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Advising Non-Doms in Tax Disputes: Why Tina Turner Was Right
Date: 01/12/2023 Type: Articles Topic: Private Client | Investment and HNWI’s |The ‘non-dom’ tax regime is one of the attractions of London as a global wealth hub. In recent years however, being a ‘non-dom’ has been seen as akin to not paying your ‘fair share’ of tax. In the writer’s view, provided that people have done their best to comply with the law, such criticism is entirely misplaced. However, politicians have bracketed non-dom status with tax avoidance, trading assertions on whether the non-dom regime aligns with the UK’s economic goals, or attracts the ‘right kind’ of wealth to the UK. The fact that the wife of the Prime Minister reportedly enjoys the tax benefits of the non-dom remittance basis will ensure that this remains a hot topic in the run up to 2024’s General Election. The Labour Party is committed to reform, and its proposals may result in a new regime aimed at benefiting incoming workers in the short term, rather than wealthy longer term UK residents.
Domicile is a general law concept, transcending nationality. It confers certain UK tax benefits, relating to both income , capital, and inheritance taxes. Whereas ‘tax residence’ is based on physical presence in the UK over the course of a tax year (including day count and connections under the Statutory Residence Test), ‘domicile’ is about someone’s ‘permanent home’. Domicile is usually established at birth, but it is possible to acquire a new domicile ‘of choice’, dependent on the degree of commitment an individual has to a new country. If someone is UK resident, but not domiciled in the UK (‘non-dom’ or ‘RND’) then in certain circumstances they may be taxed on the ‘remittance basis’ for a number of years, meaning they are only taxed on foreign income and gains brought into the UK. The RND tax regime dates back to 1914 and has long been important to HNW individuals moving to the UK. There have been a number of recent changes to RND tax rules, including the introduction of annual remittance basis charges, and a limitation on the time an individual may be resident before being ‘deemed’ UK tax domiciled (normally a maximum of 15 years). Inheritance tax, and the treatment of trust arrangements are also a significant issue for non-doms. The estates of UK domiciled individuals are charged to UK inheritance tax on the worldwide assets held by that person just before they died. If an individual is non-UK domiciled, the estate is charged to UK inheritance tax only on UK assets. If a family has structured its assets using trust arrangements there are a number of complex tax provisions which affect whether or not the estate attracts UK inheritance tax at 40%.
HMRC statistics indicate that in the tax year ending 2022, HMRC a combined total of at least 78,700 UK resident non-domiciled (‘RND’) and ‘deemed domiciled’ taxpayers made total tax contributions of at least £12.4 billion. The number of ‘non-doms’ is small, but remains economically significant. However, the fluidity of the modern work patterns, and development of cross border tax information sharing is making the non-dom tax regime appear anachronistic. Notions of ‘permanent home’ don’t necessarily fit with how families live now, and the connectedness of the modern world. There is also a greater expectation that HMRC should be supplied with information, even where the assets are potentially outside of the UK tax net. HMRC requests for information re overseas assets have been litigated in some recent non-dom tax cases (such as Embiricos). HMRC has also been emboldened to make increasingly intrusive personal information requests, seeking evidence to test claims to non-dom tax status.
Old style non-dom tax disputes tended to focus on the machinery of when a taxable remittance had been made. The remittance basis has developed a complex rule set involving considerations of issues like when a fund unremitted capital, or say a mixture of foreign income and capital. Say that a wealthy London based French born grandfather uses his French bank account to buy a car in France for his French grandchild. Is that a remittance? What if the grandson drives the car to the UK…? Arcane conundrums like these were until recently the type of RND tax risk commonly focused upon. However, the recent HMRC trend is towards investigating and challenging the claim to RND status itself. An argument will often centre on whether, by virtue of long periods of UK residence, a new UK domicile of choice has been established. The conventional approach to RND tax advice in anticipation of such challenges was the preparation of a ‘domicile statement’. This might involve a client filing some form of statement (be that with their adviser, lawyer, or directly with HMRC), to the effect that their stay in the UK was temporary, and that they were always going to return to the country of their birth upon, say, retirement, or when the children left home. Such approaches have been found wanting in recent tax tribunal cases.
The emerging theme in cases such as Henkes v HMRC [2020], Coller v HMRC [2023] and Shah v HMRC [2023] has been the emphasis that the Courts have placed upon multi-factored evidence rather than any witness testimony. Tax disputes are now following the approach established by the 2013 case of Gestmin -v- Credit Suisse where Justice Leggatt set out guiding principles regarding a Court’s approach to witness statements in litigation. Rather than accepting witness testimony at ‘face value’ Courts take modern psychological approaches to the conscious and unconscious bias of witnesses. Recent Court judgements have shown a trend towards displacing witness evidence, which may be unreliable, and displacing it by documentary evidence. In a tax domicile dispute, what a client has actually done will weigh more heavily in proceedings than any assertions of intention. Where HMRC is able to show connections to the UK without evidence of connections to another jurisdiction individual’s claim to be treated as non-UK domiciled may fail. The Courts are also increasingly sceptical of any shaping of witness testimony to obtain a tax benefit, so witness statements which have clearly been shaped by tax advisers carry little weight. The recent case of Strachan v HMRC [2023] re-emphasised these trends, basing factual findings on inferences drawn from the documentary evidence rather than witness testimony.
The management of HMRC information requests, and the anticipation of how evidence may play out in a sceptical court are the dominant trends in tax domicile disputes. Pre-prepared witness statements, and oral testimony, however well intentioned, may carry little weight. Any changes to the non-dom regime will take time, and whatever emerges after next year’s General Election, there will be disputes around both existing tax rule sets, and the transition to any new ones for years to come. However, the approach taken by the Courts towards evidence in non-dom tax disputes has already changed, and so therefore must the advice given to clients. When Tina Turner died near Lake Zurich earlier this year, she had settled in Switzerland, taken Swiss citizenship, and had made Zurich her permanent home. Whatever her tax domicile, she demonstrated a commitment to telling like it is throughout her career. She got the ‘Gestmin principles’ long ago when she sang “I can’t believe what you say, because I see what you do”. Anyone advising non-dom clients these days would do well to heed her words.
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Craig Thomson - CSM Tax Consulting
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