to a close long-running HMRC enquiries,” Porter said.