A married couple had emigrated from the UK in the 1970’s. Now retired, they had returned to the UK following political and economic upheaval in their adopted homeland. HMRC were arguing that their “domicile of origin” (acknowledged to be in the UK) had revived as a result of their actions. [The incidence of taxation is, of course, potentially much lower for someone of foreign domicile]. Following our intervention, HMRC were persuaded to accept that the couple retained a “domicile of choice” outside the UK, following which a significant tax repayment claim was submitted.

Comment: Domicile is a difficult concept and is sometimes mis-understood. The Pre-Budget Report announced changes that, if enacted, will affect many foreign nationals who are resident in the UK. Nevertheless, the underlying principle of taxation by reference to domicile looks set to remain a part of the UK system. It is clear that once an individual’s domicile has been established, the burden of proving a change falls on he who asserts that change. Thus many people with foreign domicile have been able to live happily in the UK for long periods of time. For further information see the attached article below.

 Taxation Article 12.7.2007 (220Kb)

We frequently hear of cases in which penalties are paid to HMRC when, arguably they may not be due. This is sometimes done for “commercial expediency” – in other words when the costs of appealing and the associated risks are considered too great. There is nothing wrong with taking a commercial approach, but it is sometimes overlooked that HMRC also have to look at the risk/reward ratio! We recently advised in a case in which an individual filed a personal tax return well before the due date for filing. HMRC enquired into the return, as they are perfectly entitled to do, and established that it contained several errors, understating the tax liability by many thousands of pounds. The return was amended, as permitted by the legislation, but HMRC nevertheless demanded a penalty, on the grounds that the return had been filed negligently. Even though there had been no loss of tax, HMRC were not willing to forego a penalty, and this was confirmed at a very senior level. The penalty was appealed to the Commissioners. At the hearing, the Commissioners were persuaded to determine the penalty in the sum of £zero.

Comment: There is no obvious advantage to an individual in filing a personal tax return before it is due. This gives HMRC more time to launch enquiries. If penalties are, as a matter of policy, to be pursued in these circumstances, it seems more appropriate to withhold submission until the due date, as doing otherwise increases the risk of being selected or enquiry which is unlikely to be in the taxpayer’s interest. Hopefully nobody files a return knowing it to be wrong. Sadly, human error is a fact of life but HMRC’s enquiries will usually be focused on finding any errors that favour the taxpayer and under the existing penalty regime it is likely to be argued that most errors constitute negligence thus justifying a penalty. That should not always be accepted at face value.

The power of a common sense approach and negotiation

A case had been working with the Revenue for four years and had reached an impasse. The case was destined to be listed for hearing before the Special Commissioners. HMR&C had disputed the proportion of loan interest claimed on a substantial retail complex that had been rented to the company by the director. Unfortunately the director had no receipts, the expenditure in part had been funded through his director's loan account. The case had become more complex due to the liquidation of the company and the directors personal IVA. HMRC were maintaining that a high proportion of the loans had been used to fund the director's personal lifestyle which had been quite lavish. The absence of receipts to support the expenditure weakened the defence.

Comment: The costs of preparing this case for hearing before the Special Commissioners would be high. After reviewing the case our opinion was that HMRC would prefer not to take the case due to the time the enquiry had been working. Their delays and the numerous people who had been involved in the case would have been an embarrassment. Researching the internet we were able to demonstrate the average percentage increase in commercial properties' values over the period of ownership, thus demonstrating to the senior Inspector of the Appeals Unit that genuine expenditure had been spent on the property. We were then able to negotiate a substantial increase in the loan Interest allowable and settled the case quickly without taking the case before the Special Commissioners   

The total contribution forecast for 2007-08 is reported to exceed £450bn. The only recognised taxes not predicted to increase this year, are PRT, tobacco duties and the climate change levy. So, HMRC are under increasing pressure to bring in more, and they are going to be looking for more ways of doing so, whilst the politicians continue to mess around with the legislation. Tax is going up.

We were instructed in a case that concerned tax planning that had been undertaken in the 1990’s. HMRC’s enquiry into the relevant tax return remained open and impasse had been reached. We thoroughly reviewed the trail of correspondence and prepared an application for a closure notice to the Commissioners under section 28A (4) TMA. HMRC decided, on reflection, that it would not be necessary for us to trouble the Commissioners with this matter, and agreed to issue the closure notice.

Comment: In our profession it has been relatively unusual for tax advisers to take the initiative in seeking closure notices, except in relation to relatively minor “fishing expeditions” conducted at local District level (the gradual disappearance of the “local District” from the scene is another topic for another day!). However in the light of the “Litigation and Settlement Strategy” paper, published by HMRC in June this year, we predict that this will become more commonplace. The paper indicates that negotiated settlements are in many cases a thing of the past, but it remains to be seen whether this will be the case in practice. Litigation is an expensive, time consuming and high-risk strategy for HMRC as well as for taxpayers. Is it in always going to be in the Exchequer’s interest to risk all against nothing? It seems that for the time being that is HMRC’s “official” agenda.

A case involving expense payments to sub-contractors had been ongoing for over 2 years, and progress had come to a halt.  HMRC were seeking a significant sum for CIS tax which had not been deducted from expense payments made by a contractor to various sub-contractors. Mercury Tax Group were appointed to resolve the situation, and within 4 months after extensive analysis work and negotiation with HMRC were able to agree an 80% reduction of the tax which HMRC were originally seeking. It was also agreed that there would be no adjustment for earlier years, which HMRC had originally suggested.

Comment: Enquiries into the operation of the CIS Scheme are becoming increasingly common. It is important to involve an advisor at the earliest stage possible to ensure that the outcome is correct and that the process is as short as possible.