Domicile - the next battleground?

For some time I have been noting in public and in private that HMRC's attitude to domicile investigations has been hardening. (I am not alone in this and have shared a good amount of anecdotal evidence with other members of the bar and private client practitioners in solicitors' firms.)

In the litigation arena, there has been some to-ing and fro-ing on the question of how much information HMRC can request before forming a decision on domicile. In particular there have been closure notice applications which have garnered significant interest. For example, the taxpayer victory in Epaminondas Embiricos v The Commissioners for Her Majesty’s Revenue and Customs [2019] UKFTT 236 (TC) is currently under appeal. (Hearing expected in October 2020.)

There has now been, in the somewhat convoluted context of a new closure notice application, a substantive decision on domicile, decided by FTT Judge Tony Beare as a preliminary issue in Henkes v HMRC  [2020] UKFTT 159 (TC).

The whole decision repays careful reading and it will be interesting to see if it is appealed on a number of grounds. But for the purposes of this article, I concentrate only on the substance of the decision that Mr Henkes, who professes no intention to end his days in the UK, is, on the balance of probabilities, domiciled here - and has been for some years. The relevant part of the judgment starts at paragraph 128.

The judge sets out much of the usual case law which will be familiar to practitioners - from Udny, Fuld, Bullock and Henwood.

He quotes extensively from Bullock in particular. For example:

“Time is always a material element in questions of domicil; and if there is nothing to counteract its effect, it may be conclusive upon the subject. But in a competition between a domicil of origin and an alleged subsequently-acquired domicil there may be circumstances to shew that however long a residence may have continued no intention of acquiring a domicil may have existed at any one moment during the whole of the continuance of such residence. The question in such a case is not, whether there is evidence of an intention to retain the domicil of origin, but whether it is proved that there was an intention to acquire another domicil. As already shewn, the domicil of origin remains till a new one is acquired animo et facto”; 

(see paragraph 142(5) of the decision in Henkes).

He also considers the interesting question of how much weight can be placed on domicile statements made by taxpayers:

when considering intention, Dicey and Morris 15th edition (“Dicey”) says that the weight to be accorded to declarations of intention “will vary from case to case. To say that declarations as to domicile are the ‘lowest species of evidence’ is probably an exaggeration. The present law has been stated as follows: “Declarations as to intention are rightly regarded in determining the question of a change of domicile, but they must be examined carefully considering the persons to whom, the purposes for which, and the circumstances in which they are made and they must however be fortified and carried into effect by conduct and action consistent with the declared expressions”. This echoes the statement by Mummery LJ in Agulian v Cyganik [2006] EWCA Civ 129 (“Agulian”) at paragraph [13] that “little weight is attached to direct or indirect evidence of statements or declarations of intention by the person concerned. Subjective intentions have to be ascertained by the court as a fact by a process of inference from all the available evidence about the life of the person, whose domicile is disputed” and the statement by King LJ in Kelly at paragraph [33iii)] that “[the] court will view evidence of an interested party with suspicion”. In Frederick Henderson; George Henderson; Cordelia Henderson; Arabella Henderson v The Commissioners for Her Majesty’s Revenue and Customs [2017] UKFTT 556 (TC) (“Henderson”), the First-tier Tribunal (Judge Jonathan Richards and Mr John Robinson) was disinclined to accord much evidential weight to statements of intention which had been made by the main witness for the appellants because those statements were inconsistent with the actions that the appellants had taken (see paragraph [128(3)]); 

(see paragraph 142(8) of the decision in Henkes).

Fundamentally, the judge accepts the propositions that a taxpayer

• needs to have formed an intention to remain indefinitely in the UK before he acquires a domicile of choice here; and that
• in the absence of a domicile of choice in most cases the domicile of origin will revive.

And yet on the facts of Henke, the judge found that a taxpayer had acquired a domicile of choice here when his sworn evidence was that he intended to leave; when he had a house in Spain where he spent time with his family; when he had never acquired UK citizenship or a passport; and when the taxpayer asserted that he intended to leave the UK on a given contingency - when he stopped working.

The decision will undoubtedly cause some consternation among practitioners and their clients.

So what can be learnt from it?

First, the court applied a very fact-sensitive and multifactorial approach. It is, therefore, more important than ever to be absolutely sure of the relevant facts, and to be able to prove them.

Secondly, while the facts and intentions set out in a domicile statement by a taxpayer will remain an important starting point and often an essential one for the purposes of fact-gathering, record-keeping, and the giving of advice, the court tested the taxpayer's stated intention carefully: "those declarations need to be examined critically in view of the fact that it is clearly in the interests of the Appellant to say that his intentions are not to remain in the UK indefinitely. This means that the Appellant’s intentions instead “have to be ascertained by the court as a fact by a process of inference from all the available evidence about the life of the [Appellant]” (see Mummery LJ in Agulian at paragraph [13])." (See paragraph 152.) It is, therefore, more important than ever to be sure that the facts stated and intentions set out in domicile statements are not undermined by other facts or statements elsewhere and, indeed, to ensure that they are supported to the fullest extent possible.

Thirdly, the court placed weight on the question of whether the taxpayer had connections with any other jurisdiction. This is no part of the strict legal test but it has increasingly been seen as a matter of great relevance. It is, therefore, important to look critically at the lifestyle choices of taxpayers. This finding is, in my view, susceptible to be overturned on appeal but if it is appealed and upheld, it marks a new direction in the law. It has always been the case that a taxpayer with no links outside the UK is unlikely really to intend to leave, this decision elevates the question to a matter of great importance. Note that while the links outside the UK still needn't be with the jurisdiction of a domicile of origin, if they are not, then the links with a third jurisdiction will need to be strong: a holiday home was regarded as insufficient in this case.

?Fourthly, the court placed weight on the lack of ties to the country of the taxpayer's domicile of origin. Again, this is susceptible to be overturned on appeal as it marks a novel legal enquiry. But if the judgment is eventually shown to represent the current law, the concept of a domicile of origin may not be as 'sticky' as people have long considered it to be. Where does this leave those fleeing war zones? Or those with inherited domiciles of origin overseas? While the latter category has long been in HMRC's sights, the law has seemed to me until now to be relatively clear.

Fifthly, the court asked where the taxpayer intended to live when he left the UK and the absence of a clear answer was considered a highly relevant factor. While it has always made sense that a taxpayer who intends to leave the UK will know to where he wants to move, it should now be seen to be more necessary than ever to have a plan for the future in positive terms, rather than just a negative attachment to the UK, in order to convince a court on the question of intention.

Finally, something that has not changed: it remains the job of HMRC to show that a taxpayer with a domicile of origin overseas has acquired a domicile of choice in the UK.

It is worth remembering that the decision in Henkes is not binding on anyone else. So, panic or instant departure (were it even possible) should not greet the decision. As I've indicated above, the approach of the FTT is a little unorthodox in places, and might well not survive an appeal or be followed by another court or tribunal.

It is, however, not surprising to me that HMRC took the case; and it is not surprising that the FTT adopted a multifactorial approach. Against this background, the court was always going to have to look at the factors before it and weigh them up. And it is only to be expected that future tribunals will do likewise.

It follows that, in my view, anyone with a borderline domicile position should take careful and considered advice on the basis of the current, binding law; and anyone facing a domicile enquiry should take early, strategic advice on the best way to pursue it.