Embiricos v Revenue And Customs: Clarifying Partial Closure Notice Requirements under TMA Section 28A

Introduction

The case of Embiricos v Revenue And Customs ([2022] EWCA Civ 3) is a landmark decision by the England and Wales Court of Appeal (Civil Division) that addresses the procedural nuances of how Her Majesty's Revenue and Customs (HMRC) can issue Partial Closure Notices (PCNs) during tax enquiries. Mr. Embiricos appealed against HMRC’s approach to his tax return enquiry, specifically challenging whether HMRC can issue a PCN without immediately quantifying the tax due when concluding that a taxpayer is not entitled to claim the remittance basis of assessment.

Summary of the Judgment

The central question revolved around the interpretation of Section 28A of the Taxes Management Act 1970 (TMA), particularly whether HMRC is permitted to issue a PCN upon concluding a matter (i.e., invalidating the remittance basis claim) without specifying the resultant tax owed. Mr. Embiricos argued that HMRC could treat the validity of the remittance basis claim and the quantification of tax due as separate "matters," thereby issuing a PCN for the former without immediately addressing the latter.

The First-tier Tribunal (FTT) initially sided with Mr. Embiricos, allowing HMRC to issue a PCN without immediate tax quantification. However, the Upper Tribunal (UT) reversed this decision, requiring HMRC to specify the tax consequences in the PCN. Upon appeal, the Court of Appeal upheld the UT's decision, reinforcing that HMRC must quantify the tax due when issuing a PCN that concludes a tax matter affecting the self-assessment.

Analysis

Precedents Cited

The judgment heavily relied on precedents such as R (Archer) v HMRC and Executors of R W Levy v HMRC [2019] UKFTT 418 (TC) ("Levy"). In Archer, the High Court held that closure notices must include amendments that give effect to HMRC's conclusions, including tax quantification. This was further supported in Lewison LJ's analysis, which emphasized that a closure notice under Section 28A acts as an assessment that must specify tax amounts when required.

Additionally, the decision referenced the consultation documents from HMRC and legislative history surrounding the introduction of PCNs. The court examined how these materials indicated Parliament’s intent to ensure that PCNs serve as instruments for early resolution and finality on discrete tax matters by requiring immediate tax assessment upon conclusion.

Legal Reasoning

The Court of Appeal engaged in a purposive interpretation of Section 28A, emphasizing that both Final Closure Notices (FCNs) and PCNs must fulfill the same statutory requirements. These requirements include stating the officer’s conclusions and making necessary amendments to the tax return to reflect those conclusions. The court reasoned that the legislative intent behind PCNs was to provide flexibility and efficiency in resolving discrete matters within broader enquiries, but without fragmenting the overall tax assessment process.

The appellant's argument that Section 28A allows for PCNs without immediate tax quantification was found lacking. The court highlighted that the nature of the remittance basis claim inherently affects the tax payable and thus requires immediate quantification to comply with Section 28A(2)(b). The judgment underscored that any amendment made by HMRC via a PCN must fully address the consequences of the officer’s conclusions, which, in cases like the remittance basis claim, include the assessment of tax due.

Impact

This decision significantly impacts the procedural approach HMRC must take during tax enquiries. HMRC can no longer issue PCNs that invalidate specific claims without providing an immediate assessment of any tax liabilities arising from those conclusions. This ensures greater transparency and finality for taxpayers, reducing the potential for prolonged disputes over tax quantification.

For taxpayers, this ruling enhances certainty by ensuring that when HMRC issues a PCN, it must include all relevant tax implications, thereby enabling taxpayers to understand their liabilities without unnecessary delays. It also streamlines the appeals process by ensuring that all aspects of a tax conclusion are addressed concurrently.

Complex Concepts Simplified

Partial Closure Notice (PCN)

A PCN is a formal notice issued by HMRC to a taxpayer, indicating that HMRC has concluded a specific "matter" within a broader tax enquiry. Unlike a Final Closure Notice (FCN), which concludes the entire enquiry, a PCN deals with individual aspects of the enquiry, allowing other matters to remain open for further investigation.

Remittance Basis of Assessment

The remittance basis is a taxation method applicable to individuals not domiciled in the UK. Under this basis, only income and gains that are brought ("remitted") into the UK are subject to UK tax. Claiming the remittance basis can significantly reduce a taxpayer's tax liability, making its validity a critical matter in tax assessments.

Section 28A of the Taxes Management Act 1970 (TMA)

Section 28A outlines the procedures for issuing closure notices (both partial and final) during tax enquiries. It stipulates that closure notices must state HMRC's conclusions and make necessary amendments to the tax return to reflect those conclusions. The interpretation of what constitutes a "matter" under this section was central to the Embiricos case.

Conclusion

The Embiricos v Revenue And Customs decision is a pivotal judgment that reinforces the necessity for HMRC to provide complete and quantified tax assessments when issuing Partial Closure Notices. By requiring HMRC to quantify tax liabilities alongside concluding the validity of specific tax claims, the court ensures greater transparency and finality in tax assessments. This ruling not only streamlines the tax enquiry process but also enhances taxpayer confidence by mitigating prolonged disputes over tax quantification. Moving forward, both HMRC and taxpayers must adhere to precise procedural requirements to ensure compliance and clarity in tax assessments.