Taxpayers who have been subject to lengthy and complex HMRC enquiries will be familiar with the desire to receive a closure notice in respect of those enquiries. Not only does a closure notice bring certainty of HMRC’s view of the issues under investigation, but the notice confers certain rights of appeal on the taxpayer.
Recently, the Court of Appeal considered the conditions to be met before HMRC is required to issue a partial closure notice on a “matter”: specifically, whether the statutory meaning of a “matter” meant that HMRC needed a conclusion on the validity of a tax claim, or whether it also needed to quantify the resulting tax brought into charge. In Embiricos v HMRC  EWCA Civ 3;  S.T.C. 232 (Embiricos), the Court of Appeal concluded that HMRC could not issue any partial closure notice without stating the amount of tax due.
The reverberations will be felt by HMRC and taxpayers alike: where HMRC lacks sufficient information or information powers to put a monetary value on its enquiry conclusions, that enquiry cannot achieve finality, to the detriment of both the public purse and certainty for the taxpayer.
From HMRC enquiries to partial closure notices
HMRC may enquire into “anything contained in [a self-assessment tax] return, or required to be contained in the return” (s.9A, Taxes Management Act 1970 (TMA 1970)). Such enquiries into a tax return are brought to a formal conclusion by the issuance of a closure notice. There is separate legislation for individuals and partnerships; and companies, although the enquiry language is replicated in the companies’ legislation (Sch. 18, para 32, Finance Act 1998 (FA 1998)).
The issue of a closure notice entails HMRC stating its view of the current tax position, and effecting any amendments required to a tax return. From the taxpayers’ perspective, closure notices carry with them rights of appeal against HMRC’s conclusion, or any amendment made by the notice (s.31, TMA 1970).
In 2017, partial closure notices (PCNs) were introduced by the Finance (No.2) Act 2017, empowering HMRC to issue a formal conclusion on a particular “matter” where there is a wider enquiry over several distinct matters. Partial closure notices are a boon for all: HMRC is able to collect the tax associated with individual matters before the whole enquiry reaches a conclusion, whilst taxpayers are able to exercise their rights of appeal earlier, should they disagree with HMRC’s conclusions or amendments.
The PCN regime was inserted into the legislation under s.28A of the Taxes Management Act 1970 (TMA 1970), which establishes that:
“Any matter to which the enquiry relates is completed when an officer of Revenue and Customs informs the taxpayer by notice (a ‘partial closure notice’) that the officer has completed his enquiries into that matter.”
Section 28A TMA 1970 continues by stipulating the requirements for a closure notice. First, a partial or final closure notice must state the officer’s conclusion. Secondly, the closure notice must state that in the officer’s opinion no amendment of the return is required; or make the amendments of the return required to give effect to his conclusions.
It is widely accepted that final closure notices were an assessment and, as such, a final closure notice had to state the amount of tax due. Whether or not partial closure notices fell within the same requirements was the subject of the appeal in Embiricos.
Mr Embiricos was born in Greece with a domicile of origin there. Although he was ordinarily resident in the UK, Mr Embiricos considered himself to be a non-UK-domiciled taxpayer and filed his self-assessment tax return declaring income and gains on a remittance basis for the tax years 2014/15 and 2015/16.
In December 2016, HMRC opened an enquiry into those tax returns and informed the taxpayer that the intention was only to investigate his claims to be non-domiciled in the UK. By September 2018, HMRC informed Mr Embiricos that they deemed him to be domiciled in the UK. In further correspondence, the taxpayer disagreed and sought HMRC’s consent to make a joint referral for the First-tier Tax Tribunal (FTT) to determine the question of domicile. HMRC refused and issued an information notice requiring Mr Embiricos to provide information on his foreign income and gains.
In turn, Mr Embiricos declined to provide such information and, instead, applied to the FTT for a direction that HMRC should issue a partial closure notice in relation to his domicile/remittance basis claim. Effectively, the taxpayer sought to exercise his formal right of appeal attached to the partial closure notice, for a tribunal to decide the domicile dispute without Mr Embiricos disclosing details of his overseas affairs.
At first instance, the FTT was persuaded by Mr Embiricos: it concluded that the domicile question and the amount of tax were “completely separate” matters. Considering the definition of a “matter” using ordinary language, the tribunal considered that domicile was capable of being a standalone matter, with the amendments themselves a separate matter requiring further investigation (requiring a further closure notice in future). The FTT concluded that HMRC could issue a PCN denying Mr Embiricos’ claim to the remittance basis and amending the return to remove that claim, and further ordered HMRC to issue such a PCN. There was no requirement that the amount of tax thereby brought into charge be stated.
Shortly thereafter, but before any appeal was heard, a differently constituted FTT reached the opposite conclusion in Levy’s Executors v HMRC  UKFTT 418;  S.F.T.D. 1045 (Levy’s Executors), meaning both taxpayers waited with baited breath for the appellate courts to finalise the PCN issue.
On HMRC’s appeal to the Upper Tribunal (UT), the original decision was overturned and HMRC’s appeal allowed. On this occasion, the UT looked to the origins of the PCN regime and acknowledged that the relevant provisions operated as amendments to the previous closure notice regime. With that in mind, and disagreeing with the FTT, it held that the principles set out by the High Court in R. (on the application of Archer) v HMRC (Archer)  EWCA Civ 1962;  S.T.C. 38 (Archer), which considered the previous regime, were also applicable to a PCN. Further, the UT considered that, in light of the joint referral mechanism for determination of a single issue under section 28ZA TMA 1970, it cannot have been Parliament’s intention to create a PCN regime that allowed a taxpayer to unilaterally seek determination of the same. This appears to be a misreading of the origins of PCNs. As is set out in the original consultation document proposing PCNs, the regime was borne from concerns that taxpayers were delaying proceedings and preventing HMRC from resolving all matters in a tax enquiry, as was then required to issue a closure notice (HMRC’s Consultation Document Tax Enquiries: Closure Rules (18 December 2014)). The original consultation therefore proposed a unilateral power for HMRC to ask the FTT to close discrete aspects of a tax enquiry, even initially naming it a “Tribunal Referral Notice” to indicate its relationship to the joint referral mechanism. The consultation developed into a policy paper for the introduction of partial closure notices, including the reciprocal power for taxpayers to unilaterally request a PCN, on the basis of fairness (HMRC’s Policy Paper, Tax Enquiries: Closure Rules (5 December 2016)). It would therefore appear that the introduction of PCNs was intended to prevent parties from delaying the closure of discrete matters by refusing to consent to the joint referral mechanism within section 28ZA TMA 1970.
With the taxpayer and HMRC each with a win under their belts in the specialist tax tribunals, the case reached the Court of Appeal.
The Court of Appeal
The unanimous Court of Appeal upheld the Upper Tribunal’s decision, dismissing Mr Embiricos’ appeal in its entirety. At the time of writing, it has not been confirmed whether the taxpayer has sought permission to appeal to the Supreme Court.
On the overarching issue, the Court of Appeal sought to define the word “matter” for the purposes of the PCN regime. It was notable that neither party in the case had suggested that the term bore its ordinary dictionary definition of a subject matter or issue. Rather, the court found that the word “matter” adopts a more limited meaning when used in the context of this statutory scheme. However, as is explored in more depth below, the interpretation of the term had a more substantive meaning than simply “any question arising in connection with the subject matter of the enquiry”.
Having contemplated the various interpretations put forward by both parties, the judgment concludes that an issue can only be a “matter” for the purposes of section 28A(1A) TMA 1970 if, had it been the only issue under enquiry, HMRC had been able to issue a valid final closure notice in respect of it. As set out above, a final closure notice is deemed an assessment and must state the amount of tax due.
In summary, Simler LJ explained that the decision was made on the basis of:
1) the existence of section 28ZA TMA 1970;
2) the legislative means by which PCNs were introduced; and
3) the judgment in Archer, which it deemed applicable to the instant case and the current PCN regime.
The court also considered that such a determination would ensure consistency between partial and final closure notices; achieve the finality of early resolution of discrete matters; assist in the acceleration of payment of any tax due to HMRC; and avoid the unnecessary fragmentation of a single dispute into multiple “matters”.
The existence of section 28ZA TMA 1970
Both the UT and the Court of Appeal considered it instructive to consider and contrast section 28ZA TMA 1970 with the construction of the PCN provisions. Section 28ZA TMA 1970 allows HMRC and a taxpayer to jointly agree to refer an issue to the tribunal, whilst the enquiry is in progress, with the tribunal’s subsequent determination being binding on all parties. The drafting of section 28ZA(1) TMA 1970 refers to “any question arising in connection with the subject-matter of the enquiry”, distinct from the term “matter”, affording the process a seemingly broad remit, but limited by the requirement for both parties to consent. The Court of Appeal surmised that the distinction drawn between “any matter” and “any question arising” makes clear that not every question arising will constitute a “matter” within the meaning of section 28A TMA 1970. Given the existence of section 28ZA TMA 1970, it was implausible that Parliament could have intended to create a parallel process to have a discrete question resolved at an early stage, but on a unilateral basis at the taxpayer’s behest. As such, not every discrete question arising during an enquiry is a “matter” in itself, but rather, a “matter” must have a more substantive definition.
With regard to section 28ZA TMA 1970, Simler LJ observed, as an aside, that there was “no doubt” that the question of domicile could have been determined by the FTT if a joint referral had been consented to by HMRC. From a common sense perspective, it is unclear why HMRC deemed such a referral to be unworthy, unless they perhaps had the ulterior motive of obstructing a resolution on the domicile question until overseas financial information had been provided.
The introduction of partial closure notices
The second reason cited by Simler LJ was the statutory intention behind the introduction of PCNs, largely derived from a consultation document published by HMRC in 2014. The document, entitled Tax Enquiries: Closure Rules, ultimately led to the creation of PCNs and so was deemed to shed light on the purpose behind the statutory provisions introduced by Finance (No.2) Act 2017.
It is notable that, when considering this document at first instance, the FTT found it “clear” that the purpose of the PCN provisions was to “make the enquiry process more efficient and flexible both for HMRC and for the taxpayer” (Embiricos v HMRC  UKFTT 236 (TC)). Meanwhile, the UT and Court of Appeal adopted a significantly different reading: those courts determined that another equally important purpose had been to “provide greater finality by early resolution of discrete matters at the enquiry stage, and thereby accelerate the payment and collection of tax”. Whilst semantic, it is interesting that the UT and Court of Appeal characterised the importance of finality in terms of HMRC’s ability to collect tax, without reference to taxpayers’ interests in obtaining certainty and concluding an enquiry. Again, the Court of Appeal found that the target of the PCN regime must have thus been to enable the conclusion of discrete disputes in multiple open enquiries (each with their own legal conclusions and quantifications of tax), rather than being aimed at enabling resolution of separate constituent elements of a single enquiry (with each element lacking a discrete tax implication).
Further, in devising the PCN regime, Parliament did not choose to create a new set of provisions, nor to adapt the existing section 28ZA joint referral mechanism. Rather, the pre-existing closure rules in section 28A TMA 1970 were simply amended to create a distinction between the new partial closure notices and final closure notices. From this, the court inferred that PCNs were intended to operate, and be subject to the same restrictions, as the previous closure notice regime, which had required that an amount of tax be specified before the issue of a closure notice.
The Court of Appeal case of Archer was considered by each of the FTT, UT and Court of Appeal judgments. That case involved an application for a closure notice under the previous regime, pre-dating the introduction of partial and final closure notices in 2017. The case gave strong authority, where the previous iteration of closure notices was engaged, that “what is required is not merely the statement of HMRC’s case as to the amount of tax due, but a statement of that amount”.
It was therefore argued at each stage by the taxpayer that Archer must be distinguished on the grounds that the case did not give authority for the new PCN regime. Such argument was accepted by the FTT, which held that the PCN regime had brought about a fundamental change in legislation. In this regard, the appellate courts considered that the FTT had erred. In their view, a PCN is “a form of closure notice, and falls to be considered as part of the closure notice code” (HMRC v Embiricos  UKUT 370 (TCC)). As such, Archer was good authority for partial and final closure notices alike.
Practical effect for taxpayers
Following Embiricos, it is clear that HMRC is not obliged to issue a PCN unless it has the information it needs to quantify the tax that depends on the subject matter of the PCN. The ruling has a broader implication beyond the PCN regime. The court’s determination now implies that, where a taxpayer seeks to resolve an enquiry, it may be required to disclose to HMRC documents that it otherwise would not be compelled to disclose (such as details of worldwide income).
This will be of interest to a number of non-domiciled taxpayers. HMRC has, on several occasions, sought to use enquiries over domicile status as a vehicle to request details of taxpayers’ overseas finances, to which it is not otherwise entitled (see, for example, the recent FTT decisions in Levy’s Executors and Henkes v HMRC  UKFTT 159 (TC)). Embiricos is the latest instalment in a series of similar cases in which non-domiciled taxpayers have sought to compel HMRC to close such an enquiry into their residence. It appears that HMRC is capitalising upon taxpayers’ aversion to long, extensive enquiries, to seek to uncover financial information about taxpayers’ offshore affairs in the ungrounded fancy that HMRC may benefit from such information, whether for the tax return under enquiry or future returns—an approach now permitted by the Court of Appeal.
In such circumstances, as a last resort, taxpayers may seek to challenge the validity of any information request from HMRC by way of judicial review. HMRC’s powers to demand information, whilst widely drawn, must only relate to information that is “reasonably required” to check the tax position under enquiry (Sch.36, para.1, Finance Act 2008). Where a taxpayer submits that HMRC has not met this threshold, and the taxpayer has exhausted all alternative available remedies, it may bring a judicial review claim arguing that HMRC’s decision to issue such an information request was unreasonable.
Implications for taxpayers’ rights
Taxpayers’ rights in HMRC enquiries are chronically disregarded by the judiciary. In the instant case, it is questionable whether the FTT, UT or Court of Appeal had any eye to the ramifications of their judgments on taxpayers’ fundamental entitlements. As HMRC’s own guidance recognises, all enquiries potentially involve some interference with the person’s fundamental human rights. Such interference is only permitted to the extent that it is lawful and proportionate (HMRC’s Enquiry Manual EM1350, “Human Rights Act 1998 and Enquiries”). Those rights which must be considered in all enquiries typically include the right to privacy, the right to peaceful enjoyment of their possessions and, where criminal penalties or serious fines are involved, the right to a fair trial within a reasonable time.
HMRC powers are not just codified within statute. The ability to apply for a closure notice to bring to an end any part of a lengthy enquiry is a taxpayer’s right to curtail HMRC’s infringements into each of the aforementioned fundamental human rights. The collateral of narrowing such an ability is that HMRC powers are extended.
In Embiricos, the Court of Appeal was tasked with drawing the boundary lines within which a taxpayer must fall in order to exercise such rights. First, the court does not seem to consider at all the balancing act required to be carried out when determining the tussle between enquiries and taxpayers’ rights. Moreover, the ruling categorically favours an extension of HMRC’s already wide-ranging powers, permitting it to not only keep enquiries open for longer, but to demand private information from individuals that it is not otherwise entitled to, in order to bring the enquiry to an end. Simler LJ even goes so far as to acknowledge that “[if] the officer’s conclusion does not have computational consequences…then there is no amendment required to be made by the PCN”; effectively suggesting that the PCN regime can be used much more swiftly where there is no gain for HMRC.
When the PCN regime was first proposed, it introduced the right for HMRC to seek partial resolution of an enquiry. Industry representatives lobbied for taxpayers to have the reciprocal right to seek a PCN. Such a right represented a protective tool in the taxpayer’s arsenal to level the playing field in preventing undue delay during an enquiry and to secure certainty of the taxpayers’ own affairs. In conflating the right to tax certainty with the importance of specifying the impact on HMRC’s tax take, Embiricos has blunted the tool. Whilst the right may still be exercised where there are no computational consequences of a matter, the playing field is no longer level. Where there are computational consequences, it is the taxpayer who must choose between protecting their rights to privacy and peaceful enjoyment of their possessions, and achieving certainty of their tax affairs.
Litigation over the statutory interpretation of HMRC powers and taxpayer rights is an activity which authorities have long struggled with. Whilst there is a pre-existing imbalance of powers between both sides, the courts are loath to obstruct the tax authority from effectively collecting tax. The Court of Appeal in Embiricos can be commended for bringing certainty to the partial closure notice regime, which had largely only been tested at the FTT. The PCN regime was initially heralded as a useful and practical tool for taxpayers and tax authorities alike. However, Embiricos will be deemed a blow for taxpayers and a windfall for HMRC investigators, as the lines have been redrawn in the considerable favour of the tax collectors.