Over the last few years, HMRC has closely reviewed the domicile status wealthy UK taxpayers that appear to have settled in the UK. Historically, individuals that did not originate from the UK and had not settled here permanently were entitled to claim the remittance basis of taxation to minimise their UK tax position.
Individuals could claim the remittance basis and limit the tax they paid to the funds they remitted or brought into the UK rather than the income and gains arising on their worldwide assets.
Since 2007, HMRC has gathered information from various disclosure opportunities on claims for the remittance basis of taxation. Where HMRC considered that the individual had adopted the UK as their home and settled here permanently, it would challenge the domicile status of the individual.
The argument was that while the individual may have originally only intended to stay in the UK temporarily, over time they had put down roots and adopted the UK as their home.
HMRC enquiries of this nature are complex and often very intrusive, as the ‘taxman’ will ask for information going back over the period the individual has resided in the UK. Further, the questions often cover personal and private matters that may not appear to be relevant to tax.
These enquiries are often very contentious and lengthy. In some cases, the only way to achieve closure is to refer the matter to the independent tax tribunal to rule on either a particular aspect or the enquiry as a whole. These are called partial or final closure notices.
HMRC has always contended that, to resolve the matter, it is necessary to identify the tax at risk. However, tax advisers representing wealthy individuals under enquiry have been reluctant to disclose their client’s worldwide income and gains in case this affected HMRC’s decision. The concern was that the more that there was at risk, the greater the incentive for HMRC to pursue the domicile point.
Advisers requested that the domicile point be considered first and if it was determined that the individual was UK-domiciled for tax purposes, HMRC could then ask for information on the worldwide assets.
This made sense, as wealthy individuals wish to keep their financial affairs private and confidential. Furthermore, it can be extremely time-consuming and costly to compile the information for HMRC if the information may ultimately not be required.
The Upper Tribunal (UT) was recently asked to consider an appeal by HMRC against an earlier decision of the First-tier Tribunal, where it was ruled that the domicile position should be considered first. After considering the most recent decisions, the UT ruled that a partial closure notice or ruling on domicile cannot be issued without first specifying the amount of tax owed. It is a condition of any assessment that it informs the taxpayer of their liability to tax. The relevant decision is HMRC v Embiricos (UT/2019/0080).
The decision is very important, as a decision of the UT sets a legal precedent or rule that has to be followed by lower courts and HMRC. What is not known at this time, is how and when HMRC will utilise the decision to support requests for details of overseas assets and structures, which previously would only have been provided once the independent tribunal had ruled that the individual was UK-domiciled.
Moore Kingston Smith specialises in representing and assisting clients with complex tax affairs. We have a proven track record of successfully resolving all types of tax enquiry and can provide advice on all aspects of the investigation and resolving any disputes that arise.