Huw Witty Partner, Head of Tax
Domicile and issues of taxation
Taxation is complicated at the best of times but for many people in the shipping industry who often work in a country other than the one where they were born or grew up, there are invariably added cross border complications. A recent decision of the English Tax Tribunal concerning the concept of “Domicile” has thrown up some issues which may affect those who have come to the UK to work and on which they may wish to reflect.
“Domicile” is a concept which is taken into account in determining the extent to which a taxpayer is connected with the UK for tax purposes. In particular, a person domiciled in the UK will have a greater exposure to inheritance tax. A person with an overseas domicile may a) elect to pay tax on a remittance basis which may save tax on his overseas income and gains and b) claim protected trust status which may protect him from tax on income and gains arising to a trust of which he was a settlor.
Although reference is commonly made to “non-domiciliaries” or “non-doms”, in order not to face full exposure to UK taxes, an individual will have to show that he is domiciled in an overseas jurisdiction; it is not sufficient to claim that the taxpayer is not domiciled in the UK. However, exceptionally in tax cases once an overseas domicile is asserted, the burden of proof is on HMRC to show that the relevant taxpayer has a UK domicile.
A person will have a “domicile of origin” which he acquires at birth. This will be the domicile of the individual’s father assuming he is alive at the date of birth and the child is legitimate. This may be replaced by a domicile of choice if the individual a) resides in another jurisdiction and b) intends to permanently reside in that jurisdiction. In the past, this has led to individuals who were born in the UK but to overseas parents and who spend the majority of their time in the UK claiming they were non-domiciled. As a result, the UK tax rules on domicile were amended in 2017. In addition, HMRC appear to have stepped up their review of the domicile status of taxpayers as is evidenced by domicile related tax cases reaching the UK tax tribunals.
The latest case concerns a Mr Henkes. Mr Henkes took the view that he was domiciled outside of the UK and filed his tax returns accordingly. HMRC launched a protracted investigation into Mr Henkes’ tax affairs. To bring the investigation to an end Mr Henkes applied to court for a direction that HMRC should issue a closure notice to the investigation against which he could appeal.
Unfortunately for Mr Henkes, as it turned out, the Tax Tribunal took the view that it could determine Mr Henkes’ domicile as a preliminary matter although this is not free from doubt. On the basis that Mr Henkes was UK resident at the relevant time, the tribunal took the view that it had to decide whether he intended to permanently reside in the UK although importantly the tribunal used the term indefinitely rather than permanently.
Mr Henkes said that he intended to leave the UK once he retired and therefore he did not intend to stay in the UK permanently. However, the Tribunal took the view that Mr Henkes’ intention should be judged on his circumstances. Mr Henkes had been resident in the UK for 50 years. His business and social connections had been in the UK. He was aged 75 and after ceasing to be employed had continued to work in London. Whilst Mr Henkes had indicated that he would leave the UK once he retired he had shown no sign of retiring. Further, Mr Henkes did not have strong links with any other jurisdiction. The Tribunal considered that Mr Henkes had shown no specific intention to leave the UK and noted that his wife was reluctant to leave the UK.
As a consequence, the tribunal concluded that he was domiciled in the UK. In addition, the tribunal considered that Mr Henkes had no right of appeal against this decision, although Mr Henkes may be able to challenge this.
What points can be taken from this case? It would be sensible for everyone to review their domicile position to make sure that they are not vulnerable to an attack from HMRC. Any person claiming to be domiciled overseas should maintain strong connections with the jurisdiction in which they consider themselves to be domiciled. Also, they should have a demonstrable plan to leave the UK at some point. Finally, care should be taken when litigating with HMRC to avoid a ruling against which there is no appeal.