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Henkes: closure notices and domicile enquiries

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Of all HMRC investigations, domicile enquiries are uniquely laborious, time-consuming, and financially and emotionally costly for taxpayers.

Frequently, their scope balloons to vast proportions, with lengthy schedules of questions being followed by yet more schedules of questions, and then more still, and more. Many of the details requested have limited or no conceivable relevance to a person’s domicile, but HMRC justifies its approach by claiming that it is ‘in the information gathering’ phase of its enquiry, and because domicile can only be ascertained ‘in the round’, by examining all aspects of a person’s history and lifestyle. Restraining HMRC only to relevant considerations can be a task of Herculean effort.

Superficially, examining a taxpayer’s unique situation ‘in the round’ on the basis of all the available evidence might seem positive: it should, after all, be preferable to the rough justice of an inflexible rule of thumb. But in domicile enquiries, its effect is that of a bludgeon rather than an incisive scalpel.

Unfortunately for taxpayers, HMRC seems to consider that the ‘information gathering phase’ of a domicile enquiry lasts from its outset until the point that the investigating officer considers himself or herself ready to make a determination. Too often, that is several years after the enquiry was opened. In the meantime, the taxpayer will have spent large sums on professional advice and suffered unwanted (and, in many cases, unwarranted) intrusion into all aspects of their private lives, which can include re-opening painful memories and explaining complex family relationships.

In recent years, HMRC has significantly increased the number and scope of enquiries into taxpayers’ domicile status, especially where the person in question has spent several years resident in the UK. The attraction of taxing a person’s worldwide estate on death at 40% is doubtless a powerful lure for HMRC.

Unfortunately, HMRC’s unwillingness to be satisfied where evidence – other than the taxpayer’s recollection – no longer exists is particularly problematic. It has reached the stage where the officious prying and sour tone in many domicile enquiries is causing real concern among professional advisers that HMRC’s conduct risks damaging the UK’s reputation among internationally mobile individuals. And word gets around, especially as some national groups are disproportionately affected.

So what is an affected taxpayer to do? Perhaps conscious that HMRC might occasionally overreach itself, Parliament enacted a specific safeguard: the right for a taxpayer to apply to the tribunal for an order directing HMRC to issue a closure notice in an enquiry. This balances the right of HMRC to investigate a person’s domicile with the right of the subject to require a final decision within a reasonable period of time, once sufficient information has been provided. If that closure notice is adverse to a taxpayer, he or she then has a right of appeal to the tribunal, which can uphold or overturn HMRC’s decision.

In the recent case of Henkes v HMRC [2020] UKFTT 159 (TC) (Judge Tony Beare) (reported in Tax Journal, 15 May 2020), the FTT considered an application by Mr Henkes for a closure notice in HMRC’s domicile enquiry, which, by the time of the hearing, had been open for over three years.

What makes Henkes so important is the FTT’s decision that it has the jurisdiction conclusively to determine a taxpayer’s domicile in the context of a closure notice application – and not just in a substantive appeal against HMRC’s determination once issued. Moreover, the FTT’s determination of a person’s domicile, once made, is binding both on the taxpayer and on HMRC for the tax years in question, and may not be re-litigated in any court or tribunal in future proceedings. 

In so deciding, the FTT departed from the decision and reasoning in Levy v HMRC [2019] UKFTT 418 (TC) (Judge Andrew Scott). 

The FTT considered a number of points (not all examined here). Its decision is significant because it brings forward the point at which a taxpayer can expect a determination of his or her domicile, thus hopefully shortening HMRC’s enquiry and saving substantial professional costs. The FTT made it clear that it would not be appropriate to determine a taxpayer’s domicile in every such application, and, as more appeals follow Henkes, the limits of the FTT’s willingness to do so should become clearer.

Unfortunately for Mr Henkes, the FTT decided that he was domiciled in the UK. But the strategic loss for HMRC – which had argued that the FTT did not have jurisdiction to determine domicile in a closure notice application – was much greater. It is not yet known whether Mr Henkes and/or HMRC will appeal to the Upper Tribunal.

In the meantime, taxpayers suffering lengthy and intrusive domicile enquiries should be emboldened by the Henkes decision into requiring HMRC to issue closure notices within a reasonable period, failing which they should take advice about applying to the FTT for an order. In many cases, this could turn out to be an invaluable tool in the taxpayer’s armoury.

But the most positive outcome from the Henkes case would be if HMRC changed its approach to domicile enquiries from its present antagonistic model back to the common-sense attitude which prevailed in previous years. One lives in hope.

James Austen, Collyer Bristow  (