Domicile, closure notices and information notices – be careful what you wish for…
In this case, the First-Tier Tribunal – Tax Chamber (the Tribunal) considered a taxpayer’s application for a closure notice against HMRC’s investigation into his domicile status and an appeal against a request for further information in relation to his non-UK income and gains. In the course of doing so, the Tribunal held that it had jurisdiction to determine the taxpayer’s domicile and that its determination of that point had a limited right of appeal. Unfortunately for the appellant, however, the Tribunal found that he had acquired a domicile of choice within the UK.
Long-term UK residents are increasingly finding themselves the subject of HMRC investigations into their claims to have retained their foreign domiciles. Under particular scrutiny are individuals who claim a domicile of origin outside the UK that has not been displaced by a UK domicile of choice arising from their long-term residence in this country. In maintaining non-UK domicile status, they benefit from the ability to access the remittance basis of taxation.
New deemed domicile rules are now in place, since 2017, affecting foreign domiciliaries born outside the UK. Such individuals are now deemed domiciled in the UK from the beginning of their 16th tax year of residence in the UK, from which point onwards they are unable to use the remittance basis.
Under the Taxes Management Act 1970, HMRC are able to open enquiries into anything contained within a self-assessment tax return, including any claim or election included in the return. They may also issue an information notice, requiring the taxpayer to produce information relevant to their tax liabilities. This may include information about their intentions and personal circumstances (on the basis that, if the taxpayer is found to be a UK domiciliary, HMRC require information on their non-UK income, gains and assets to calculate their consequent tax liability).
To avoid a prolonged state of uncertainty caused by open-ended enquiries, the legislation contains an important safeguard. On the application of a taxpayer, the Tribunal may order HMRC to issue a closure notice concluding the enquiry (or part of an enquiry) if the Tribunal is satisfied there are no “reasonable grounds” for continuing it (or a specific part of it). Similarly, the Tribunal may declare void any information notice which is not “reasonably required” in making a revised tax assessment.
The legislative provisions therefore seek to strike a balance between the need for HMRC to fully exercise their investigative powers and the taxpayer’s need for finality.
Once a closure notice has been issued by HMRC, the taxpayer may appeal to the Tribunal if they do not agree with the conclusions set out in the closure notice.
In Henkes, HMRC opened an enquiry into Mr Henkes’ domicile status after he claimed the remittance basis for the years 2014/15 and 2015/16. Mr Henkes was born in Venezuela to a non-UK domiciled father, thereby acquiring a non-UK domicile of origin. He is a Dutch citizen and after education in the US moved to the UK in 1967 aged 23. In February 1984, following the submission of a domicile questionnaire, the Inland Revenue (HMRC’s predecessor) confirmed its acceptance of the fact that, at that time, Mr Henkes was not domiciled in the UK. Mr Henkes now divides his time between two homes in the UK and Spain.
HMRC took the position that he had acquired a domicile of choice in the UK having been based here for the majority of the period from 1967 to date. They argued that:
- Mr Henkes had lived in the UK for nearly 50 years during which time he had built up significant ties to the UK and a very settled UK-centric life. During those periods when he lived outside the UK by reason of his employment, he maintained his ties to the UK and afterwards returned to the UK;
- although Mr Henkes had stated his intention to leave the UK when he retired, he was already 75 and there appeared to be no indication as to when that intention would come to fruition. His residence here appeared therefore to be open-ended; and
- Mr Henkes’ statements of intention had to be considered in the light of all surrounding facts.
HMRC highlighted inconsistencies in Mr Henkes’ replies to HMRC and sought to reassess the returns for both tax years. They also issued information notices in respect of his worldwide income and gains for a further separate tax year.
At the time of the hearing the enquiry had been ongoing for over three years. Mr Henkes had applied to the Tribunal for final and partial closure notices, in addition to appealing the information notice.
The Tribunal considered that it was necessary to determine Mr Henkes’ domicile as a preliminary issue during the course of the proceedings, in order to decide whether HMRC had reasonable grounds for continuing the enquiry or issuing an information notice.
Does the Tribunal have jurisdiction to decide on domicile in the context of a closure notice application?
In HMRC v Vodafone 2  EWCA Civ 1132, the Court of Appeal held that a tribunal has jurisdiction to determine a point of law as a preliminary issue in considering an application for a closure notice. In Henkes, the Vodafone 2 principle was extended to hold that mixed questions of law and facts (such as that of domicile) also fell within the Tribunal’s competence.
By contrast, in Levy v HMRC  UKFTT 2369, the Tribunal reached the opposite conclusion on its jurisdiction to determine domicile. In its view, the statutory scheme for closure and information notices was supervisory in nature; therefore, the Tribunal only needed to satisfy itself that HMRC’s view on a taxpayer’s domicile “has some merit”. It was considered inappropriate to have a conclusive determination of domicile at this stage of proceedings.
However, in Henkes Judge Beare was firm in his view that “whether or not the [HMRC] have reasonable grounds for continuing the enquiry depends…on the reasonableness of the conclusion which they have drawn from each such fact as so objectively determined”. In other words, a proper determination of domicile, under the law, is a prerequisite to assessing the reasonableness of closure and information notices. This is especially the case when the issue is “so fundamental as to be capable of bringing the enquiry to an end”.
Will the Tribunal exercise its discretion?
Separately, the Tribunal considered whether it was appropriate to exercise its power to determine Mr Henkes’ domicile status.
To this end, Judge Beare carried out the proportionality exercise prescribed in Beneficial House LLP v HMRC, seeking to strike a balance between HMRC’s right to investigate returns and protecting the taxpayer against protracted enquiries. On balance, he found that the facts favoured a ruling on the domicile issue at this stage of proceedings. In coming to this conclusion, he was mindful to the ongoing nature of the enquiry, and the substantial professional costs that the taxpayer would save if the issue were resolved without further delay.
Ultimately, the Tribunal agreed with HMRC that Mr Henkes had acquired a domicile of choice in the UK. This was borne out of the fact that despite being 75, he maintained active business interests since leaving the Shell group as CEO of its chemicals arm. It was considered that his plans to leave the UK on retirement may never come to fruition. Additionally, his strong family ties (including grandchildren who are all living in the UK) proved that he had much to keep him in the country. It was unhelpful to his case that the time he did spend away from the UK at his property in Spain was during traditional holiday periods of Christmas and Easter.
Can the Tribunal’s determination of domicile be appealed?
In a successful closure notice application, where the Tribunal has not made any determination of the taxpayer’s domicile, HMRC must, when issuing the closure notice, take a position on the taxpayer’s domicile based on the facts available. If HMRC’s decision is adverse to the taxpayer, its decision may be appealed and overturned.
In Henkes, it was held that the determination of Mr Henkes’ domicile would have a limited right of appeal. The doctrines of estoppel and abuse of process would prevent Mr Henkes’ domicile from being re-litigated in subsequent appeals against any closure notice. However, this would not prevent him from appealing against the Tribunal’s decision on the closure notice application, which could include, as one of the grounds of appeal, that the decision on domicile was incorrect.
Partial closure notice
Having resolved the issue of domicile, the Tribunal held that it was reasonable for HMRC not to issue a full closure notice in relation to the overall enquiry. This was because, having found that Mr Henkes was domiciled in the UK, HMRC now needed to establish the extent of Mr Henkes’ overseas income and gains.
Where a full closure notice is not available, a taxpayer may be able to seek a partial closure notice (PCN) on the specific issue of domicile, with a view to appealing any adverse determination within that closure notice. The rationale is that the assessment of a tax liability in relation to a taxpayer’s overseas affairs may take years to conclude, and this should not hold up a decision on the narrow point of domicile. In addition, requiring a taxpayer to provide information about their overseas affairs would impose a significant burden on a taxpayer, which would be unnecessary if the taxpayer is not in fact domiciled in the UK.
In Henkes, a PCN would serve no purpose for the appellant, as the Tribunal’s determination decided to address the issue of domicile in the context of the closure notice application itself. Regardless, the Tribunal went on to consider whether HMRC have power to issue a PCN in respect of domicile alone despite the amount of tax payable if the taxpayer were UK domiciled being yet unknown. In Embiricos v HMRC  UKFTT 236, the Tribunal held that HMRC are able to issue a PCN without stating the amount due. While in Levy, the Tribunal reached the opposite conclusion. Judge Beare, in the instant case, did not lend his voice to the debate to avoid further muddying the waters. The Upper Tribunal’s decision in the Embiricos appeal, due to be heard in October this year, should bring some clarity on this point.
It remains to be seen whether future tribunals will prefer the view taken in Henkes or Levy.
In the meantime, the Henkes decision will serve as a healthy reminder to HMRC of the need to resolve domicile disputes within a reasonable period of time. It also reinforces the common-sense conclusion that determining an individual’s domicile status before investigating the precise tax implications which would arise if the taxpayer turns out to be UK domiciled is likely to save significant time and expense both for the taxpayer and HMRC.
Though in the instant case, the Tribunal found in favour of HMRC on the question of domicile, it is of course likely that on less clear-cut facts a change of domicile might be difficult for HMRC to establish.