Information overlord? Are there limits on HMRC's power to require information from foreign domiciled taxpayers?
The recent decision in Perlman v HMRC is the latest in a flurry of (often contradictory) procedural decisions by the First-tier Tribunal (“FTT”) in cases where HMRC is challenging a taxpayer’s domicile. The common thread running through all these cases is a remittance basis user seeking to avoid the potentially expensive and onerous task of providing information to HMRC regarding his/her unremitted foreign income and gains. Such information would be wholly irrelevant if the taxpayer were found to be non-UK domiciled during the relevant period. Remittance basis users are not taxed on their foreign income / gains unless remitted to the UK, and are not obliged to disclose unremitted foreign income/gains in their tax returns.
In Perlman, HMRC had issued information notices under Finance Act 2008, Schedule 36 (“Sch 36 Notices”) regarding the taxpayer’s foreign income and gains, covering a number of tax years. In some of these years HMRC had opened an enquiry into the taxpayer’s returns; but in one year it had not (and was now out of time to do so). The issue was whether the Sch 36 Notices needed to be complied with. Taxpayers are required to comply with such notices unless certain exceptions apply, one of which is that the information demanded is not “reasonably required” by HMRC.
The recent procedural domicile cases have generally focused on partial closure notices (“PCNs”) rather than Sch 36 Notices. Where there is an open enquiry into a tax return for a particular year, a PCN allows a taxpayer to force HMRC to issue a formal conclusion on a particular "matter" which forms part of that enquiry, so that it can then be appealed to the FTT if the taxpayer disagrees with HMRC’s decision on the point. The focus of the previous FTT decisions was whether a PCN could be issued by HMRC in respect of the question of domicile alone, or whether HMRC was entitled to insist upon the taxpayer providing details of his/her unremitted foreign income and gains so that it could issue a final closure notice (“FCN”), closing the whole enquiry and stating its conclusion both that the taxpayer was UK domiciled during the relevant tax years and the resultant overdue tax liability.
Taxpayers in these cases have argued that domicile is a separate “matter” in relation to which a PCN can indeed be issued, with the result that any Sch 36 Notices issued by HMRC were not “reasonably required” and so could be overturned. Following two opposing decisions of the FTT, the Upper Tribunal in Embiricos v HMRC has decided that PCNs cannot be issued on the question of domicile alone and so that the information sought by HMRC was “reasonably required”. However, this decision is widely considered to be flawed, and it is hoped that the Court of Appeal will reverse it (see further here).
First Henkes v HMRC and now Perlman have shifted the focus to whether the taxpayer’s domicile can be decided by the FTT as a preliminary matter, before deciding whether a PCN can be issued or a Sch 36 Notice can be overturned – if the FTT were to find that the taxpayer was non-UK domiciled, information regarding unremitted foreign income and gains would clearly be irrelevant and there would be no obstacle to HMRC issuing a PCN or indeed an FCN.
In Henkes, where the taxpayer was appealing Sch 36 Notices and seeking a PCN in respect of his domicile, the FTT concluded that (a) it had jurisdiction to decide the domicile question, and (b) that it should exercise its discretion to do so. Unfortunately for the taxpayer, the judge found that he was UK domiciled (see further here). In Perlman, the taxpayer appealed Sch 36 Notices on the grounds that the information would not be reasonably required unless he was UK domiciled, and asked the FTT to decide his domicile accordingly. The (differently constituted) FTT reached the polar opposite conclusion to that in Henkes, finding (a) that it had no jurisdiction to decide the domicile question, and (b) even if it did, it shouldn’t exercise it.
The judge then rejected Mr Perlman’s appeal against the Sch 36 Notices on the basis that his domicile could not and should not be decided in the course of preliminary proceedings, and the Sch 36 Notices were lawfully issued unless it was irrational for HMRC to have issued them. This latter conclusion appears to have been made in reliance on the FTT’s judgement in Kotton v HMRC. The latter indicated that the test of whether the information demanded under a Sch 36 Notice was “reasonably required” was a fairly easy test for HMRC to pass. The test looks at the connectedness, or otherwise, of the HMRC enquiry with the information sought by HMRC; “there simply has to be a ‘rational connection’ between the enquiry and the information required by the [Sch 36 Notice]”. The basis for the decision in Perlman seems to be that it wasn’t irrational for HMRC to have issued the Sch 36 Notices, as there was a real possibility that the taxpayer was UK domiciled and, to make an assessment, HMRC needed information about the taxpayer’s foreign income/gains. The judge observed that “As long as a HMRC officer has a rational basis for believing that Mr Perlman may be UK domiciled, HMRC do not have to prove, in the course of the hearing challenging the Sch 36 Notice, that the officer's view of Mr Perlman's domicile is correct.”
The conclusion that a taxpayer’s domicile shouldn’t be decided as a preliminary issue to a Sch 36 Notice appeal seems sound, particularly as there is no further right of appeal in relation to an FTT decision on an appeal against a Sch 36 Notice. However, if the Court of Appeal reverses the Upper Tribunal’s decision in Embiricos, so that HMRC can issue a PCN on the issue of domicile without information about the taxpayer’s foreign income/gains, this will have a knock-on impact on the scope to challenge Sch 36 Notices in domicile cases. Arguably, if the Embiricos decision is indeed reversed, this will mean that a Sch 36 Notice in relation to a tax year that is under enquiry will be susceptible to challenge, where the notice requires provision of information about unremitted foreign income/gains of that tax year. If a PCN in relation to domicile alone is possible, then arguably HMRC has no need for information about the taxpayer’s unremitted foreign income/gains unless and until the domicile issue has been decided against the taxpayer; and, pending any such decision, it is arguable that any Sch 36 Notice demanding provision of such information has no “rational connection” with the enquiry.
Any such argument would however only be available for a Sch 36 Notice issued in relation to a tax year in respect of which there is an open enquiry. This would create a distinction between Sch 36 Notices issued in relation to enquiry years and non-enquiry years, which might be considered an odd result. It is common in domicile cases for Sch 36 Notices to be issued in relation to tax years where there is an open enquiry but also in relation to tax years in which, for various possible reasons, there is no open enquiry, but there is potential scope for HMRC to make a “discovery assessment”. Indeed, this is/was the situation in Perlman. It is to be hoped that this point will be clarified in subsequent cases.
Again, it seems that much rests on the Court of Appeal’s decision in Embiricos, which is listed to be heard before 22 February 2022. Until then at least, the deck seems to be stacked against the taxpayer in domicile cases. It appears that in such cases, HMRC does have the power to demand information about taxpayers’ unremitted foreign income and gains. This is so even though, if one takes a step back from the intricacies of the tax procedural legislation, there is no objective need for HMRC to have this information unless and until it has been established that the taxpayer was UK domiciled for the relevant tax years. Requiring the provision of such information before the taxpayer’s domicile has been determined might be considered an oppressive exercise of state power.