HMRC domicile enquiries

HMRC domicile enquiries

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In this article we take a look at the growing number of domicile enquiries by HMRC, which looks set to increase further following their recent success in the Henkes case, more of which later.

A particularly challenging aspect of domicile enquiries is the fact they look back over the life of the individual – and often of their parents –  to establish their likely domicile status if it is unclear – which means there can be great difficulty in providing documentary evidence to help prove what may be well known family history. However, domicile enquiries can also look into the future, seeking evidence of an individual’s stated objective of leaving the UK; this too can present evidential difficulties.

If documentary evidence can’t be found to prove the facts of the past and the plans for the future, HMRC and tax tribunals are entitled to draw inferences about what is the most likely state of affairs based on the civil standard of proof; the balance of probabilities. Over the years, courts and tribunals have wrestled with the difficulties a lack of clear evidence can create and in particular, how much weight should be given to declarations of an intention to leave the UK. In Henkes the judgment noted that “those declarations need to be examined critically in view of the fact it is clearly in the interests of the Appellant to say that his intentions are not to remain in the UK indefinitely. This means that the Appellant’s intentions (quoting an earlier case) “have to be ascertained by the court as a fact by a process of inference from all the available evidence about the life of the Appellant”.”

Awareness of the standard of proof and the tribunal’s approach to critically examining statements of intention against the facts should help taxpayers to ensure they gather and retain evidence of their family history, major life decisions, connections with their country of domicile versus the UK and, perhaps most critically, their plans to leave the UK.

The Henkes case provided a number of avenues for HMRC to challenge the past and future actions of the taxpayer and demonstrates that decisions on domicile rarely turn on a single aspect of a person’s life, but rather are more likely to result from an accumulation of evidence across various aspects. It is also worth noting that HMRC take a forensic approach to gathering evidence in minute detail, which is consistent with this view that it isn’t only the major decisions that are taken into account.

Mr Henkes was born in Venezuela to a Dutch father, he was educated in the USA and was a Dutch passport holder, although he appears never to have lived there. Mr Henkes arrived in the UK in 1967 at the age of 23 and had remained UK resident since then. His wife, children and grandchildren all lived in the UK and although he owned a large property in Spain, it was noted that he used the property typically for holidays.

The other key factors that indicated Mr Henkes had acquired a UK domicile were as follows:

  • His wife appeared to be reluctant to leave the UK; this statement was made in a letter to HMRC and although it was retracted, the tribunal still considered it was significant
  • Mr Henkes stated he would leave the UK when he retired but there was a lack of clarity over if and when he would actually retire
  • He travelled to his home in Spain for holidays and then returned to the UK rather than spending extended time in Spain
  • Most of his non-executive work was outside the UK, he did not have to remain in the UK to obtain work or to carry out his work
  • Mr Henkes’ domicile or origin was unclear (Venezuela or Netherlands) and the tribunal decided he had no meaningful links in either country
  • The tribunal decided his intention to retire was no more than a vague aspiration

 
But what will prompt HMRC to enquire into a person’s domicile status?

The change of law in 2017 to introduce the concept of deemed domicile for income tax and capital gains tax purposes after 15 out of 20 preceding years of UK residence has been a major trigger for domicile enquiries. Taxpayers who are deemed domiciled cannot elect for the remittance basis of taxation and their overseas income and gains must be included in their tax returns.  However, settling a protected trust prior to acquiring deemed domiciled status or acquiring a UK domicile of choice can achieve many of the benefits of the remittance basis, depending on client circumstances.     Settling a trust may pique the interest of HMRC with a view to questioning whether a UK domicile of choice has been acquired at some point before the date of deemed domicile.

Those who are not yet deemed domiciled and continue to elect for the remittance basis can also attract enquiries, particularly older taxpayers whom HMRC might judge to have settled here permanently.

New arrivals in the UK are not immune from HMRC’s attentions; we have had to explain to a number of people in their 70’s and 80’s that it is simply not realistic to expect that HMRC will agree they are not settling here permanently or indefinitely unless they can demonstrate very clearly why their stay is only temporary.

There are of course many other triggers to prompt a domicile enquiry (including, perhaps most notably, the death of the taxpayer with a view to considering their Inheritance Tax position) which will be specific to the particular circumstances of an individual and the enquiry is likely to be lengthy and onerous in terms of the questions and information requested. Therefore, we recommend that rather than being reactive when a domicile enquiry is made, non-doms should take a proactive stance and continually maintain and add to a “domicile file” to safely record evidence of their origins, past actions and future plans to ensure that domicile status can be adequately evidenced to HMRC and the tribunal if required.

If you would like to discuss any issues in relation to domicile please contact us

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