Domicile issues and HMRC enquiries

27 May 2021

A number of recent Tax Tribunal cases concerning domicile enquiries reflect what we are seeing in practice – that HMRC is increasingly questioning the domicile status of taxpayers who have been resident in the UK for a number of years.  The key issue is whether those taxpayers have acquired a domicile of choice in England & Wales, Scotland or Northern Ireland.

Although the 2017 deemed domicile rules – which treat an individual as being domiciled in the UK if they have been UK resident for 15 out of the last 20 tax years – have to some extent reduced the areas of focus for HMRC, they are still keen to uncover liabilities for previous tax years, or to question the status of an excluded property trust with a non-UK domiciled settlor. In addition we will no doubt see scrutiny by HMRC of an individual’s claim for non-domicile status if they are returning to the UK having “reset” the 15 year clock. 

For an individual to have acquired a domicile of choice in the UK, they must be present in the UK and have an intention to remain in the UK indefinitely. Proving an intention either way is notoriously difficult and the result is often a protracted and expensive enquiry by HMRC into a taxpayer’s affairs. 

Example: A Swiss individual who was resident in the UK for a number of years, decided to return to Switzerland in January 2015. She has family and business interests in the UK from the period when she was UK resident. She is considering a return to the UK in mid-2021 as she will no longer be caught by the 15 out of 20 rule. She is potentially vulnerable to an enquiry by HMRC into her domicile status as they may seek to argue that she has acquired a UK domicile of choice.

In the recent court cases, both HMRC and the taxpayer have invoked their statutory rights to improve their position.  HMRC sought to use their powers to obtain information from other countries to find out how much UK tax has been saved by the taxpayer claiming to be non-UK domiciled.  The taxpayer, on the other hand, rejected such requests and asked HMRC to issue a partial closure notice so that the domicile matter could be brought to a conclusion.  To complete this circle, HMRC argue that they cannot issue a closure notice because they do not have the necessary information from other countries to enable them to assess the liability.

In the most recent case (HMRC v Embiricos [2020] UKUT 370], heard at the Upper Tribunal, it was held that an assessment of the tax must be made for a partial closure notice to be given.  Therefore the non-UK information must be handed over to HMRC so that they could make the assessment.  This case is covered in detail in our February 2021 edition of Private Client Focus - Switzerland, and in our recent article written for Tax Adviser.  The taxpayer has been given leave to appeal the decision to the Court of Appeal.

Whilst partial closure notices have the advantage of enabling the taxpayer to appeal HMRC’s decision, another recent case (Henkes v HMRC [2020] UKFTT 7645) highlights the risks of pursuing one in domicile disputes.  The First Tier Tribunal held that it had the jurisdiction to determine the taxpayer’s domicile status as a preliminary step in resolving the requests of each party and, having decided that he was domiciled in the UK, that the taxpayer had no right of appeal. 

Mr. Henkes had been resident in the UK for nearly 50 years after moving there in his early 20s.  His wife was British, and their 3 children and 7 grandchildren lived in the UK.  He said that his intention was to leave the UK on retirement but at age 75 he was still working in a number of roles in the UK.  He had a large home in Spain where he spent up to 60 days each year, often accompanied by friends and family.

Taking into account all the relevant facts, the Tribunal held that the taxpayer had acquired a domicile of choice in the UK.  HMRC’s request for information from other countries was therefore valid. 

As HMRC continue to challenge the domicile status of long-term UK residents the need for up-to-date evidence regarding an individual’s domicile status is of great importance. The Henkes case also highlights the need for advice in how to approach HMRC during an enquiry, given the many pitfalls.  If dealt with correctly, these cases could be used in the taxpayer’s favour help to bring a long enquiry to an end.

In the circumstances we would always recommend that a client’s domicile position be regularly reviewed (at least every 5 years) and a contemporaneous note be made confirming the findings of the review in the form of a statement capturing the client’s intentions at that time. If you have any questions about domicile or you would like us to help with a domicile enquiry please get in touch.