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Prolonged HMRC domicile enquiries appear set to continue

Posted on 01 February 2021

The past few years have seen both an increase and a sharpening of HMRC enquiries into domicile status. These are often complex and involve multiple rounds of searching questions. The approach adopted by HMRC often includes both a simultaneous review of domicile status, and a detailed examination of the relevant individual's assets, and foreign income and gains, for relevant years.

In the last few years, there have been conflicting decisions in the tax tribunal on whether a taxpayer can force a separate and early determination of domicile status prior to an examination of the quantum of assets, foreign income and gains (and subsequent UK tax liability) for the relevant periods. Unfortunately a recent decision in the Upper Tribunal (Embiricos [2020] UKUT 370) has resolved this conflict in a somewhat disappointing way.

In this case, Mr Embiricos filed tax returns in the UK on the basis that he was non-UK domiciled. HMRC opened an enquiry and concluded that he was UK domiciled, so sought details of his foreign income and gains. He had not reported such foreign income or gains, as he had filed on the basis that he was non-domiciled and had not remitted such income or gains to the UK.

Mr Embiricos applied to the tribunal for a "partial closure notice" (PCN) in relation to the domicile decision. PCNs allow a taxpayer to force HMRC to issue a formal decision on a discrete matter so that it can be appealed to the tribunal. The taxpayer argued that domicile could be the subject of a PCN, without concluding the details of foreign income and gains beforehand. For Mr Embiricos, if his domicile status was confirmed on appeal as non-UK domiciled, he could avoid the need to incur both the time and cost of working out his foreign income and gains.

Although the First-tier Tribunal found in Mr Embiricos' favour, the Upper Tribunal has allowed HMRC's appeal. This decision relied upon existing case law that states closure notices cannot be issued without quantifying the potential tax liability. In addition the Upper-tier Tribunal was concerned that this route of appeal conflicted with separate statutory regime for HMRC and taxpayers to refer issues jointly to the tribunal.

Overall, this is an unfortunate setback, as it removes a powerful strategic tool for those faced with domicile enquiries. However, other proactive ways in which to tactfully manage such enquiries remain available.

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