Hoist with his own petard? Henkes v HMRC, and the lessons that can be learned regarding domicile enquiries
Introduction
In recent years HMRC have shown a growing interest in challenging taxpayers on their claims to being foreign domiciled, despite the introduction of the deemed domicile rules in April 2017. Domicile enquires are often costly and time-consuming, inducing some taxpayers to seek to end the process by applying to the First-tier Tribunal (FTT) for a direction that HMRC should issue a closure notice.
Applications for closure notices have been considered in three recent cases concerning enquiries by HMRC into the affairs of taxpayers asserting a non-UK domicile: first in Epaminondas Embiricos v HMRC [2019] UKFTT 0236 (TC), followed shortly by Levy’s Executors v HMRC [2019] UKFTT 418 (TC), and then Henkes v HMRC [2020] UKFTT 00159 (TC). All three cases repay study by taxpayers who are subject to domicile-related tax enquiries, who might be minded to seek closure notices.
Henkes, the latest of these cases, indicates a significant change of direction in the law. The FTT agreed with the taxpayer that it could, and should, decide the substantive question of the taxpayer’s domicile as a preliminary matter, in a procedural application in advance of a full trial. Unfortunately for the taxpayer, the FTT’s finding on the domicile question was not what the taxpayer had been hoping for …
As an FTT decision, Henkes is not binding. (Decisions of the tax tribunals do not create legal precedent in the way that decisions of the courts do). However, it may well open the floodgates for other taxpayers who may wish to make similar applications for an accelerated determination of their domicile. Whether that is the correct strategic decision, and in particular whether they will get the hoped-for answer, is an entirely different issue.
Legal background
HMRC may enquire into an individual’s tax return for a particular year by sending a notice of enquiry within a specified time limit. The enquiry can cover anything contained in, or required to be contained in, the return, including claims or elections.
During the course of an enquiry, HMRC are able to issue a formal information notice (IN) to the taxpayer, requesting information that is ‘reasonably required’ to check the taxpayer’s tax position. An IN can also be issued where there is no ongoing enquiry, subject to satisfying certain additional conditions. The taxpayer is entitled to appeal to the FTT against the IN or any information contained in it. The tribunal’s decision on any such appeal is final, and may not be appealed further.
An enquiry continues until it is brought to an end by HMRC issuing a final closure notice (FCN). Since 2017 there has also been an ability for HMRC to issue a partial closure note (PCN). Whereas a FCN communicates HMRC’s determination with respect to all outstanding enquiries for the relevant tax year, a PCN communicates HMRC’s determination with respect to just one ‘matter’, allowing the enquiry to continue in relation to other ‘matters’.
FCNs and PCNs can be issued by HMRC of their own accord. Unless a direction is made by the FTT (as discussed below), the decision whether to issue a closure notice is entirely at the discretion of HMRC. HMRC will often have little, if any, incentive to issue a closure notice and will prefer to prolong the enquiry, even where, objectively, all information reasonably required for the making of an assessment has already been obtained.
However, a taxpayer can force HMRC’s hand, by applying to the FTT at any time for a direction that HMRC issue a closure notice, of either kind. The closure notice must be issued unless HMRC can satisfy the FTT that there are reasonable grounds for not doing so.
Once the closure notice is issued, the taxpayer must then either accept HMRC’s decision, or appeal it and proceed to litigation.
In a domicile-related dispute, the taxpayer may want a PCN to be issued on the domicile question, in the hope that the FTT will find that he/she was non-UK domiciled in the relevant tax year(s). This may allow a quicker resolution of the dispute; but also, and importantly, it may allow the taxpayer to resist a demand from HMRC for information about his/her foreign income and gains in the relevant tax year(s). There may be a strategic advantage in withholding this information from HMRC where doing so is legally possible. There may also be a significant costs saving for the taxpayer in not providing this information, as a significant amount of accounting work may be needed to collect the required data.
For a PCN to be issued regarding an individual’s domicile, it must qualify as a separate ‘matter’. The question of whether an individual’s domicile is a separate ‘matter’, on which HMRC can make a determination by PCN (and consequently whether HMRC can be required by the FTT to make such a determination) is currently unclear.
In both Embiricos and Levy’s Executors, the taxpayer applied for such a PCN. HMRC argued that this required not only a conclusion on the question of domicile, but also amendments to the tax return to state the amount of additional tax payable. As a result, HMRC would have needed to obtain information (pursuant to an IN) regarding the quantum of the taxpayer’s foreign income and gains, which the taxpayer had (legitimately) refused to provide during the course of the enquiry.
In Embiricos, the FTT rejected this argument and found that domicile is a separate ‘matter’ that is capable of being the subject of a PCN, and that HMRC could make the necessary amendments to the taxpayer’s tax return by simply withdrawing the claim for the remittance basis – there was no need for HMRC to quantify the additional tax due in order for the PCN to be valid. But in Levy’s Executors, the FTT reached the polar-opposite view, concluding that a PCN should not be issued in circumstances where HMRC did not have sufficient information to specify the further tax payable.
The Embiricos case is currently on appeal to the UT, with the hearing scheduled for October, so a further development on this point can be expected soon.
Case overview
Mr Henkes is a Dutch national, born in Venezuela, who was raised in South America and educated in the USA. That Mr Henkes has a non-UK domicile of origin was not disputed by HMRC.
Mr Henkes took the position that he had remained non-UK domiciled, despite living in England since moving there in 1967, at the age of 23. He therefore claimed the remittance basis for (inter alia) the 2014/15 and 2015/16 tax years, such that he reported and paid tax on his relevant foreign income and foreign chargeable gains only insofar as remitted to the UK.
HMRC opened an enquiry into these two tax years, focussing on the question of whether Mr Henkes had acquired a domicile of choice in the UK such that he had ceased to be eligible for the remittance basis of taxation.
After almost two years of correspondence with HMRC, Mr Henkes applied to the FTT for an order directing HMRC to issue FCNs in relation to the two enquiries, or, in the alternative, PCNs in respect of his domicile status for the two tax years under enquiry.
HMRC contended that they could not issue any sort of closure notice without calculating the tax that was (in their view) due in relation to the two years under enquiry, on the basis that Mr Henkes had (in their view) become UK domiciled. Instead, they issued an IN requesting details of Mr Henkes’ foreign income and gains for the 2014/15 and 2015/16 tax years and also for the 2013/14 tax year, which was not under enquiry.
The issues before the FTT were, in brief:
(1) whether HMRC should be ordered to issue FCNs or PCNs in respect of the 2014/15 and 2015/16 tax years, or whether they had reasonable grounds for not doing so; and
(2) whether HMRC reasonably required the information requested in the IN.
Jurisdictional issues
The FTT explained that ‘at the heart’ of the issues under consideration was a ‘reasonability-based’ test, in relation to which two questions had to be considered:
(1) whether the FTT has the jurisdiction to determine the domicile status of a taxpayer in the course of considering an application for a closure notice or an appeal against an information notice; and
(2) if so, whether the FTT should exercise its discretion to make such a determination in this particular case.
The FTT found, respectively, that it did and it should.
The FTT relied on HMRC v Vodafone 2 [2006] EWCA Civ 113 as Court of Appeal authority for the proposition that a question of law may be determined as a preliminary issue in considering an application for a closure notice. It was acknowledged that the question of where a person is domiciled is a mixed question of law and fact, rather than a question of pure law.
In Levy, this distinction was sufficient for the FTT to conclude that it had no jurisdiction to decide where the taxpayer was domiciled as a preliminary issue. But in Henkes, Judge Beare found no reason to distinguish between questions of law and mixed questions of law and fact. He concluded that the Vodafone 2 principle should apply to any ‘threshold question’ which is within the competence of the relevant court or tribunal to decide, where that question has a binary answer that is capable of bringing proceedings to a close.
Both parties agreed that the question of the taxpayer’s domicile would conclusively determine Mr Henkes’ case (subject, in the case of the PCN application, to the eventual outcome of Embiricos). If Mr Henkes was found to be UK domiciled, HMRC would be entitled to continue in their enquiries and he would be obliged to provide them with the information sought in the IN; if Mr Henkes was found to be non-UK domiciled, on the other hand, HMRC would be ordered to issue an FCN and he would not be required to furnish them with any further information. The FTT concluded that Mr Henkes’ domicile was therefore a binary threshold question, fundamental to the conclusion of the enquiry.
The jurisdiction of the FTT in relation to an appeal against an IN was not addressed in Vodafone 2 or in any previous decision. However, Judge Beare found that the FTT again had jurisdiction to decide the question of domicile before considering whether the information requested in the IN was reasonably required.
Having established that it had jurisdiction to answer the question of Mr Henkes’ domicile, the FTT had to consider whether it was appropriate for it to exercise its discretion to do so. Judge Beare acknowledged that ‘it would not be appropriate for me to determine the domicile of the Appellant in these proceedings merely because I have concluded that I have the power to so’. However, he had relatively little trouble in finding that he should determine the question of Mr Henkes’ domicile.
This conclusion seems to have been based primarily on the fact that the enquiry had been running for over two years, during which Mr Henkes had co-operated fully and extensively and had been put to a considerable amount of trouble and cost. The FTT felt that the time allocated for the hearing (two days) was more than adequate to cover legal arguments and evidence on the domicile question, and that there was no need to delay further.
Importantly, the FTT found that, based on the doctrines of estoppel and abuse of process, that its decision regarding Mr Henkes’ domicile would be binding for the purposes of subsequent proceedings in relation to the relevant tax years. Any appeal against any closure notices or assessments issued in due course in relation to the relevant tax years could not be argued on the grounds of domicile.
Discretion: the better part of valour?
In deciding (1) that he / the FTT had a discretion to go beyond the narrow question of whether HMRC’s conclusion on Mr Henkes’ domicile was reasonable, and (2) that it was right for him / the FTT to exercise that discretion, by making a determination as to whether, in the relevant tax years, Mr Henkes was domiciled in the UK or abroad, Judge Beare departed from the approach taken in Levy. The FTT in Levy found that ‘the only thing that HMRC need to show is that they have a genuine case that, realistically, has some merit’. Although the question of jurisdiction was not raised in Embiricos, the FTT did observe that determining the question of domicile as a preliminary issue to the closure notice application seemed an ‘efficient and cost effective way of proceeding’.
As the divergence between these cases indicates, whether the question of domicile should be determined as a preliminary issue is a point of difficulty. In considering this point, Judge Beare referred to Wrottesley v HMRC [2015] UKUT 637 (TCC) and Boyle v SCA Packaging [2009] All ER 1181, observing the key principles applicable in deciding whether a preliminary issue should be heard. These included that ‘the power that tribunals have to deal with issues separately at a preliminary hearing should be exercised with caution and resorted to only sparingly’ and only exercised where there is a ‘succinct, knockout point which is capable of being decided after only a relatively short hearing’. It is hard to disagree with the proposition that Mr Henkes’ domicile was a ‘knockout point’, but whether it was ‘succinct’ or could (and should) be decided at a short hearing is perhaps more debatable.
Any decision regarding domicile would be binding on future proceedings in the FTT in relation to the relevant tax years and, even if the point could be re-litigated in a higher court (e.g. on appeal from the FTT’s decision on the closure notice application), the decision may be difficult to overturn. Given the impact of such a finding and in light of the comments in Boyle and Wrottesley, the power to decide the question of domicile should arguably not be exercised unless the FTT is presented with evidence of a similar quantity and quality as would be adduced in a full hearing on the issue. It is unclear whether that was the case in Henkes, given that there were questions posed by HMRC in correspondence that had not yet been answered by the taxpayer and that might have had an impact on the outcome of the investigation, and Counsel for HMRC chose not to cross-examine witnesses for the taxpayer. Nonetheless, Judge Beare was evidently comfortable that he had sufficient time and evidence to reach a full and considered judgment on the issue.
Marry, why was he sent into England?
Both parties agreed that Mr Henkes had a domicile of origin outside the UK. The issue was whether that foreign domicile of origin had been replaced by a domicile of choice in a part of the UK, ie England. The question for the FTT to consider was whether HMRC had ‘provided sufficiently clear and cogent evidence’ that, on the balance of probabilities, Mr Henkes had formed an intention to remain in the UK indefinitely. The FTT found that, by the start of the 2013/14 tax year, he had.
The decision seems to have been very finely balanced and was apparently swayed by slight inconsistencies in the pre-action correspondence. While the FTT was clearly influenced to a degree by Mr Henkes’ strong links to the UK and weak attachment to any other jurisdiction, significant weight was placed on the identity and nature of the ‘trigger’ event or circumstances that would lead to his departure from the UK. Mr Henkes argued that his intention was to leave the UK on retirement, which was ‘a clearly foreseen and reasonably anticipated contingency’ for these purposes. However, Judge Beare felt that the position was somewhat equivocal and the correspondence with HMRC created uncertainties as to the ‘fixedness and clarity of the circumstances which would lead [Mr Henkes] to leave the UK’.
In particular, Judge Beare found that Mr Henkes had not been clear in the correspondence as to why he needed to remain in the UK for work and, perhaps more fundamentally, whether he ever actually intended to retire. A reference to the reluctance of Mr Henkes’ wife to leave the UK being a factor in the delay to his retirement (subsequently retracted in later correspondence) was also unhelpful to his case.
Words, words, words (and the importance thereof)
The FTT held that an intention to reside in a jurisdiction indefinitely can develop ‘organically over a relatively long time’ and that HMRC’s inability to point to a particular tipping point was not fatal to their case. Nonetheless, while there may not have been strong evidence that Mr Henkes definitely would leave the UK, there equally appears to have been no strong evidence that he would not.
For this reason, the FTT’s finding on Mr Henkes’ domicile seems questionable. It is well-established that a change of domicile must be proved by the party alleging that the change has occurred, and that the acquisition of an intention to reside in a particular country permanently or indefinitely cannot be inferred purely on the basis that the individual has resided there for an extended period. There has to be some evidence of this intention. In this case, it might be argued that there was insufficient evidence of the required mental state for a change of domicile, for the FTT to reach the conclusion that it did.
The case certainly highlights the importance of bearing in mind the possibility of litigation from the outset of an enquiry. Fact-finding and information-gathering should be front-loaded, to reduce the risk of inadvertent inconsistences in correspondence. Every sentence in correspondence with HMRC should be fact-checked and checked for consistency with previous statements. Words should be chosen carefully, and sentences should be weighed. Correspondence should be written on the assumption that it will be read by the FTT, and material provided to HMRC should be reviewed and prepared to a litigation standard.
Clients may find all this unattractive (as such an approach will necessarily also involve the front-loading of costs), but the knife-edge decision in Henkes should serve as a warning that apparently minor wrinkles or contradictions in correspondence may be enough to tip the outcome in favour of HMRC.
To apply for a closure notice, or not to apply? That is the question
This case highlights the difficult strategic questions presented to any taxpayer who is embroiled in a long-running domicile enquiry. Should the taxpayer suffer the slings and arrows of an outrageously protracted HMRC investigation, or take arms against this sea of troubles, and by opposing, try to end them?
On one view, the taxpayer in Henkes took a significant gamble on the FTT finding in his favour, and the dice went against him. As noted above, it was the taxpayer and not HMRC who argued for the extended jurisdiction of the FTT and, crucially, for the FTT’s decision to be binding. As a result, there is no possibility for Mr Henkes to appeal a closure notice issued by HMRC for the 2014/15 or 2015/16 tax years on the grounds of domicile. As explained above, the FTT’s decision regarding the IN is final and cannot be appealed. Mr Henkes’ only possible recourse appears to be to appeal to the UT for Judge Beare’s decision regarding the closure notices to be overturned on the grounds of domicile, i.e. on the basis that he is in fact non-UK domiciled and that the closure notices should be issued on that basis.
However, and perhaps paradoxically, some taxpayers who are currently embroiled in long-running domicile-related enquiries may take some comfort from the decision in Henkes. The case leaves the door open for them to apply for determinations of their domicile as a preliminary matter, on an accelerated basis. In a protracted and costly domicile dispute, this may be an attractive option. However, it will clearly need to be weighed against the risks of receiving an adverse decision, particularly if it is correct to say that any determination on domicile as a preliminary issue would be binding for any subsequent appeal against a closure notice or assessment for that particular year.
In that light, it will be critically important for a taxpayer to ensure that, on any determination of domicile as a preliminary issue, his/her case is presented in essentially the same manner, and with the same level of attention, as for a full hearing. In particular, the taxpayer will need to be confident that additional time (to gather evidence and correspond with HMRC) would not improve the prospects of his/her case. If all those criteria are met, a taxpayer may well be able to save considerable time and costs.
Further, the decision in Henkes is potentially significant for any taxpayer in receipt of an IN requiring details of his/her unremitted foreign income and gains. It suggests that, where the IN is appealed on the grounds that the taxpayer is non-UK domiciled (so that the information requested is irrelevant), the test as to whether the information is reasonably required is whether the taxpayer is actually UK domiciled – and not merely whether HMRC have reasonable grounds for suspecting so.
If this is right, then it will give taxpayers greater scope for challenging such an IN. However, in doing so, taxpayers will need to be aware that it may necessarily involve a determination as to their domicile in a manner which is binding for the relevant tax year and unappealable, so they must be suitably prepared for battle. As an alternative, a taxpayer could possibly choose to appeal the IN on the grounds that HMRC are unreasonable (rather than merely wrong) in asserting a UK domicile, which would avoid the need for the domicile question to be decided, but would clearly be a much lower threshold for HMRC to meet.
Finally, if the UT decision in Embiricos confirms that a PCN may be issued on the question of domicile alone, without stating the additional tax payable, an alternative approach for the taxpayer would be simply to apply for such a PCN without applying to the FTT for a decision on domicile. Applying the reasoning in that case, any related IN requiring details of foreign income and gains could also be challenged on similar grounds. This would arguably be the simplest and safest approach, but whether it is appropriate in a particular case will depend heavily on the facts of that case. Even if Embiricos is overturned on appeal, a taxpayer may still be able to seek a closure notice without having domicile determined as a preliminary issue, but may have to accept that he/she will need to provide details of his/her foreign income and gains in the course of doing so.
It seems likely that the question of whether the FTT does have jurisdiction to decide a question of domicile as a preliminary matter will not be clarified until a decision is made in favour of the taxpayer and HMRC appeals to the UT. Until then, taxpayers have a potentially powerful weapon in their arsenal, but one which must be wielded with care. A taxpayer who uses it when his claim to be non-UK domiciled is doubtful faces a distinct risk of being hoist with his own petard.
This article was written by Dominic Lawrance, Hugh Gunson and Catrin Harrison.
For more information please contact Dominic at dominic.lawrance@crsblaw.com, Hugh at hugh.gunson@crsblaw.com or Catrin at catrin.harrison@crsblaw.com.
