Domicile status, appeals and taxpayer rights

The First-tier Tribunal (FTT) decided an appeal by a taxpayer against a Sch 36 information notice aimed at finding out details of his worldwide income and gains where HMRC had decided that he was ineligible to benefit from the remittance basis (Robert Perlman v HMRC [2021] UKFTT 219 (TC)). The taxpayer asserted that the information sought was not reasonably required because he was indeed non-UK domiciled. Accordingly, he requested to have the substantive issue of his domicile status tested by the tribunal as a preliminary issue. HMRC resisted, saying that an appeal against an information notice was not the right forum for this matter to be heard.

Background

Mr Perlman was born in Curaçao and lived in the UK for at least 50 years. He claimed to be non-UK domiciled. HMRC opened enquiries under s9A, Taxes Management Act 1970 (TMA 1970) into his self assessment tax returns for the years 2014/15 through to 2016/17. In HMRC’s view, he was domiciled in the UK and not entitled to claim the remittance basis. HMRC asked informally for information and documents about his worldwide income and gains. Mr Perlman refused and HMRC issued him with notices under Sch 36, Finance Act 2008 for the years under enquiry in relation to the “requirement to correct” provisions in Finance (No. 2) Act 2017.

Mr Perlman appealed on the grounds that the information was not “reasonably required”. This was because he was not domiciled in the UK, arguing that the information would only be reasonably required if HMRC had first proved he was not so domiciled. In this way he sought to have his domicile dispute with HMRC decided as part of the hearing against the Sch 36 notices. HMRC argued that the FTT did not have the jurisdiction to determine Mr Perlman’s domicile as part of this process and even if it did, the FTT should decline to exercise it.

Was the information reasonably required?

The case law concerning whether the Tribunal has the jurisdiction to decide whether a taxpayer is UK domiciled as part of an appeal against a Sch 36 information notice is slightly chequered. In Executors of Levy v HMRC [2019] UKFTT 0418 (TC) the Tribunal decided it did not have the jurisdiction to decide Mr Levy’s domicile. In a later decision, Henkes v HMRC [2020] UKFTT 159 (TC) Judge Beare found that the Tribunal did have the jurisdiction to decide this issue, but then went on to decide that Mr Henkes was indeed UK domiciled.

HMRC argued that the position was analogous to the position where third-party notices had been issued with the approval of the Tribunal, referring to several authorities. One involved a request made by the Australian tax authorities for assistance under the Double Taxation Convention with the UK to obtain information (Derrin Brothers Properties Ltd v HMRC [2016] EWCA Civ 15). The second involved a similar request for information, but this time from the Swedish Tax Authorities (Kotton v HMRC and others [2019] EWHC 1327 (Admin)). The upshot of those decisions was that:

• Sch 36 represents a balance between the interests of individuals and the interests of the wider community;
• the reason why it is there is to help HMRC investigate tax avoidance and evasion; and
• it operates at the preliminary investigative stage in order to access documents and information without providing an opportunity for those to delay or frustrate the investigation by lengthy or complex adversarial proceedings.

This meant that the scope for challenging an information notice is relatively limited. Provided there is a genuine and legitimate investigation or enquiry of any kind into the tax position of a taxpayer that is neither irrational nor in bad faith, that is enough. The focus of a challenge does not extend to whether the investigation is itself well-grounded in tax law, but is limited to the rationality of the conclusion that the information/documents are reasonably required for checking the taxpayer’s tax.

The conclusion reached by Judge Anne Redston in this case was that the Derrin and Kotton cases provided a useful guide to the way that the law in this area should be construed, albeit it was not formally binding because those cases involved notices issued in different circumstances and under different legislative provisions. However, she found those decisions to be highly persuasive. In her view:

• the Tribunal is only required to consider the rationality of whether the information/documents are reasonably required;
• there is no requirement that the approval of a notice is conditional on the tax investigation itself being reasonably required;
• instead, the Tribunal has only to be satisfied that the investigation or enquiry is genuine and legitimate; and
• there is no requirement for HMRC to show that a positive liability to tax will arise or that liability will arise in a particular way.

Applying those principles to Mr Perlman’s case, the Judge only had to decide whether there was a “rational connection” between the enquiry and the information required in the notices. This did not extend to deciding the underlying substantive issue of Mr Perlman’s domicile.

The Judge considered that such an approach was entirely consistent with the purpose of Sch 36 as a whole, as set out in Derrin, namely that it operates “at the investigatory stage” and is designed to avoid “lengthy or complex adversarial proceedings”.

For all these reasons the Judge concluded that the information requested by HMRC was indeed reasonably required within the scope and terms of the legislative provisions.

If the Tribunal had jurisdiction, should the FTT determine the domicile position?

Just in case she had decided the first issue incorrectly, the Judge went on to consider whether the Tribunal did have jurisdiction to decide the substantive issues between the parties. In this respect, there is some authority that would support such a move based on the Court of Appeal’s decision in HMRC v Vodafone 2 [2016] EWCA Civ 1132. Here the court decided that the Tribunal did have the jurisdiction to decide incidental points of law when deciding an application by a taxpayer to close an enquiry. 

In the present case, the Judge decided that as the determination of an individual’s domicile is a mixed question of fact and law (rather than incidental points of law), she was unable to do so. In any event, there was other authority that said that the jurisdiction to determine incidental points of law should be exercised sparingly.

One aspect that supported such an approach here was that if the Tribunal decided it did have jurisdiction to determine Mr Perlman’s domicile status, the losing party would have no right of appeal, so the only remedy would be to apply to the court by way of judicial review.

The threshold to succeed in such an application would be much higher than in the case of a simple appeal to the Upper Tribunal.

Conclusion

While it is difficult to take issue with the logic of the decision, and its basis in law, there does seem to be something that is not quite working in the way that HMRC is proceeding with its litigation policy in relation to non-UK domiciliaries. No one could possibly object to the right of HMRC to recover all taxes properly payable. However, there should be a way of deciding preliminary issues such as an individual’s domicile status at an earlier stage to avoid unnecessary expense to both taxpayers and the Crown.

About the author

Andrew Cockman, Director Personal Tax Advisory, Azets Birmingham, and member of the Tax Faculty’s Private Client Committee