Areas of HM Revenue & Customs focus come and go, but domicile is here to stay, according to Hugh Gunson, senior associate at law firm Charles Russell Speechlys.
Recently, there has been a marked upturn in the number of HMRC challenges to non-domiciled status and the vigour with which they are pursued.
There is no respite, even with the new ‘deemed domicile’ rules from 2017.
While the picture appears bleak, a careful, strategic approach can overcome the challenges.
Definitions and advantages
Domicile is a common law concept. Everyone acquires a domicile of origin at birth, but a new domicile can be acquired by choice.
Enquiries may concern the alleged acquisition of a domicile of choice in the UK, or the alleged acquisition of a domicile of choice abroad.
UK resident non-doms have significant tax advantages, such as the ability to claim the remittance basis for non-UK income/gains and the limitation of inheritance tax to UK assets.
‘Deemed domicile’ rules that apply for all tax purposes were introduced in 2017.
But common law domicile remains very important – for historic periods; for those who are not yet deemed domiciled; and in certain circumstances even for those who are deemed domiciled, eg those who have created ‘protected settlements’.
Consequently, the UK taxman been scrutinising claims to non-dom status; and this looks set to continue.
Unrealistic requests
Enquiries are frequently long running and HMRC’s aggressive approach has drawn criticism.
Taxpayers can receive repeated requests for large quantities of information (covering every detail of their life and historic events), plus unrealistic levels of documentary evidence.
Questions can also cover family bereavements and other traumatic events with little compassion.
The overall effect is that taxpayers can feel pressured or worn down into submission.
But a successful outcome is possible, with the right approach.
Stand your ground
Clearly, the taxpayer’s stance should be co-operative.
In a domicile context, HMRC may be entitled to ask for wide-ranging information. And ultimately, if the Revenue is making enquiries, taxpayers need to convince HMRC of their positive case.
But where it oversteps the mark, taxpayers should push back.
Every request should be treated as a formal information notice, so consider whether the information and documents are reasonably required for checking the taxpayer’s domicile status.
If not, HMRC has no right to them.
Similarly, if the proposed response timeframe is unreasonable, say so.
Proactivity is better than reactivity.
Although HMRC is in the driving seat, taxpayers should seek to steer the enquiry in the correct direction.
Evidence is key. All correspondence and documents provided to HMRC should be reviewed as if in formal litigation.
The Revenue also often requests face-to-face meetings.
Remember that taxpayer attendance is not mandatory and is rarely sensible – verbatim notes will be taken, and any factual discrepancies highlighted.
If taxpayers do attend, they should prepare fully, as if for cross-examination in court.
Stacking the deck
There are some issues to be aware of that arise frequently.
First, HMRC often argues (incorrectly) that all previous rulings on domicile status can be ignored.
The position is actually more nuanced – any such rulings should be examined closely to see whether the taxman can be held to them.
If so, this can be a significant advantage, as it fixes the domicile position as at the prior ruling date, with the burden on HMRC to show a change.
Second, the Revenue frequently gives undue attention to unfulfilled promises in previous domicile statements eg to leave the UK in a given timeframe, as evidence to support its case.
Taxpayers can and should rebut this.
Third, there can be a real risk of ‘mission creep’, where domicile enquiries lead to enquiries in other areas.
Finally, if an enquiry drags, taxpayers should remember their right to apply for a closure notice (a notice where HMRC closes the enquiry and state their conclusions).
An application will be granted where it has had sufficient information, for sufficient time, to come to an informed judgement.
Of course, HMRC’s conclusion might be unfavourable, leading to litigation – but that can be preferable to a drawn-out enquiry reaching the same result.
Current state of play
It is currently not clear whether domicile can be litigated as a separate matter, with other contentious aspects of a taxpayer’s affairs left open; and/or whether HMRC needs details of foreign income/gains to be able to issue a closure notice.
Two recent First-tier Tribunal decisions have come to opposite conclusions on these points, so this is an area to watch closely.
Domicile enquiries are evidently a hot topic that is here to stay. Without careful thought, they can easily spiral out of control.
But all is not lost – taxpayers who are aware of their rights and are prepared to defend themselves can achieve a favourable outcome.
This article was written for International Adviser by Hugh Gunson is a senior associate at Charles Russell Speechlys, specialising in tax disputes and investigations.
