Power without Responsibility

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Those who deal regularly with matters of domicile and residence know that HMRC routinely requests large shopping lists of information from taxpayers in the course of its enquiries often where it has no sufficient reason to suspect that the taxpayer’s assertions as to his residence or domicile status are incorrect.  A letter which it takes an HMRC officer five minutes to draft can involve a taxpayer in extended historical enquiries which consume substantial amounts of the taxpayer’s time and require him to engage very expensive professional advice.

This nuisance is sometimes increased by HMRC asking, before it has come to a considered conclusion on the taxpayer’s residence and domicile status, for equally burdensome information about his overseas income and gains which will only prove to be relevant if the taxpayer’s residence or domicile status is not as he has said it is.  It would seem reasonable that before it exercises its power to require the provision of this latter class of information, HMRC should be required first to come to a conclusion on the antecedent questions of the taxpayer’s residence and domicile status and to provide an opportunity for the taxpayer to contest those conclusions if it is reasonably possible for him to do so. 

The FTT case of Robert Perlman v. HMRC [2021] concerned a taxpayer who claimed not to be domiciled in the UK with the result that he was eligible to claim the Remittance Basis.  HMRC raised information notices under FA 2008 Sch. 36 para. 1 (‘Para. 1 Notices’) requiring the provision of information about, inter alia, Mr Perlman’s worldwide income and gains much of which would be irrelevant if his assertion that he was domiciled outside the UK proved to be correct. 

An HMRC officer may only require a taxpayer to provide information and, or, documents under a Para. 1 Notice:

‘ … if the information or document is reasonably required by the officer for the purpose of checking the taxpayer’s tax position’.

Mr Perlman appealed against the Para. 1 Notice (a ‘Para. 1 Notice Appeal’):

‘ … on the ground that the information was not “reasonably required” because he was not domiciled in the UK.  In his submission, the information would only be reasonably required if HMRC had first proved he was not so domiciled.  In other words, he asked for his domicile dispute with HMRC to be decided as part of the hearing against the Sch 36 Notices.’ (Case Report para. 4)

The Tribunal Judge, Anne Redston, concluded that:

‘ … the Tribunal does not have the jurisdiction to decide Mr Perlman’s domicile as part of a hearing against Sch 36 Notices [the ‘First Issue’], but that if I were wrong in that conclusion, the Tribunal should decline to exercise the jurisdiction [the ‘Second Issue’].’ (Case Report para. 6)

As Judge Redston explained:

‘Two previous Tribunal decisions have considered the same issue.  In Executors of Levy v HMRC [2019] UKFTT 418 (TC) (“Levy”), a decision of Judge Andrew Scott, the Tribunal decided it did not have the jurisdiction to decide Mr Levy’s domicile.  In Henkes v HMRC [2020] UKFTT 159 (TC) (“Henkes”), Judge Beare found that the Tribunal did have the jurisdiction to decide the appellant’s domicile, and went on to find that Mr Henkes was UK domiciled.  As already noted, there was no right of appeal against either decision.’ (Case Report para. 42)

Judge Redston in finding for HMRC chose to follow the decision in Levy rather than the decision in Henkes and what she admitted to be dicta in two judicial review applications heard in the High Court concerning appeals against notices issued to third parties under FA 2008 Sch. 36 paras. 2 and 3 (being Derrin Brothers Properties Ltd and others v. HMRC and others [2016] and Kotton v. HMRC and others [2019] (Case Report paras. 42 and 43)). 

She also took a particularly restricted view (Case Report para. 7) of the implications of the decision in HMRC v. Vodafone 2 [2016] in which the Court of Appeal had held that the Tribunal had the jurisdiction to decide incidental points of law when deciding upon an application by a taxpayer to close an enquiry.  Judge Redston found both that the Tribunal does not have the same jurisdiction when deciding Para 1 Notice Appeals  and that the Tribunal’s jurisdiction under the principle in Vodafone in deciding applications to close an enquiry did not, in any event, extend to mixed questions of fact and law such as are at issue in deciding issues of domicile and residence. (Case Report paras. 5, 6, 84 and 85)

In reaching this conclusion she was strongly influenced by the consideration that there is no mechanism for an appeal against the decision of the Tribunal in respect of a Para. 1 Notice Appeal (Case Report paras. 3 and 4).

In deciding, in respect of the Second Issue, that, even if the Tribunal had the jurisdiction to decide the question of domicile, it should not do so as a matter of case management discretion, Judge Redston explained that she considered that the argument of Counsel for Mr Perlman that it would be:

‘ … unfair and unjust to refuse to exercise the jurisdiction because it would prevent Mr Perlman from putting forward his key argument as to why the Sch 36 Notices are not reasonably required, fundamentally misunderstands the purpose and scope of those provisions, as set out earlier in this decision.  It would, however, be unfair and unjust to decide Mr Perlman’s domicile by exercising a jurisdiction which gave the losing party no appeal rights, so that his only route of challenge would be by way of judicial review, a much higher hurdle than obtaining permission to appeal on a point of law to the UT.’ (Case Report para. 102)

This comment itself ignores the substantial injustice which is done to a taxpayer who is forced to spend thousands, sometimes tens of thousands, of pounds to identify and provide information and documents which are entirely irrelevant to his tax affairs. 

The binary way in which Mr Perlman’s Counsel argued the matter, however, may provide an explanation as to why, in deciding between two apparently unpalatable alternatives, Judge Redston chose to risk imposing immediate and substantial costs on the taxpayer rather than to risk HMRC, or the taxpayer, being denied rights of appeal against a decision on the substantive issue of the taxpayer’s domicile.   Mr Perlman’s Counsel’s argument that the Tribunal had the jurisdiction to determine, in hearing a Para. 1 Notice Appeal, Mr Perlman’s domicile status and ought to do so had the result that in such an appeal the Tribunal must hear and decide upon complex matters of fact in an appellate procedure which did not seem to be designed to facilitate that process and which provided no further right of appeal. 

Was it necessary for the taxpayer’s argument to be framed in that way?  As we have seen what the Tribunal had to decide was whether the information or documents required to be provided under the notice were ‘reasonably required by the officer for the purpose of checking the taxpayer’s tax position’.  Judge Redston characterised the Tribunal’s role in such an appeal as:

‘ … supervisory in the sense that the Tribunal’s role was to consider the reasonableness of HMRC’s information requests, and not whether the underlying enquiry, or their conclusions so far, were correct.’

Although, in our view Judge Redston was correct in taking this view of the Tribunal’s role in a Para. 1 Notice Appeal the question of the reasonableness of the information request must surely not take place in a vacuum but take account of the context of the request in respect of HMRC’s enquiries and, in particular, of the stage which those enquiries have reached when the request is made.

It is surely reasonable for HMRC to be expected to organise its work in a way which does not impose a substantial burden on taxpayers to provide information which may subsequently prove to be unnecessary if it can do so without unreasonably restricting its enquiries or imposing undue burdens on itself.  Requests which are made before there has been an opportunity for the taxpayer to contest HMRC’s conclusions on antecedent matters which may make the requests irrelevant and unnecessary must surely be unreasonable if a procedure exists under which they could be contested by the taxpayer at that stage even though similar requests made later might be reasonable if made after the antecedent matters had been decided. 

Such an argument in a Para. 1 Notice Appeal would not require the taxpayer’s domicile or residence status to be decided by the Tribunal in the appeal.  All that the Tribunal would need to decide was whether HMRC had yet come to a final conclusion on those antecedent matters, had concluded that it disagreed with the taxpayer and had, at least unless and until the rather unsatisfactory decision in HMRC v. Epaminondas Embiricos is reversed on appeal, indicated its willingness to join with the taxpayer in a joint referral under TMA 1970 s. 28ZA. Only then would it be reasonable for HMRC to risk placing on a taxpayer who considers that the information is irrelevant because he is not domiciled or not resident in the UK what might prove to be the wholly unnecessary and onerous burden of providing information about his overseas income and gains. 

It seems that, other than through judicial review proceedings, Mr Perlman has lost the opportunity to advance that argument.  Whether another taxpayer, seeking to resist similarly burdensome requests in respect of his worldwide income and gains which, because of his domicile or residence status, he considers to be irrelevant, will raise the argument in respect of a future Para. 1 Notice Appeal remains to be seen. 

Published in
24 July 2021
Last Updated
30 September 2021