The decision in the First Tier Tribunal case J Charman v RCC was released on 20th December 2018. The case illustrates some of the complexities in assessing remuneration (including restricted shares and share options) before the introduction of the Statutory Residence Test, and the Internationally Mobile Employees rules. Many of the technical points are therefore only relevant where the position with HMRC in relation to years before 2013/14 is still not final.
However, the case does shed some light on HMRC’s approach, in particular the types of evidence which they put forward. We’ve therefore summarised the points of wider relevance in HMRC investigations.
John Charman was a well-known figure in the underwriting business in the City of London. In March 2001, he parted company with the ACE group, and went on to set up Axis Capital, a Bermuda-based reinsurance and insurance business. He submitted his tax returns on the basis that he had taken up full-time work abroad from October 2001 and ceased to be UK tax-resident from January 2003, and therefore certain remuneration paid to him was not subject to UK income tax.
Evidence considered in relation to residence position
The tax years in the case were before the introduction of the statutory residence test, which provides more precise definitions, whereas Mr Charman argued that he had taken up “full-time work abroad” in Bermuda from January 2003. However, it is interesting to see in the case the extent of HMRC’s fact-finding.
HMRC obtained witness statements, his Bermudan work permits, the statements for his American Express card (particularly in respect of meals at restaurants in the City of London), and his bank statements. They had a copy of his 2001 work diary, but he had lost his 2002 and 2003 diaries when he moved out of the family home on his divorce. They used this information to analyse his location at various times.
HMRC put forward in evidence a message sent in response to an email from the Inspector, by an employee of the London office, saying “Mr Charman is not in the office today. He is in Bermuda but is back in the office on Friday.”. HMRC argued that this employee was Mr Charman’s London PA and that the email showed that Axis London was treated as his office.
Mr Charman was a high-profile businessman, and hence HMRC knew that he had divorced in 2005 and brought evidence from his divorce proceedings. He left the family home for the last time, with some personal possessions including his Aston Martin, in November 2003. His Counsel argued that “he had decided that his marriage was over long before he told his wife in November 2003”.
HMRC had evidence that he had told his wife that he was working in Bermuda temporarily, which he said was to avoid precipitating the divorce. Mr Charman said that his personal diary for 2001 could not be relied on.
The new statutory residence test rules require careful record-keeping, and taxpayers should note that if HMRC decide to check the accuracy of such records, there is ever-increasing information in the public domain for them to use.
Discovery assessment where the discovery is “stale”
In 2010, HMRC issued a discovery assessment to charge income tax on Mr Charman’s bonus for 2003, received in 2003/04, a year where they contended that he was UK resident. He had made a return for the year, which did not include the bonus from his Bermudan employer, on the grounds that he was not UK resident, and HMRC had challenged this. The tribunal said that “HMRC had the information to make an assessment during the usual enquiry window but failed to even open an enquiry”. HMRC had made the discovery in 2006, but had not raised the discovery assessment until 2010, and the tribunal held that a discovery assessment could not properly be made at that time.
• The court held that he was UK tax resident in the years 2001/02 and 2002/03.
• They concluded that the discovery assessment for 2003/04 was invalid, although they considered that if it had been valid, he had been non-UK resident by February 2004.
• They concluded that where he had been UK tax resident at the time when a particular share option had vested, he was then subject to UK income tax in 2007/08 when that option was exercised.
• They concluded that he had been UK tax resident when the restricted shares were acquired and he was then subject to UK income tax in 2005/06 when the restrictions were lifted.
He therefore had tax to pay of nearly £12m, plus interest.
In our view, this case demonstrates the importance of the following practical points in relation to any relevant tests in the Statutory Residence Test;
• Maintaining reliable and detailed contemporaneous records.
• Storing those records safely, possibly with an advisor, family office etc.
• Reviewing these records, and in particular their consistency with other sources of evidence open to HMRC, in a thorough and critical way well in advance of any Tribunal
In 2006, Mr Charman apparently became “extremely irritated” and told his adviser to cease co-operating and communicating with HMRC. However, this may have led to higher costs to achieve what was ultimately an unsatisfactory but, arguably, reasonably predictable outcome.
Trident Tax are specialists in tax disputes and investigations and are well placed to advise on unresolved disputes with HMRC.
We advise clients regularly on residency issues, and provide practical advice on record-keeping, providing real-time reviews.