There is a tendency mention the phrase “non-dom” and assume that it applies to anyone who has a non-UK background or alternatively that it applies only to the super rich. Neither is the whole story. It is crucial to be clear what the phrase means and check its applicability before considering the preparation of tax returns or undertaking any planning.
There have been thousands of words written as to what “domicile” means and when it changes but how do we practically identify the correct position for any given individual?
HMRC Non-Dom rules
Over the last couple of years we, in common with many firms who work in this area, have seen a marked increase in the number, duration and depth of domicile-based enquiries. HMRC are no longer content to accept a simple statement that an individual is non-domiciled and insist on testing the matter. It is essential that anyone claiming non-domiciled status has a detailed technical analysis undertaken to review the soundness of the claim and considers the evidence held or to be obtained to support it. Preparation in advance will minimise the stress of dealing with the enquiry when HMRC call for documents, which they will require within a short period of time. HMRC are often unwilling to provide extensions to deadlines and use threats of statutory notices to obtain information if it is not immediately provided. In advising our clients, we have to assess both the validity of a claim and then secondly consider whether there is any benefit to using the remittance basis if we believe it is available. HMRC often argue that the money involved is a determinant. It is not, it is a consequence.
Deemed Domicile rules
Many individuals arriving in the UK assume they are not domiciled here simply because they are a foreign national. That is not enough. The point is that in HMRC’s eyes you have to have clear evidence of the circumstances of when you will leave. A gentleman came to see me recently who had moved to the UK, obtained Indefinite Leave to Remain (ILR) with an intention to obtain Citizenship and who had moved his parents over too with similar aims. He said he had researched the point and was confident that he was not domiciled. On questioning him, it was clear that he had left his home jurisdiction completely, had no ongoing links there and no intention to live anywhere other than the UK. If he had completed his tax return on the basis that he was non-domiciled, he could have been liable to the new penalties for errors involving offshore matters. Even if mistakes innocent the penalty can be more than 100% of the tax due and have a severe impact.
Non-Dom status in the UK
There is often misunderstanding surrounding the new category of Formerly Domiciled Residents (FDRs). Introduced with effect from 6 April 2017, an FDR is not able to utilise any of the reliefs or deferrals available to a non-domiciled person. An FDR is a person who was both born in the United Kingdom and who has a domicile of origin here. The domicile of origin requires that the individual’s father (usually) was also domiciled here at the time of the individual’s birth.
Your family tree
The place of birth is a fact readily ascertained from a passport but the domicile of a parent can be hard to establish particularly where the parent is now deceased. A large number of people are still affected by the displacements after the Second World War and the immigration of the 1950s. Many people came to the UK and had families here but had they settled with the requisite degree of permanence at the time of the child’s birth? HMRC will almost certainly look to argue that such parents had settled here so if you have evidence to the contrary, it may be wise to collate it now.
Don’t take your situation for granted
In terms of leaving the UK, the duration of the absence is irrelevant. If a person is an FDR the absence from the UK could be many years and in some circumstances virtually the whole of the individual’s life. Consider two brothers coming to the UK for a few years to set up a UK branch of their business. The brothers have apparently identical circumstances and are expecting to use the remittance basis. Looking at the passports, it was clear the elder one had been born in the UK. The British parents had emigrated when the elder child was two while the younger child was born in the new home jurisdiction. The next contact with the UK was 35 years later but the tax analysis for the brothers is entirely different. The elder one is an FDR and cannot access the remittance basis while the younger one can. The moral here is to take nothing for granted.
Non-Dom tax changes
HMRC’s stated aim is to maximise the tax collected and minimise what they regard as tax evasion and avoidance. This is being achieved by a zero tolerance approach which catches innocent and inadvertent errors just as much as criminal activity. The practical impact is that taxpayers have until 30 September to identify and notify their intention to correct any errors from the past. There are 90 days to make the correction once the intention is notified.
Failure to correct past errors will expose the individual to penalties of up to 200% of the tax lost. It is not my intention to scaremonger but rather to inform so that anyone who has any concerns has an opportunity to come forward. HMRC have indicated that, for example, if they determine that an individual is UK domiciled when the individual thought they were not, the resulting under declaration of tax will fall within this regime. There is an element of defence if the individual can show that they have relied on professional advice but that advice must come from a person:
- With appropriate expertise;
- Who took account of all the relevant circumstances; and
- Who was not involved in avoidance arrangements or did not receive consideration for facilitating entry into avoidance arrangements.
In addition, the advice must have been addressed to the individual concerned and not to any other person.
The HMRC guidance on requirement to correct provides some examples but once again care is needed to consider the extent to which this defence can apply in each individual’s circumstances.
This is a challenging situation but it is the present reality and all of us in the profession and our clients have to deal with this. The costs and stress of lengthy litigation with no guarantee of success mean that for many clients it will be preferable simply to pay the amount demanded from them by HMRC.
We can help you
If there is anything you would like to discuss with us about this article please contact Lisa Spearman or your usual Mercer & Hole contact.
Lisa Spearman CTA TEP is a partner at Mercer & Hole advising individuals and trusts on UK taxation matters and has spent more than 30 years advising private clients particularly on residence and domicile matters. Further information is available at www.mercerhole.co.uk
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