Andrew Park highlights a recent tribunal case confirming that HMRC can ignore previous technical conclusions when considering a matter such as domicile in a subsequent tax year.
The recent First-tier Tribunal (FTT) decision in Gulliver v Revenue and Customs  UKFTT 222 (TC) does not create a binding precedent as to whether questions of fact can be looked at afresh by HMRC. However, it is likely to be influential as it demonstrates the risks to taxpayers of seeking to rely upon any past understandings on questions of fact or technical issues (such as domicile) that they and their advisers believe they reached with HMRC and which they, therefore, consider affect their UK tax position for subsequent tax years.
The taxpayer – now Chief Executive of an international banking group – was born in the UK and educated in the UK. He had a UK domicile of origin. However, he travelled extensively in the Far East for work and moved to Hong Kong whilst working for the bank. He believed that he had successfully acquired a Hong Kong domicile of choice during the time he spent there.
Mr Gulliver later returned to the UK for a role which was meant to last for two years before he was due to return to Hong Kong. In the event, he is yet to return to the UK, despite living and working here for well over a decade. Nevertheless, he understands that he has retained his Hong Kong domicile of choice. Indeed, further to a March 2003 letter from HMRC’s Capital Taxes Office, the taxpayer understood that HMRC agreed that he was domiciled in Hong Kong for UK tax purposes. It was for that reason that HMRC accepted that he did not have a UK inheritance tax liability with regard to a transfer the previous year into a family trust.
In December 2015, HMRC opened a fresh investigation into Mr Gulliver’s domicile for the 2013/14 tax year. HMRC issued a voluminous information notice (under FA 2008, Sch 36, para 1) seeking documents and explanations covering his personal and professional life since 1981. The taxpayer sought to ‘head that off at the pass’ by appealing against the information notice and seeking a closure notice.
The taxpayer applied to the FTT for a direction that HMRC must issue an enquiry closure notice (under TMA 1970, s 28A(4)) within a specified period. The FTT considered whether there were reasonable grounds for refusing this request.
Mr Gulliver’s counsel argued that:
- The March 2003 correspondence from HMRC’s Capital Taxes Office accepted that the taxpayer had a non-UK domicile of choice.
- HMRC’s subsequent valid self-assessment enquiry into Mr Gulliver’s 2013/14 tax return, therefore, had to start from the point that he was non-UK domiciled in 2003. Consequently, in order to assess extra tax, HMRC was required to demonstrate that subsequent events meant that his UK domicile of origin was restored.
- Mr Gulliver correctly restricted the information provided to HMRC during the enquiry to that which was relevant to this position. All information and documents that HMRC requested for the period prior to March 2003 were not reasonably required for the purposes of checking Mr Gulliver’s tax position, so this part of the information notice did not meet the criteria of FA 2008, Sch 36, Para 1.
The FTT found against the taxpayer, affirmed the information notice and refused to direct HMRC to issue a closure notice, since it considered that a determination of fact in relation to one tax year is not binding on another:
‘The law set out in Caffoor v Commissioner of Income Tax  AC 584, Barnett v Brabyn  STC 716 and King v Walden  STC 822 is clear. Income tax and capital gains tax are charged by reference to separate tax years. In those circumstances, a determination of fact (whether made by a tribunal or following an agreement under s 54 of TMA 1970) made in relation to one tax year is not binding in relation to a later tax year. Both HMRC and a taxpayer are permitted to make arguments that call into question factual determinations made in respect of a different tax year.’ [para 18]
Indeed, the FTT went further, and expounded that questions of fact can even be revisited for years for which they had already previously been agreed:
‘In fact, the principle is even wider than that set out at . In Barnett v Brabyn, the taxpayer and HMRC had reached an agreement under s 54 of TMA 1970 that income the taxpayer received in certain tax years from his activities as a technician was taxable under what was then Case I of Schedule D. HMRC discovered that the taxpayer had received additional income from these activities and raised a further assessment for the same tax years. Lightman J held that the taxpayer was free to argue, in appeals against these additional assessments that, despite the position set out in the s54 agreement, he was an employee and not an independent contractor.’ [para 19]
Furthermore, even a court ruling on the domicile of choice in 2003 – and there wasn’t one – would not impede a re-examination of whether a domicile of choice had ever been acquired for the purposes of determining assessability for the later year:
‘Therefore, even if, in 2003, a court or tribunal had decided that Mr Gulliver had a Hong Kong domicile of choice, or HMRC and Mr Gulliver reached an agreement under s 54 of TMA 1970 to this effect, there would be no impediment to HMRC arguing, in proceedings relating to the 2013/14 tax year, that Mr Gulliver never acquired a Hong Kong domicile of choice. Mr Gulliver does not even have a court or tribunal decision on his domicile or a s 54 agreement. He cannot be in any better position simply because HMRC wrote the letter. Since there would be no impediment to HMRC arguing that Mr Gulliver never acquired a Hong Kong domicile of choice in any appeal relating to the 2013/14 tax year, I see no reason why they should be precluded from using their powers of enquiry to seek to establish this.’ [para 21]
Consequently, HMRC can request further documents and other information to revisit whether the taxpayer ever acquired the Hong Kong domicile of choice, notwithstanding the previous correspondence in that regard.
The tribunal commented that the other avenue open to the taxpayer was to challenge HMRC’s decision to depart from the previous position as set out in its letter of March 2003. This may be done via judicial review, subject to the time limits for bringing such an action and only if the High Court gives permission. The grounds for such an action may be unfairness, unreasonableness, or legitimate expectation.
The rationale in this case does, of course, extend beyond just questions of domicile, and has relevance to any situations which turn on matters of fact. As we are all aware, although in principle ‘the facts are the facts’, the reality of addressing tax issues that turn on the facts is that demonstrating the true facts of a situation is, in itself, often difficult and too often depends on what inferred facts and characterisation of the facts are agreed with HMRC from whatever plain facts might be clearly demonstrable. As such, I would argue that the facts are all too often a matter of subjective debate and speculation when agreeing and settling tax matters with HMRC.
This decision also emphasises the need to retain information and documents to support positions taken in tax returns. Failure to do so may be expensive. If, after an enquiry or investigation, HMRC concludes that more tax is due because (for example) a view on residence or domicile (or even the base cost of a capital asset taking into account renovations or improvements thereto) cannot be substantiated, then HMRC may seek to impose penalties for the error in the tax return (FA 2007, Sch 24) if it considers the error to be careless or deliberate.
This ruling provides no comfort to tax dispute practitioners, and serves only to caution us all against relying on any past agreements with HMRC when seeking to submit tax returns or settle any tax matters that arise at a later date.
Andrew Park FCA is a Director in the Tax Dispute Resolution Team at BDO LLP with over 15 years of tax dispute experience. He specialises in providing solutions to tax problems and managing investigations and voluntary disclosures with HMRC – including complex UK tax enquiries involving entities, parties and assets in multiple international jurisdictions. He also heads the Tax Dispute Resolution component of BDO LLP’s Tax Support for Professionals service and provides daily advice to external practitioners on all aspects of tax enquiries and tax disputes.