How to manage a domicile enquiry
Recent years have seen a significant increase in HMRC enquiries into domicile status. Areas of focus include:
- long-term UK residents who claim not to have acquired a UK domicile of choice;
- individuals with a UK domicile of origin who return to the UK but maintain they have not abandoned a domicile of choice acquired in another jurisdiction; and
- children who claim foreign domicile by reference to the domicile of a parent or grandparent despite never having resided outside the UK (e.g. Henderson v HMRC  UKFTT 556).
These enquiries present particular challenges (often due to the age and scope of potentially relevant material) and require careful management.
What is domicile, and why is it still relevant?
Domicile is a common law concept that is critical to an individual’s CGT, IHT and income tax treatment. Domicile is acquired in one of three ways:
- domicile of origin: acquired at birth (typically from one’s father);
- domicile of dependency: acquired by a dependent person from the person on whom they are dependent (e.g. a child under 16 from their relevant parent); and
- domicile of choice: a new domicile can be acquired by choice, through a combination of actual residence and a fixed and settled intention of permanent or indefinite residence.
From 6 April 2017, certain individuals who are non-UK domiciled at common law are deemed UK domiciled for tax purposes (in particular by virtue of long-term UK residence). However, the common law position remains relevant. First, there is a significant tail of outstanding domicile enquiries for prior periods. Second, under the new rules, the conditions for deemed domicile may not be met. And third, individuals who are deemed UK domiciled can potentially access favourable tax treatments not available to those who are actually UK domiciled.
For example, there is a longstanding ‘rebasing’ relief for gains realised by offshore trusts, if ‘matched’ to a distribution to a beneficiary who is non-UK domiciled; and a more recently introduced ‘rebasing’ relief in relation to personally held non-UK assets of non-UK domiciled individuals. And perhaps most importantly, the ‘protected settlement’ provisions, which prevent arising basis taxation of settlors on the income and gains of offshore trusts they have created, only apply for as long as those settlors continue to be non-UK domiciled. For the purposes of these reliefs, common law domicile is crucial.
Too much information?
Domicile enquiries typically start with a relatively short list of questions from HMRC about basic facts in the taxpayer’s life. However, they tend rapidly to fan out from there. Responses to the initial questions generate further, more detailed questions, which generate further avenues of enquiry and so on. Questions often cover the minutiae of events long ago (including in the lives of parents or grandparents), combined with requests for supporting documentary evidence that no reasonable person can be expected to retain. Examples encountered in practice include: evidence of schools attended by taxpayers over 50 years old; and details of the itinerary for an emigration in the 1970s. Taxpayers are often asked to provide essentially the same information multiple times in slightly different forms.
HMRC’s Residence, Domicile and Remittance Basis Manual at RDRM23080 includes a (long) list of information that might be requested during an enquiry, but stresses the need for tailored requests, stating that: ‘It is always important to think about the relevance of particular items of information to the detailed subject matter of each enquiry.’ In practice, however, HMRC staff appear to consider that every detail of an individual’s life may potentially be relevant, on the basis that it provides ‘context’ to the overall enquiry.
Preparing for battle
So, how best to manage this? First, there can be real benefit to ‘front-loading’ information gathering and consideration of its relevance. The quality of evidence is often a key factor, particularly where questions of a taxpayer’s intention are in point. A detailed review upfront provides a sense of the overall picture (and the evidential strengths and weaknesses) that is not possible where information is drip-fed reactively in response to HMRC’s questions. It also reduces the risk of inconsistency at a later stage, particularly where reliance is placed on an individual’s memory of events from many years ago.
The general approach should be cooperative, not obstructive. This should facilitate the progress of the enquiry (and the ultimate aim of persuading HMRC of non-domicile status), and help to avoid formal information requests under FA 2008 Sch 36 para 1. However, taxpayers and their advisers should consider carefully the relevance of each HMRC request, by reference to the relevant legal tests. A good rule is to treat every request as if it were a formal information request, and ask oneself: is the information or documentation reasonably required for checking the taxpayer’s tax position? If not, HMRC has no right to it and taxpayers can legitimately refuse. A particular point to beware is that requests in a domicile enquiry may in reality lead to enquiries into other areas (e.g. the transfer of assets abroad rules, or management and control of foreign companies). For example, HMRC may assert that a taxpayer claiming that they have not acquired a domicile of choice in the UK must ‘prove’ a domicile of choice in a specific other jurisdiction. However, this is incorrect. The legal test is whether the taxpayer has acquired the requisite intention of permanent or indefinite residence in the UK. Questions (and responses) should be directed at this.
If an enquiry is proceeding down irrelevant lines, a taxpayer may wish to consider proactively changing its direction. For example, rather than simply responding to HMRC’s questions, it may be helpful to restate the key issues for determining domicile in the particular case by reference to the relevant stages of the taxpayer’s life (and where the burden of proof lies at each stage). HMRC can be invited to agree or disagree with the taxpayer’s analysis for each stage with a view to narrowing the grounds of contention.
Another key issue is timing. Information requested by HMRC frequently takes time to collate, particularly if it relates to the distant past. Taxpayers should resist the temptation to provide incomplete (or potentially inaccurate) responses purely to meet an unrealistic deadline. Negotiating a more reasonable timeframe is significantly easier where there is no formal information notice – which again highlights the importance of avoiding them. But even under an information notice, the recipient is only required to comply within such period as is ‘reasonably specified’ (FA 2008 Sch 36 para 7), so the timing can be challenged if appropriate.
The subject matter of questions can be sensitive for taxpayers. HMRC has been known to ask probing questions about traumatic events such as family illnesses and deaths, health conditions and difficult family relationships. Clearly, these can sometimes be relevant (for example, if illness or bereavement explains why someone did not leave the UK when anticipated); but frequently they are not, and taxpayers and advisers can be shocked at the lack of sensitivity and compassion with which these questions are raised.
One eye on litigation
It is important to remember that litigation is always a possibility. Correspondence should be written on the assumption it will be seen by the FTT; and material provided to HMRC should be reviewed and prepared to a litigation standard. The same goes for other forms of interaction with HMRC. Detailed notes should be taken of any calls. HMRC often suggests face to face meetings with taxpayers. Serious thought should be given before accepting such an offer, and it is rarely advisable. HMRC has no power to compel attendance, but may use a meeting as a trial run for cross-examination. It will typically take detailed or verbatim notes, which it may refer to subsequently. If the taxpayer does attend, it is prudent to treat the meeting as if giving evidence before the FTT (and prepare accordingly).
Historically, many taxpayers obtained rulings/decisions as to their domicile status, particularly during the 1990s and 2000s. HMRC now appears to view the decision in S Gulliver v HMRC  UKFTT 222 as giving it carte blanche to ignore these. The case concerned an application for a closure notice in circumstances where HMRC was seeking to enquire into the taxpayer’s acquisition of a domicile of choice in Hong Kong, which had been implicitly accepted in a previous enquiry. The FTT rejected the application. HMRC was entitled to continue its enquiries, despite its previous decision.
The decision in Gulliver was, however, only a non-binding FTT decision on a procedural question. Much of the discussion around whether HMRC was bound by the previous domicile decision was obiter and discursive in nature. Indeed, the FTT explicitly declined to express a view as to whether Mr Gulliver had any public law remedies available to him (para 22). Further, HMRC had pursued only a cursory ‘risk-based approach’ in its earlier enquiry and its final written decision had not even mentioned domicile.
Other taxpayers may have rulings expressed in clearer terms following a more detailed HMRC enquiry. They would be well advised to consider whether that ruling is sufficiently ‘clear, unambiguous and devoid of relevant qualification’ (ex parte MFK Underwriting Agents Ltd  STC 873) to give rise to a legitimate expectation that it would be unjust for HMRC to resile from (and therefore grounds for judicial review).
Even so, this would not determine a current enquiry – at most it would bind HMRC to its decision at that prior time. But that may crucially narrow the focus and provide a taxpayer with a stronger starting point. For example, if HMRC is held to a previous acceptance of a domicile of choice outside the UK, the enquiry is limited to subsequent years, with the burden on HMRC to show a change of domicile.
Many taxpayers also sign domicile statements, setting out their future plans/intentions to support their domicile position. Generally, these are helpful evidence, provided they are regularly reviewed. However, problems can be caused where the taxpayer’s subsequent actions are inconsistent with their stated intentions. For example, if an individual declares their intention to leave the UK in a given timeframe, but then does not (even for entirely legitimate reasons), HMRC can attach significant weight to it. Again though, this is just one factor among many (as HMRC’s guidance at RDRM22320 acknowledges). Just as a statement of intention to leave the UK is not conclusive evidence of an individual’s foreign domicile, nor is a failure to leave when previously anticipated conclusive evidence of an intention to remain indefinitely.
Enquiries can be prolonged, with seemingly little progress towards a resolution. One option is to apply to the FTT for a direction that HMRC issue a closure notice (TMA 1970 s 28A(4)), for example within three months from the date of the hearing. The FTT is required to issue such a direction unless satisfied that there are ‘reasonable grounds’ not to (with the burden on HMRC to prove this). The relevant principles are summarised in Beneficial House (Birmingham) Regeneration LLP and another v HMRC  UKFTT 801 (para 15). Broadly, the question is whether HMRC has been provided with sufficient information (with sufficient opportunity to review it) to come to an ‘informed judgment’ on the matter. In practice, making such an application may prompt HMRC to expedite matters itself.
Domicile enquiries present particular challenges, often requiring consideration of the whole life of a taxpayer (and their relatives). If not managed properly, enquiries can be prolonged and involve the production of significant volumes of (potentially irrelevant) information. Taxpayers should consider at each stage the relevance of HMRC’s requests; prepare responses with an eye on potential litigation; and always be mindful of their right to seek closure.
This article was written by Hugh Gunson and first published by Tax Journal on 13 March 2019.