House of cards

KEY POINTS

• General Commissioners’ case on non-domiciled records.
• Request for details of accounts both inside and outside the UK.
• Closure notice granted by General Commissioners.
• Is the current regime truly workable?

I only went to one General Commissioners’ hearing in my short time as an Inspector of Taxes back in the late 1970s, and only took one case for a client to the General Commissioners while

I was in practice (I lost…). Just as they are to be abolished, I have completed my set by attending one as a member of the press.

It was a case that revealed a worrying approach by HMRC to the reassurances given about disclosures by the non-domiciled, and which also made me wonder yet again whether this new regime can actually work at all. Both sides knew that

I was attending and would be writing the case up in the magazine, and both have seen the report of the case itself (but not my comments on it) and have been given the opportunity to correct any errors.

The case concerned Mrs A, who was resident but not domiciled within the UK. Her case was presented by her accountants; HMRC’s case was presented by an Inspector of Taxes in the Appeals Unit.

As well as some brief evidence from Mrs A, the Commissioners also heard from Mr B, the local compliance office Inspector who was dealing with the enquiry.

There were two matters to be heard: an appeal against the issue of a s 19A notice and an application by Mrs A for a closure notice in respect of an enquiry into the 2006-07 tax return.

Prior to the hearing it was agreed that these would be heard together, and that the taxpayer’s case on both issues would be presented first.

The taxpayer’s case

The accountant said that, because of her status, Mrs A’s overseas income and gains were taxed on a remittance basis. Mr B had opened an enquiry into her 2006-07 return in August 2008.

The opening letter asked for various documents, including a certificate of all her bank accounts, both inside and outside the UK.

The accountants had replied giving certain information but asking why the overseas accounts were relevant when Mrs A was non-domiciled.

Mr B repeated his request for details of all accounts at the beginning of October.

The accountants replied at the beginning of November saying that Mrs A’s solicitor, from a leading firm, had contacted her bank in Switzerland and had confirmed that all her remittances to the UK from overseas had come from her capital account.

In December, Mr B issued a s 19A notice for the outstanding information, which was by now solely the details relating to overseas accounts.

This was appealed in January 2009. During discussions, Mr B told the accountants that there was an undisclosed source of UK bank interest.

Mrs A told her accountants that this must be wrong because she had no savings account in the UK, but after Mr B provided further details she realised that her current account paid interest, and she had therefore failed to declare £107 of net interest after tax.

The statements for this account were forwarded to HMRC on 2 March, and Mrs A had in the weekend before the hearing worked through the statements to identify for the Commissioners deposits which did not come from her overseas account; these came from sources such as the sale of some clothes to a friend.

Mr B said to the accountants that Mrs A had ‘strenuously denied’ to him that she had a UK account and this showed that she had not taken sufficient care in completing her tax return.

It therefore reinforced the need to carry out further checks into her offshore accounts as well.

However, the UK account had been referred to by the solicitor as the destination for her overseas remittances, so the Inspector knew about it.

Mrs A had simply not realised that interest had been added. There was no ‘strenuous denial’, indeed no denial at all, there was instead a request for justification of the need for disclosure.

There was no tax lost by this omission. In fact, a small repayment would have arisen if it had been included on her return.

In evidence, Mrs A said that she had taken advice before coming to the UK on the way to set up her affairs, and had followed that.

She regarded the request for details of her overseas affairs as an intrusion into her privacy. She confirmed that she had no other income or gains taxable in the UK.

In concluding the presentation of Mrs A’s case, her accountant said that HMRC’s actions were not in line with their published practice, and that there were Human Rights Act implications in relation to the right to privacy.

The request for information was also not in line with the circular from Dave Hartnett on 12 February 2008 when he was Acting Chairman of HMRC, which said that ‘the intention is that those using the remittance basis will not be required to disclose the source of those remittances’.

HMRC’s case

HMRC, presenting their case, said that TMA 1970, s 28A and 28B required the closure notice to be given unless there were reasonable grounds for keeping it open.

HMRC were not yet in a position to state their conclusions as required by s 28A. The s 19A notice required information needed so that HMRC could state their conclusions as to whether, and to what extent, the return was incomplete.

The issue was therefore whether the information requested in the notice was reasonably required.

Mr B wanted to check not just whether Mrs A was eligible to be taxed on the remittance basis, but the whole of her return. TMA 1970, s 9A gave HMRC a statutory right to do so.

If an Inspector did not do so, he would not be fulfilling his duty. If Parliament had intended to exclude overseas accounts from being checked, they would have provided for it.

Without the information requested, Mr B was unable to state his conclusions.

Inspector’s evidence

Mr B had provided a witness statement which was provided to the Commissioners and the parties. Mr B then gave evidence in response to questions about this statement.

He was asked whether he was in a position to close the enquiry, and said that he was not. Mrs A had claimed the remittance basis, and he therefore needed to check whether any remittances of income or gains had been made. To do so, he needed all the information contained in the notice.

Asked why he needed to see all the accounts, he said he needed to see all accounts both in and outside the UK in order to check whether remittances had been made.

It was normal for transfers to be made from one bank account to another, or from overseas accounts direct to third parties in the UK. He therefore needed to see all statements for the year for all accounts held.

The UK account showed large amounts coming into the UK from an overseas account. There was also some £22,000 of other deposits, and transactions relating to at least one credit card, both of which he needed to ask about.

Mrs A had not exercised sufficient care in preparing her tax return, as shown by the omission of the bank interest from her current account. He did not know whether there were any other UK accounts.

Asked why the solicitor’s letter was not satisfactory, Mr B said that he needed to have first-hand evidence of the transactions.

The letter only said that the payments had come from an account designated as a capital account, Mr B needed to check that it actually was a capital account – income was sometimes paid into such accounts

Mr B was asked about the Dave Hartnett letter. He said that he understood it was issued as part of the consultation on the new non-domiciled rules from 6 April 2008, and therefore had no bearing on a 2006-07 enquiry.

All it did was to reassure non-domiciled taxpayers that they would have to make no additional disclosures under the new rules as compared to the old.

Even if it should be seen as a concession, the remedy would be in judicial review, not via the General Commissioners.

Mr B also confirmed that he had considered the Human Rights Act implications, and believed this fell within the override allowing intrusions into privacy for the economic well-being of the country, including the collection of taxes.

Cross-examination

In cross-examination, Mr B was asked why there was a requirement in the Act for a request to be ‘reasonable’ – surely that was intended to impose a limit on what could be asked for?

Mr B said that Mrs A had claimed the remittance basis, and it was therefore reasonable to ask for the information necessary to check that she had applied it correctly.

Asked again why the letter from the solicitor was considered inconclusive, he said that the chain of evidence was that Mrs A’s accountant had asked a solicitor to ask her banker about the payments.

This was not a high standard of evidence, and he needed to see the prime records.

Mr B was asked whether similar checks, at this level of detail, were carried out on all non-domiciled taxpayers.

Mr B pointed out that he was only there to talk about Mrs A’s case, but that all taxpayers could expect that their tax return might be checked.

From time to time, those who claim the remittance basis will therefore also have their returns checked to see that they have applied the rules correctly.

Asked what the relevance of the Dave Hartnett letter was in cases such as this, Mr B said that he had been advised that it had been concerned with whether non-domiciled taxpayers would have to reveal details of the trusts with which they were associated.

As that part of the proposed legislation did not go through, it was ‘difficult to see where it would have any relevance’.

One General Commissioner referred to part of Mr B’s witness statement where he had said that he wanted, among other things, to investigate whether she had sufficient means to maintain her lifestyle.

He asked why Mr B had not investigated this further before asking for all the records. Mr B said that he would be able to see this from the bank statements when they came in, and that he needed to see these anyway in order to check whether there were any remittances of income or gains.

Final comments and decision

HMRC concluded their case by saying that all the information fell within s 19A, and the only question was whether or not it was reasonable to request it. For the reasons given, they believed that it was.

In response, the accountant said that this was a fishing expedition, and that it broke new ground, as the request for a certificate of accounts normally only accompanied a serious fraud case.

Mrs A had confirmed that she had made no other omissions, and she had explained the other credits to the account.

Asked for a final comment, HMRC said that if there was nothing untoward in the statements of her accounts, Mrs A had nothing to fear. Mrs A interjected that providing these would cost her a lot of money.

After taking some time to consider their decision, the General Commissioners held that the s 19A notice had been given in very sweeping terms, and they were not persuaded that the information was reasonably required.

They therefore set it aside. Having decided that, they considered there were no grounds for not issuing a closure notice, and directed that the enquiry should be closed within 60 days.

The powers issue

There are some startling remarks by HMRC in this case. The one I found most surprising, which is why I took care to write it down verbatim, was that Mr B, in response to a question from the accountant, said of Dave Hartnett’s 12 February 2008 letter that  it was ‘difficult to see where it would have any relevance’.

The letter was sent prior to the completion of consultation on the proposed new remittance basis regime, and included the following two sentences:

‘[T]hose using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances’.

As can be seen, above, the Inspector dealing with the case alleged that this was to do with trusts, and therefore became irrelevant once the trust legislation did not go through in the terms originally planned – but there is nothing in the rest of the letter that says that, and the profession had taken this as an important limitation by HMRC on the scope of the new provisions.

The case eventually turned on whether the demand was reasonable, and despite the general extensions to HMRC powers in FA 2008, Sch 36, the requirement that the documents are ‘reasonably required’ still remains.

However, there is one key exception, although it can only be found by checking the appeals provisions in para 29 – there is no right of appeal against an information notice requiring the production of documents that form part of the statutory records.

We do not yet know what the statutory records will be, but in the committee stage of the Finance Bill last year, Jane Kennedy, speaking for the Government, said that ‘a bank statement could be a statutory record if the bank account is used for the business or for taxable transactions’ (Eighteenth Sitting, at column 618).

What about a bank statement which could contain taxable transactions but might not? Will that be a statutory record?

Because, while there might be an appeal against whether or not it is a statutory record, and there might be a case for judicial review on the grounds that it was not reasonably required, there would not be a right of appeal to the first tier tribunal on the grounds that, although it was a statutory record, it was not reasonably required in this particular case.

Wider context

It has to be said that the Inspector’s arguments in this case do have a limpid simplicity.

They were certainly presented entirely disingenuously. The remittance basis is a complicated regime, and it can be particularly complicated to administer when trying to run the ‘two account trick’ of a separate capital and income account, which it appears was done in this case.

Anyone who has had to get an offshore bank to accurately follow the simple instruction to credit the interest from the capital account direct to the income account, and seen the total mayhem which often results, will understand why the Inspector thought that there might be tax to pay.

Perhaps the problem is with this whole house of cards we have constructed for the non-domiciled.

It is, arguably, too much to expect that a system can meet the requirement for privacy that formed the core of the non-domiciled reaction to last year’s proposals, while also imposing a requirement that tax is still due on remitted income and gains.

How can you be sure of taxing the latter without breaching the former? It may work in theory, but as soon as it gets into practice the entire rickety edifice comes tumbling down.

If the system does prove to be unworkable, then broadly there are two options. Either the non-domiciled are, after a number of years’ residence, taxed in exactly the same way as the UK domiciled, or the payment of the £30,000 charge entitles them to remit income and gains without further liability.

That choice would be political, and on the basis of my comments over the past eighteen months there are no prizes for guessing that I would choose the former.

At least the latter would produce a workable regime in which proper compliance checks could be made.

Issue: 4198 / Categories: Comment & Analysis , Admin , Residence & domicile