A robust approach
It is now some years since HM Revenue & Customs (HMRC) ceased to give domicile rulings and it has been necessary to make a claim for non-domiciled status on an individual’s tax return. This also affords HMRC the opportunity to enquire into the taxpayer’s domicile status annually.
Such enquiries have become increasingly common in recent years. The individual circumstances vary but HMRC’s approach appears to be uniformly aggressive – even in situations where they have previously looked at an individual’s domicile and provided confirmation that they considered him or her to be non-domiciled in the UK.
In our experience the enquiries often do not merely seek to review the position after any previous ruling and consider whether the taxpayer’s intentions have changed; on many occasions HMRC are asking questions which constitute an attempt to revisit the domicile of origin of the individual under enquiry. Clearly, a change in HMRC view in relation to a taxpayer’s domicile could have an enormous effect on his UK tax liabilities given that non-domiciled status provides individuals with access to the remittance basis of taxation.
The potential effect on UK tax liabilities is often the cause of disagreement between advisers and their clients on one hand and HMRC on the other. Where there is a potential disagreement over domicile status, HMRC will usually seek information about a taxpayer’s overseas assets, income, and gains, often with a view to assessing whether the potential differential in the tax due is ‘worth’ pursuing the domicile point. However, many taxpayers and their advisers believe that domicile status is a question of fact and principle and should not be pursued more robustly because there is a large amount of tax at stake, particularly in view of the fact that the information they request about overseas matters would not be available to them if a non-domiciled client chose to be taxed on the remittance basis.
Resistance to providing the information regarding overseas income and gains often results in HMRC issuing a determination that the taxpayer is UK domiciled together with a Schedule 36 FA 2008 notice (Schedule 36 notice). The notice requires the provision of information to calculate the tax due, on the basis that it is not possible to issue a closure notice for an enquiry until the tax due has been quantified.
The position adopted by the Courts
The Courts have recently sided with HMRC in two cases which touch on this area. In Embiricos v HMRC the taxpayer did not consider it either necessary or appropriate for HMRC to have details of his overseas income and gains before the question of his domicile was determined.
He therefore applied to the First Tier Tribunal (FTT) for a direction requiring HMRC to issue a partial closure notice under section 28A Taxes Management Act 1970 to enable him to appeal the discrete issue regarding his domicile status. He also appealed against the Schedule 36 notice issued by HMRC on the basis that the information was not reasonably required until after his domicile status had been finally decided.
Although the FTT accepted Mr Embiricos’s application in relation to the partial closure notice, HMRC appealed, and the Upper Tribunal (UT) reversed the decision. In addition, the FTT noted that if its decision was incorrect in relation to the partial closure notice, then it would have rejected Mr Embiricos’ appeal against the Schedule 36 notice.
A similar decision was reached more recently in the FTT in the case of Perlman v HMRC where the appellant, Mr Perlman, appealed a Schedule 36 notice on the ground that the information was not “reasonably required” because he was not domiciled in the UK. In his submission, the information would only be reasonably required if HMRC had first proved he was not so domiciled. In practice, he asked for his domicile dispute with HMRC to be decided as part of the hearing against the Schedule 36 Notices. The FTT decided that it did not have the jurisdiction to decide Mr Perlman’s domicile as part of a hearing against Schedule 36 notices, leaving him in much the same position as Mr Embiricos.
Mr Embiricos has, however, been granted leave to appeal the UT’s decision to the Court of Appeal. It will therefore be interesting to see if there are further developments.
What are the changes in potential tax liabilities?
The most obvious potential effect on UK tax liabilities as a result of HMRC determining that a taxpayer is UK domiciled in circumstances where he has previously filed tax returns on a non-domiciled basis, is the removal of access to the remittance basis.
The effect on UK tax liabilities could be even more severe in circumstances where a taxpayer was born in the UK if HMRC pursues the angle that an individual who had previously been ruled to have a non-UK domicile of origin was in fact UK domiciled from birth. This is because the changes to the UK tax legislation which became effective on 6 April 2017 mean that trusts settled by such individuals during a period when they believed themselves to be non-domiciled, (even if the settlement took place when the individuals were not UK resident), would lose their status both as excluded property and as protected trusts. The loss of these protections brings the settlor (for income and gains) and the trust (for inheritance tax) purposes within the UK tax regime.
Not only would this potentially create UK tax liabilities, but it presents major problems in evaluating those liabilities for trusts that were not previously obliged to keep records in the belief that there was no liability.
What are the assessment time limits for offshore income and gains?
It is worth noting that the changes in the law which took effect on 6 April 2019 extend to twelve years the discovery time limits in respect of non-deliberate errors for assessment of tax liabilities relating to offshore income and gains, which includes domicile enquiries. This means that where HMRC believe that an inaccuracy in a tax return is innocent, they are still able to assess tax years 2015/16 onwards (and will be able to do so until 5 April 2028), and where they believe the inaccuracy is careless, they are still able to assess tax years 2013/14 onwards (and will be able to do so until 5 April 2026).
This also adds a significant burden to taxpayers, who will now have to keep records for much longer periods to ensure that they have appropriate information available should HMRC decide to investigate.
Would you like to know more?
If you have received an HMRC domicile enquiry letter notifying you of an of an upcoming investigation, our Tax Risk & Dispute Resolution team can help.
To discuss any of the above and how it might apply to you as either a business or an individual, please get in touch with your usual Blick Rothenberg contact or Fiona Fernie or Gary Gardner in our Tax Risk & Dispute Resolution team using the details on this page.
Find out more about our Tax Risk & Dispute Resolution services here.