Our Insights

Just when we thought we would have to wait for the 30 October Budget for more detail around the new non-dom tax rules, the new government published a policy paper on the changes to the taxation of UK resident foreign domiciled individuals on 29 July giving additional insight. This article is divided into two parts. The first looks at the policy paper itself and the how it adds to what we knew previously. The second part provides an overview of the anticipated new regime incorporating our newly acquired knowledge.

Some of us were clinging to the hope that a new government, without the same political forces driving it as existed at Spring Budget 2024, would take the necessary time with such important legislation and not rush to legislate. To be clear the changes announced in 2014 were not legislated until 2017 and those were less far reaching. Any such hopes were immediately crushed as this policy paper makes it clear that the changes will be effective from 6 April 2025. That is:

• 2024/25 will be the last year for which the remittance basis can be claimed.
• The new four-year FIG regime will be introduced from 6 April 2025.
• Trust protections will not apply to income arising or gains accruing within trusts from 6 April 2025 onwards.
• The new IHT regime will be effective from 6 April 2025 with everyone who has been UK resident in at least ten of the preceding tax years being subject to UK IHT on worldwide assets and a ten-year tail IHT will attach when such individuals leave the UK.
• From 6 April 2025 excluded property status will no longer be able to keep trusts outside the scope of UK IHT indefinitely.

Whilst this feels like an unnecessary haste to legislate, it seems clear that there will be no delay.

The policy paper refers to the new regime as being ‘internationally competitive and focused on attracting the best talent and investment to the UK’. The regime will be welcome to short term secondees but not the high and ultra-high net worth individuals that the UK has historically looked to

attract. The new proposed regime seems refreshingly simple but so is the Italian regime – to name but one jurisdiction with a more favourable special regime – with the Italians offering a ten-year grace period albeit with a €100k annual fee.

The policy paper generally repeats what we already knew of the changes from the Spring Budget 2024, the April 2024 Labour announcement and the June 2024 Labour Election Manifesto. There is, however, some clarification and some new details.

• It now seems clear that there will be no change of heart with respect to the April Labour statement that there will be no grandfathering of the current IHT protection provided by existing excluded property trusts. However, recognising that existing trusts were ‘established and structured to reflect the existing rules’, there will be provisions to allow for appropriate adjustment of current structures and to allow for transitional arrangements for affected settlors. We await more on this with nervous anticipation.
• It looks like the Temporary Repatriation Facility (TRF) that will be offered by this government will be more comprehensive than that previously envisaged. There is a very welcome commitment to making the TRF as attractive as possible. The TRF period could be for longer than originally announced. The policy paper also states that the government is exploring ways to expand the scope of the TRF to include stockpiled income and gains within overseas structures.
• The policy paper states that officials will engage with stakeholders on the design principles for overseas workday relief. Potentially this might mean that there will be a more comprehensive reform than previously anticipated, and it could result in much needed welcome simplification.
• The government committed itself to rebasing for current and past remittance basis users. At Spring Budget 2024 the rebasing date for this transitional provision was announced as being 5 April 2019. There was criticism of this date during the stakeholder engagement meetings earlier in the year. It appears that the current government has listened as the policy paper states that ‘the rebasing date may not be 5 April 2019. It is being considered and will be announced at the Budget’.

Inevitably the new narrative leads to further questions that we will have to wait until the Budget to have answered. In terms of advising clients now we need to go with what we have to date (see below).

The formal consultation that the previous government promised on the IHT changes has been set aside to be replaced by a review of stakeholder feedback and further external engagement over the summer. Dropping the formal consultation suggests that the government has made its mind up. The IHT aspects of the changes are causing more concern than anything else (the ten-year tail in particular), so this is especially concerning.

The government also uses the policy paper to announce that it intends to conduct a review of the offshore income tax and CGT anti-avoidance legislation, specifically the Transfer of Assets Abroad (ToAA) and Settlements legislation. The purpose of the review is said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions:

• remove ambiguity and uncertainty in the legislation;
• make the rules simpler to apply in practice; and
• ensure these anti-avoidance provisions are effective.

This could be an opportunity to simplify this highly complex legislation; however, the last sentence with respect to this announcement is somewhat concerning: ‘It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year’. In addition to each regime being complex in and of itself there are a myriad of interlocking offshore anti-avoidance provisions. To review them adequately and come up with appropriately thought through amendments would take significantly longer than the year to 18 months envisaged if the review is working to a 2026/27 effective date.

Note that the current Economic Secretary to the Treasury, Tulip Siddiq MP, when she was Shadow Economic Secretary to the Treasury earlier this year, had echoed professional body concerns with the amendments made to the ToAA legislation in the light of the Supreme Court decision in HMRC v Fisher [2023] UKSC44. The concern is that any review will be more akin to a consultation on specific proposals rather than an in-depth holistic review with full consultation and any removal of ambiguity.

The new regime

The four-year FIG regime

The current tax year (2024/25) is the last year for which a remittance basis claim can be made. From tax year 2025/26 onwards a much-simplified regime based on residency will be put in place for considering whether foreign income and realised foreign capital gains will fall to be taxed in the UK. This much-simplified regime is referred to as the four-year FIG regime. The following categories of taxpayer will be eligible for the new regime:

• new arrivers (those who have been non-UK resident for a 10-year period) in the first four tax years after they arrive in the UK; and
• individuals who were resident in the UK prior to 6 April 2025 but have been here for less than four tax years and were also non-UK resident for 10 years before coming to the UK.

The statutory residence test will be used to determine tax-residence for a tax year. Crucially, and to the considerable disadvantage of taxpayers, the following will be counted as complete tax years:

• any year when the individual is resident in both the UK and another jurisdiction and is treaty resident in the other jurisdiction; and
• any year where the individual arrives or leaves the UK and is entitled to split year taxation. This will be a particular problem given our April tax year end (few individuals will be able to arrange things such that they can come to the UK on or close to 6 April).

We will not know for certain until we see the draft legislation, but it appears that it is a continuous four-year period that is looked at (rather than the first four tax years of UK residence after an absence from the UK of at least 10 years). This would mean that if the individual is not UK resident for part of the four-year period the time frame when they can benefit is reduced even more.

Provided they make the claim, qualifying individuals will not be subject to tax on FIG arising/accruing in the first four years of tax residence, regardless of what they do with the FIG. This means that individuals can remit the FIG to the UK without paying tax on the remitted funds. In addition, they will not pay tax on income distributions from non-UK resident trusts in this period and the anti-avoidance provisions attributing FIG to such individuals will be switched off.

Making the claim results in the loss of entitlement to the personal allowance and the CGT annual exemption. However, depending on the quantum of their income the individual might lose that anyway and the CGT annual exemption is now only £3,000. The choice to make the claim is on a year-by-year basis.

After the four-tax year period qualifying individuals will be taxed on income and gains on a worldwide basis in the same way as a UK resident individual domiciled in one of the three UK jurisdictions.

Transitional provisions

The government is committed to two transitional provisions for individuals.

The first is CGT rebasing for current and past remittance basis users. There will be specific qualifying conditions within the draft legislation. It is likely that a qualifying asset will be defined as an asset that was situated outside the UK at a specified date.

Where eligible individuals dispose of a personally held qualifying foreign asset on or after 6 April 2025, they will be able to elect to rebase the value of that asset to its value as at whatever date is specified at the time of the Budget (this was originally said to be 5 April 2019, but the current government is reconsidering).

The second transitional provision is the TRF. The TRF was announced as an attempt to deal with the legacy of unremitted FIGs that have over the years been kept out of the UK and sheltered by the remittance basis. At Spring Budget 2024, the reduced fixed rate was announced as 12% and the facility was to exist for two tax years (2025/26 and 2026/27). The policy paper states that the reduced tax rate and length of time that the TRF will be available for will be set to make use as attractive as possible. It may be, therefore, that the length of time will be longer than the original two years. As stated in the policy document the government gave a commitment to explore ways to expand the TRF to include stockpiled income and gains within overseas structures. Further details of the reduced tax rate, TRF period and scope will be provided at the time of the Budget.

Overseas Workday Relief (OWR)

Eligibility for OWR is expected to be reformed in line with the new regime. Only individuals arriving in the UK from 2025/26 onwards who are eligible for the new four-year FIG regime will be able to access OWR. OWR will only be available for the first three tax years. For that period, OWR will continue to provide income tax relief for earnings relating to overseas duties where there is a mixed UK/overseas employment contract. In contrast to the current regime, these earnings will be able to be remitted to the UK without any tax charge.

It may be that OWR is reformed more fundamentally given the comment in the policy paper that officials will consult on the design principles for this tax relief. Consultation will take place in stakeholder meetings over the summer with an announcement in the Budget.

Trusts

FIGs that arose in protected non-UK resident trusts before 6 April 2025 will not be taxed unless matched to distributions or benefits (whether UK or foreign) paid to UK residents. The new four-year FIG regime will prevent a tax charge arising in such circumstances. However, in this circumstance, the legislation will not view the payment/benefit as giving rise to a matching event so the trust income and/or gains pools will not be reduced. The onwards gifts rules are to be modified.

For income and gains arising/accruing after 5 April 2025, the trust protections will not apply. Anyone who comes within the four-year FIG regime will not be taxed on distributions or benefits in the tax years to which the four-year FIG regime applies. After that or for those who do not qualify for the four-year FIG regime, they will be subject to the full rigour of the anti-avoidance provisions. If they can benefit from the trust, this means being subject to tax on all trust income on the worldwide basis (the settlements regime) and on the net trust gains each tax year (TCGA 1992 s 86).

The trust protections, when coupled with the IHT protection for foreign situs property within excluded property trusts, were the main reason why the changes in 2017 did not result in significant numbers of UK resident foreign domiciled individuals leaving the UK. However, removing the trust protections at the same time as reducing the favourable tax period and (most drastically) removing IHT protection is a very different proposition.

Settlors could avoid being subject to the income tax and CGT anti-avoidance provisions by having trust deeds amended prior to 6 April 2025 to exclude individuals that would trigger attribution of income and/or gains. This is easier with the income tax provisions as just the settlor and their spouse/civil partner need to be excluded from benefitting (though the spouse/civil partner only has to be irrevocably excluded whilst the settlor is alive and can be added after the settlor is dead).

The CGT anti-avoidance provisions ensure that the range of beneficiary that will result in attribution of gains to the settlor is so wide as to include all immediate family members (i.e. virtually everyone that most settlors would want to benefit). Amending the trust deed such that the provisions would not be applicable is unlikely to be palatable in most cases.

It has long been anomalous that the CGT settlor charge is wide in its scope. Aligning it with the income tax anti-avoidance provisions for trusts (the settlements regime) would be sensible, such that:

• the attribution of gains on the arising basis is only triggered if the settlor and (whilst the settlor lives) his spouse/civil partner can benefit have the power to benefit; and
• there are attribution provisions to a UK resident settlor of any gain matched where a capital payment is made to their minor child.

No rebasing is proposed with respect to pregnant gains within trusts which is somewhat incongruous and ideally this will be re-visited as trust rebasing for the purposes of the CGT settlor charge could be introduced for all assets within trust structures. In 2008, there was such similar rebasing with respect to the CGT beneficiary charge when it was extended to UK resident foreign domiciled individuals and extending the CGT settlor charge to UK resident foreign domiciled individuals is more significant in terms of the penal nature of the provisions.

IHT: individuals

From 2025/26, the UK will move to a residence-based regime for IHT. An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence. In addition, once an individual is caught within the UK IHT net, unless an Estate Treaty provides relief, they will have to be non-UK resident for ten-years to be free of its clutches. This ten-year tail is particularly contentious and will result in many individuals leaving the UK earlier than they might otherwise have done.

IHT: trusts

Although not entirely clear, it is understood that, regardless of when the trust was created, the UK IHT treatment will mirror that of the settlor. That is, when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope of IHT (including the ten-year tail period) the trust will be too. There is no grandfathering for current excluded property trusts.

We do not have the details, but as mentioned above the policy paper states that the government recognises that these trusts ‘will already have been established and structured to reflect the existing rules’. Consideration is being given to how the changes can be introduced in a way that allows for appropriate adjustment of current structures and transitional arrangements for affected settlors. There is to be external engagement over the summer and details will again be published in the Budget.

What next?

There are to be ‘engagement sessions’ on IHT and OWR over the summer (August/September). These would seem very similar to the ‘listening events’ that happened earlier in the year, so they are likely to be a chance to express views rather than find out anything new. Details of these will go up on the Gov.uk website in the same way as the May listening events were. Decisions will be published as part of the Budget on 30 October.

There is an intention to release the draft legislation for scrutiny. Details will again be published on the gov.uk website in due course.

Original article can be found here: Much ado about non-doms: the new policy paper (taxjournal.com)

In this decision, the First-tier Tribunal (Tax Chamber) (“FTT”) dismissed an appeal against discovery assessments which disallowed amortisation relief claimed by the Appellant company for three types of goodwill acquired from a partnership. The decision examined the applicability of each of the circumstances set out in s882 CTA 2009 before concluding none of them had been satisfied. It also provided guidance on the meaning of carrying on a business pursuant to s884 CTA 2009. In rejecting the appeal, the FTT reached a number of key conclusions:

1. partners can potentially rebut the presumption that individual partners do not own the goodwill of the business (in whole or part) by expressly recording the division in a partnership agreement;
2. whether a partner is an equity or salaried partner has no bearing on whether they can be treated as carrying on the business for the purpose of s884;
3. when determining whether and when a partner carries on a business, the FTT will consider, inter alia, (1) if they are in a partnership as per the definition in s1 of the Partnership Act 1890 and (2) their role in the day-to-day running of the practice;
4. a fundamental aspect of the self-assessment regime is that taxpayers must ensure that they retain adequate records (backed up by an external valuation as relevant in the case of a goodwill transfer) sufficient to support the information provided in their returns, including evidence to support claims made for relief.

What are the practical implications of this case?

This decision should be a warning to partners when changing profit sharing ratios/acquiring additional businesses and companies acquiring partnerships. The key to successfully obtaining amortisation relief for goodwill is strong and independent contemporaneous evidence to support its valuation. In this case, such evidence was lacking:

1. It was argued that one of the Appellant’s directors (Mr Hewitt) did not carry on the business of the acquired partnership (“AVC”) until 2005 but the lack of a partnership agreement between him and the retiring partner (Mr Alexander) meant they were unable to evidence this. Instead, the FTT considered alternative evidence (including Mr Hewitt’s title of “Partner” on their website) to conclude he was carrying on a business with Mr Alexander before 1 April 2002. As such, the Appellant could not access the Intangibles Regime in Part 8 of the CTA 2009 to claim amortisation relief for post 2002 goodwill.
2. Even though the parties agreed that the goodwill of the business acquired by AVC in 2012 could fall within the Intangibles Regime, there was insufficient documentary evidence and detail surrounding the acquisition to prove that the conditions under that regime had been satisfied. Independent and documented valuations of the goodwill of a business should be undertaken as part of any acquisition process.

What was the background?

1. On 1 May 2000, DCS Alexander Partnership began trading with two partners, Mr Alexander and Mr Hewitt.
2. On 30 April 2005, Mr Alexander retired and Mr Hewitt continued to run the practice as a sole trader under the new name “AVC”.
3. Mr Walker commenced work at the practice in 2006 but he and Mr Hewitt did not enter into a partnership until 1 August 2008 (still trading as AVC).
4. At some time in 2012, AVC purchased the large animal business of Dalbair Veterniary Centre. Goodwill of £165,805 was shown in AVC’s partnership accounts following the purchase (the “Dalbair Goodwill”).
5. On 27 January 2014, the Appellant (“AVGL”) was incorporated with both Mr Hewitt and Mr Walker as directors and each having a 50% share in the company. AVGL acquired AVC. Goodwill of approximately £1.9m was recognised in AVGL’s accounts for the first 18-month period to 26 July 2015.
6. On 16 October 2015, AVGL filed its CTSA returns for APE 26 January 2015 and 26 July 2015. Amortisation of £56,250 in respect of goodwill acquired on incorporation was charged to the 18-month period to 26 July 2015 and that full amount was claimed as deductible.

The key issue the First-tier Tax Tribunal (“FTT”) were asked to determine was whether each of the following goodwill elements (collectively the “3 Goodwills”) fell within the provisions of the intangible fixed assets rules in Part 8 of the CTA 2009 (the “Intangibles Regime”):

1. The goodwill acquired originally by Mr Hewitt when he acquired Mr Alexander’s interest in the DCS Alexander partnership in 2005 (“DCS Alexander Goodwill”);
2. The Dalbair Goodwill;
3. The goodwill introduced when Mr Walker and Mr Hewitt became partners in 2008 (“Mr Walker’s Goodwill”)

A secondary issue of whether the discovery assessments for APEs 26 Jan 2015 and 26 July 2015 were valid was also determined by the FTT.

What did the tribunal decide?

The circumstances in which the Intangibles Regime will apply are set out in s882 CTA 2009 (cited at paragraph 86 of the decision). The FTT held that none of those circumstances applied to any of the 3 Goodwills.

The majority of the decision focused on the DCS Alexander Goodwill, and the FTT found:

1. AVGL acquired the goodwill from AVC (it having established the goodwill whilst Mr Alexander was a partner under the former name of DCS Alexander Partnership). As AVGL acquired the goodwill rather than created this goodwill, s822(1)(a) did not apply.
2. Mr Hewitt and Mr Walker (as partners of AVC) were related to AVGL (as directors) and therefore s882(1)(b) did not apply.
3. None of the three cases under s882(1)(c) applied. Case A was not satisfied as the goodwill was acquired from a partnership and not a company. Case B was not satisfied because what was transferred between the former partners was the beneficial interest of the retiring partner in his share of the partnership property, this was distinct from a transfer of the goodwill itself. Case C was not satisfied as the goodwill was not treated as acquired after 1 April 2002 from a person who at the time of the acquisition was a related party in relation to the company (s882(1)(c) & (5)).

In relation to Case B the FTT noted that “we have not seen nor has the Appellant satisfied us that there was any agreement in place between Mr Hewitt and Mr Alexander … to displace the analysis of the goodwill being partnership property”. It is therefore implied that partners can rebut the presumption that individual partners do not own the goodwill of the business by recording the same in a partnership agreement.

The FTT’s other conclusions

1. The Dalblair Goodwill – whilst the parties agreed in theory that this goodwill was capable of falling within Case B, there was insufficient evidence and detail surrounding the acquisition to prove that the condition had been satisfied.
2. Mr Walker’s Goodwill – the evidence suggested no goodwill has been contributed by Mr Walker becoming a partner. Specifically, the FTT mentioned Mr Walker’s employment since 2006 and Mr Hewitt’s concession that no goodwill had actually been contributed as relevant factors in reaching this conclusion.
3. Validity of the discovery assessments – the FTT provided a helpful summary of the tests and conditions for issuing a valid discovery assessment at paragraphs 57-80 of the decision, before concluding they were valid.
4. Scottish partnerships: the FTT also considered how its conclusion would change if DCS Alexander Partnership was a Scottish partnership before ultimately concluding its determination in respect of the treatment of the goodwill would remain the same.

Original article can be found here: Warning for partnership personnel changes? (Armour Veterinary Group v HMRC) – Lexis Nexis

What’s keeping you busy at work?

As I am sure is the same for everyone in tax, the furore in the run up to 4 July. Specifically, sifting through and decoding manifesto policies combined with health checks of existing structures to try to gage the impact for clients of what we understand will be introduced.

If you could make one change to tax, what would it be?

It’s difficult to choose just one! Particularly topical is the constant tinkering of/adding to HMRC powers which has found its way into manifesto promises. Until HMRC use their existing powers more effectively (see recent £14m ball drop re our friend Baxendale Walker [P Baxendale-Walker v HMRC [2024] UKUT 154 (TCC)]), we ought not to be adding more pages to the legislation in this area.

Another perennial gripe, highlighted in recent years in the context of the IR35 regime, is what I think the economists call horizontal equity. It just doesn’t feel right that that an individual who operates as a sole trader is taxed in an entirely different way with a significantly different fiscal outcome to the same individual, operating the same business who chooses to incorporate.

Has a recent change in HMRC practice impacted your work?

The ever-evolving methodology for resolving disputes adopted by HMRC has a big impact on my day-to-day job. The current mechanism can be prohibitively linear (the matter goes from A to B to C), rather than what might be considered a more efficient strategy with A, B and C all reaching a cohesive agreement (as happens in the High-Risk Wealth Programme cohort). The length of time it takes to resolve anything is becoming very protracted.

The Failure to Correct 200% penalties are not helping with some dead lock positions. These penalty levels are giving people a reason to fight which is obstructing settlement. The rationale and driver for these penalties was great in the context of Requirement To Correct but it was perhaps only appropriate in that short time window. Maybe a new government will deliver us a neatly wrapped new disclosure facility (akin to the pragmatism we had with the Liechtenstein Disclosure Facility) with a shiny bow on top.

What do you know now that you wish you’d known at the start of your career?

Be patient. It will come. I wanted to know everything all at once and it is not until you have a few grey hairs (covered in blond!) that you appreciate that learning and building is a lifelong endeavour so enjoy the journey, don’t worry about the destination.

Are there any new rules that are causing a particular problem in practice?

The reform of the non-dom legislation is going to be seismic; one can only hope that the relevant people take their time and consult those with boots on the ground to get it right and to not squash the global competitiveness of the UK as a destination of choice for wealth and talent. The TOAA legislation (particularly the application of the motive defence) is going to take on a new dimension as a direct result of these changes.

What are clients currently asking about?

There are many questions around the future of Excluded Property Trusts and grandfathering and the ten year IHT tail which is set to drive HNWs from the UK. Oh and how to become non-UK resident.

Finally, you might not know this about me but...

I am the best lawyer and tax adviser I can be when I am given the flexibility to be the best mum I can be. I do a lot of work around retaining talent and navigating the motherhood penalty. It is something I feel very passionate about.

Helen McGhee is a Partner in the Joseph Hage Aaronson contentious tax team specialising in UK and international tax disputes. Her specialism is the taxation of nondoms but she advises on a wide range of tax issues. Helen is a member of STEP and is a CEDR accredited mediator.
Email:hmcghee@jha.com; tel: 020 7851 8879

Original article can be found here: One minute with... Helen McGhee (taxjournal.com)

Case Note: ‘The approach of the Tax Tribunal to evidential sampling in Kittel cases’

The First-tier Tribunal (Tax Chamber) has recently published a decision of Judge Dean on a sampling application by HMRC in the case of Ezy Solutions Ltd (in liquidation) and Milo Corporation Ltd (in liquidation) v HMRC [2024] UKFTT 00209 (TC). The Decision was released on 9 March 2023 but had not been published until recently.

HMRC applied for a Direction that the parties agree a sample of 50 Mini Umbrella Companies upon which the appeal would be determined. HMRC contended that the sample would limit the scope of the parties’ evidence in the appeal. HMRC argued that it would be disproportionate and “take [HMRC] an inordinate amount of time” serve the evidence in relation to all of the MUCs that had actually supplied the Appellant.

The Appellants argued that a representative sample could not be agreed until all of the evidence in relation to the MUCs had been served and that in a Kittel case HMRC are required to prove all of the fraud, tax losses, and connections upon which they relied.

Judge Dean refused HMRC’s application and stated at [38]:

“It is a fundamental principle of natural justice that a party must know the case against it. I cannot see how in circumstances where HMRC propose not to serve the evidence which formed the basis of its decisions, the Appellants could form a view as to whether any sample is representative or whether there is commonality.”

Judge Dean also stated at [41] that she considered HMRC’s argument that serving their evidence would take “an inordinate amount of time” to be insufficient to justify their application.

More recently, in a case management decision in Horizon Contracts Limited (in liquidation) & Others v HMRC (unreported), Judge Poole followed Judge Dean’s reasoning and stated that ‘sampling’ may be “an appropriate way to proceed for the purposes of the ultimate hearing” but found that this was a matter to be resolved at a later stage once “the full evidence upon which HMRC rely has been disclosed to the Appellants”.

VAT Umbrella Appeals Decision

On 27 March 2024, the Tax Tribunal released its Decision in the VAT Umbrella Appeals.

Subject to onward appeals to the Upper Tribunal, the practical consequence of the Decision is that the Lead Appellants (i) should not have had had their VAT registrations cancelled (ii) and should have their VAT registrations reinstated from the date of de-registration (iii) and were not entitled to use the FRS and EA.  The Tribunal has not yet made directions in respect of the effect of the Decision on the Related Cases (which were stayed pending the Decision in the Lead Appeals).

The Tribunal decided the Lead Appeals in the following way:

1. It allowed the Appeal against VAT de-registration.
2. It dismissed the Appeal against cancellation of authorisation for participation in the VAT Flat Rate Scheme (“FRS”).
3. It dismissed the Appeal against the Employment Allowance (“EA”) decision.

In summary, the Tribunal found:

1. That “there were objective grounds for concluding that the VAT numbers of the Lead Appellants were used for fraudulent purposes” [347], despite there being “no specific allegations particularised in the SOC that any individual or corporate entity is dishonest or has knowingly committed fraudulent acts” and “that neither the words “dishonest” nor “dishonestly” appears anywhere in the SOC” [331 and 332].
2. That HMRC’s argument on Ablessio could not succeed “in the absence of any knowledge by the directors of the Lead Appellants that they were facilitating (enabling) the fraud of another” [353], it having not been “pleaded or put [by HMRC] to the directors of the Lead Appellants” and that the Lead Appellants “were all helpful witnesses who gave credible accounts of their roles and involvement with their respective companies” [27].
3. That HMRC’s decision to cancel FRS authorisation in respect of the Lead Appellants was reasonable “for protection of the Revenue” [358], despite HMRC having not contacted any of the Mini Umbrella Companies before de-registering them [359] and the model having been the subject of professional advice [359].
4. That the Lead Appellants were not entitled to qualify for EA [363].

A link to the Decision can be found here.

The Lead Appellants intend to appeal the Decision.

Spring Budget 2024 was littered with the usual political posturing and some ineffective tinkering. Unfortunately fiscal drag will continue to be significant. Wednesday 6 March 2024 was also an earth-shattering day for the non-UK doms and all those who advise them.

CHANGES TO NON-DOM STATUS

For tax years from 2025/26 onwards, the Government announced the abolition of the remittance basis (“RB”) for tax purposes and a plan to move away from the concept of domicile and towards a much-simplified test based on residency when considering whether foreign income and realised capital gains will fall to be taxed in the UK.

Overview of the proposals

Provided they make the necessary claim, new arrivers (those who have been non-UK resident for a 10-year period) as well as those who have been in the UK for less than 4 years as at April 2025 (and been non-UK resident for 10 years prior to that) will not be subject to tax on their foreign income and gains (“FIGs”) arising/ accruing in the first 4 years of tax residence- nor will they pay tax on distributions from non-UK resident trusts in this period to boot!

After 4 years we are told that these individuals will pay tax on their worldwide income and gains in the same way as a UK resident would.

The proposed new regime is clearly attractive for the first 4 years but that is a short period of time, so overall not as globally competitive as one might have hoped.

Examples

1. Louise comes to the UK for the first time in 2026/27. She is 24 years old so her period of non-UK residence is in excess of the necessary ten years. She is UK resident in 2026/27 and 2027/28. She is not UK resident in tax year 2028/29 and resumes UK residence in 2029/30 remaining for seven tax years. She would be eligible for the new 4-year FIG regime. However because she is not UK resident in 2028/29 it appears that she only benefits from the 4-year FIG regime in tax years 2026/27, 2027/28 and 2029/30 (that is even though she cannot benefit tax year 2028/29 is seen as part of the 4-year period).
2. Jake came to the UK for the first time in 2023/24. He was 37 years old so his period of non-UK residence was in excess of the necessary ten years. He was UK resident for 2023/24 to 2028/29. The old rules apply for 2023/24 and 2024/25 so he claims the RB. He is then eligible for the new 4-year FIG regime for 2025/26 and 2026/27.

Transitional rules

Transitional rules have been announced to assist non-UK doms already here:

• Individuals who move from the RB to the arising basis from 6 April 2025 and who are not eligible for the new 4-year FIG regime will benefit from a one off special 50% reduction with respect to the amount of the foreign income that is subject to UK tax in that year. This reduction does not apply to foreign chargeable gains.
• CGT rebasing – for individuals who have claimed the RB and are neither UK domiciled nor UK deemed domiciled by 5 April 2025. Subject to as yet unannounced conditions, where eligible individuals dispose of personally held foreign assets on or after 6 April 2025, they will be able to elect to rebase the value of that asset to its value as at 5 April 2019.
• For tax years 2025/26 and 2026/27 a Temporary Repatriation Facility (“TRF”) will be introduced to tax personally arising FIGs of all UK resident current RB users a flat rate of 12% (potentially including those already deemed dom?) The TRF will not apply to pre-6 April 2025 FIG generated within trusts and trust structures.

A relaxation of the mixed fund rules to make it easier for individuals to taken advantage of this TRF has been promised.

Overseas Workday Relief (OWR)

Eligibility for OWR will be reformed in line with the new regime. For the first three years of tax residence OWR will continue to provide income tax relief for earnings relating to overseas duties where there is a mixed UK/overseas employment contract. In contrast to the current regime these earnings can be able to be remitted to the UK without any tax charge.

More on trusts

From 6 April 2025, the protection from tax on future income and gains as it arises within trust structures (whenever established) will be removed for all current non-doms and deemed dom individuals who do not qualify for the new 4-year FIG regime. This means that, unless the 4-year FIG regime applies to an individual, they will be taxed on post 5 April 2025 trust income and gains in the same way as a UK dom.

FIG that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless matched to distributions or benefits (whether UK or foreign) paid to UK residents who are not sheltered by the 4-year rule- in that event by the way the legislation will purportedly not view the payment/benefit as giving rise to a matching event so the trust income and/or gains pools will not be reduced. The onwards gifts rules will need to be modified.

What about IHT?

The government has also announced an intention to move to a residence-based regime for Inheritance Tax, with plans to publish a policy consultation and draft legislation on these changes (including a possible a 10-year exemption period for new arrivals and a 10-year tail for those who leave the UK- eeeesh!) later in the year. Apparently if you set up an offshore trust before April 2025 then it will be safe from IHT!

The abolition of the non-UK dom regime promises a further £2.7bn per year by 2028/29 into UK PLC (in addition to the £8.5 billion which non-UK doms already pay in UK tax each year). The draftsmen/women have until 6 April 2025 to get it right! The temporary non-resident rules will require some attention! And don’t tear up the mixed fund rules just yet!

Aside from the non dom changes, points to note included….

The Government are still dreaming of a day when National Insurance no longer exists…. but for now the Tories announced a plan to reduce the main rate of primary Class 1 National Insurance contributions by 2 percentage points from 10% to 8% from 6 April 2024. Self-employed individuals will also benefit from a further reduction in the rate of Class 4 from 8% to 6%.

Hidden in the tax related documents are some anticipated Anti-Fisher Provisions- measures to amend the transfer of assets abroad provisions by applying a charge to tax where relevant transfers are carried out by a closely-held company which an individual has a qualifying interest in.

The higher rate of CGT charged on residential property gains is reduced from 28% to 24% for disposals made on or after 6 April 2024. Presumably they are still keeping 28% for carry- they seemed to leave carry alone.

We will have a new UK ISA with its own allowance of £5,000 a year for investment into UK equities.

The Furnished Holiday Lettings tax regime will be abolished from 6 April 2025. There is an anti-forestalling rule, effective from 6 March 2024, to “prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rule”.

HICBC whilst amends to this will be welcome in April 2026 unfortunately it has not been scrapped altogether and we are teetering on the brink of household taxation here. For now the threshold has been increased to £60,000pa.

Contact

Helen McGhee: HMcGhee@jha.com

Lynnette Bober: Lynnette.Bober@jha.com

In recent months, the First-tier Tax Tribunal has presided over 3 headline grabbing domicile cases which, whilst offering little precedential value, set out some useful commentary on the multi factorial approach taken by HMRC and ultimately the tribunal in determining an individual’s domicile status. This note reviews the decisions made in Shah v HMRC [2023] UK FTT 539 (TC), Strachan v HMRC [2023] UKFTT 00617 (TC) and Coller v HMRC [2023] UKFTT 212 (TC).

Shah v HMRC [2023] UK FTT 539 (TC)

This case concerned an appeal against an IHT assessment raised by HMRC concerning the estate of Mr Shah. Mr Shah was born in Karachi in 1929, travelled back and forth to Tanzania to some extent over the years and then moved to the UK in 1973 where he lived until his death in 2016.

As the party asserting the change in domicile, HMRC had to prove their case (based on the balance of probabilities) that Mr Shah had acquired a domicile of choice in the UK contrary to what his executors claimed that Mr Shah had always been intent to return to India upon retirement.

The tribunal concluded that Mr Shah had settled and had the intention to remain in England permanently – he had acquired a domicile of choice here and any intention of moving back to India was described as “at best vague”.

Many factors contributed to this decision, including (but not limited to):

• Mr Shah had no significant ties to India, having only visited twice for a period of three weeks over 43 years.
• Mr Shah had no bank account or other assets or investments in India.
• Despite a DOM1 form being completed, this was not submitted to HMRC at the time and the tribunal found it inconsistent with the evidence available.
• There were multiple potential trigger points at which Mr Shah could have returned to India yet he remained in the UK.
• The tribunal noted Mr Shah’s close attachment to family based in the UK, and it was considered to be ‘unrealistic’ for somebody of his age and health to relocate from a place with many family ties to a place which he had never lived in before.

This case is particularly relevant for long-term UK resident individuals who may hope to take advantage of a UK estate tax treaty (such as with Pakistan or India) to potentially limit their exposure to UK inheritance tax by virtue of non-UK domicile status.

Strachan v HMRC [2023] UKFTT 00617 (TC) 

Mr Strachan completed his self-assessment tax returns for the tax years 2011-12 to 2015-16 on the basis that he had abandoned his UK domicile of origin and had acquired a domicile of choice in Massachusetts. HMRC disagreed, and issued discovery assessments for the first four years, and a closure notice and amendment for the fifth year.

The judge held that: “Where a person has two homes (Mr Strachan still maintained his London residence), a domicile of choice can only be established in a jurisdiction if the person has his ‘chief’ or ‘principal’ home in that jurisdiction.”

Mr Strachan’s US home did not constitute his chief residence as it was used almost exclusively for holidays, and he did not move to Massachusetts until he was diagnosed with Alzheimer’s in 2020. HMRC asserted that he had stronger ties to the UK both through work and socially.

Importantly, it was further found that Mr Strachan had been “careless” as he had not taken any professional advice on his domicile status since 1987, and had assumed that he was domiciled in Massachusetts, when a reasonable taxpayer in his position would have taken new advice given the significant changes to his position during that time. It is vital to keep a domicile status under constant review. HMRC were unable to prove that Mr Strachan’s carelessness had caused a loss of tax thus his appeals were successful in part.

Coller v HMRC [2023] UKFTT 212 (TC)

The four main issues considered in this case were:

1. At the time of his son’s birth in 1958, had Mr Coller’s father acquired a domicile of choice in the UK, thereby giving his son an English domicile of origin?
2. If he had not obtained a domicile of choice in the UK at the time of his son’s birth, had Mr Coller’s father acquired a domicile of choice in the UK at the time of his death in 1968, giving his son an English domicile of dependency, which would have become a domicile of choice when he turned 16?
3. After the death of Mr Coller’s father, had his wife acquired an English domicile of choice, in turn giving an English domicile of dependency to their son, as above?
4. If the first three conditions had not been met and Mr Coller did not have an English domicile of origin or dependency, had he acquired an English domicile of choice himself?

The tribunal underwent a detailed forensic review of many years of Mr Coller’s family history before concluding that his father must have acquired an English domicile of choice prior to his son’s birth thus Jeremy also had an English domicile of origin. Thereafter the mother’s domicile was irrelevant albeit the tribunal commented upon such extensively.

Mr Coller had been educated in the UK and maintained strong social and philanthropic ties here. The tribunal considered that in the context of his wider circumstances his intention to ultimately relocate and settle in Israel upon his divorce in 2012 (despite significant real estate investments there) was not consistent with his life in London where his children were at school.

The cases provide useful commentary and insight into the approach the courts will take and certainly highlight that those seeking to maintain or establish any non-UK domicile status must ensure they have consistent evidence to support this. Vague statements of intent to settle elsewhere are of insufficient evidential value.

The issue of maintaining a non-UK domicile as a matter of law remains of vital importance to many still benefiting from trust protections. Any domicile enquiry can be protracted and emotionally and financially draining (expert advice is pivotal in managing the flow of information) and early and up to date advice is pivotal.

If you wish to discuss domicile or require assistance with HMRC enquiries, please contact Helen McGhee or Daisy Oliver at HMcGhee@jha.com DOliver@jha.com.

Iain MacWhannell, instructing David Bedenham, successfully represented an employment intermediary in an appeal against a denial of input tax and £15 million VAT assessment.

The intermediary had purchased (and on-supplied) labour from thousands of mini-umbrella companies. HMRC subsequently denied the intermediary’s input tax on the Kittel and Fini basis. 

The appeal was listed for a 10 day hearing before the Tax Tribunal.

On day 1, HMRC opened their case by setting out their detailed basis for applying the Kittel and Fini principles. 

On day 2, David opened the Appellant’s case. This included drawing on the extensive evidence filed on behalf of the Appellant and raising numerous other challenges to highlight the flaws in HMRC’s case.

On day 3, HMRC applied for an adjournment. That application, which was opposed by the Appellant, was refused by the Tribunal. 

HMRC then announced in open court that they were withdrawing their Kittel/Fini decision and VAT assessment in full. The Tribunal then ordered HMRC to pay the Appellant’s costs. 

The so-called non-dom regime that has played a significant role in the UK’s tax framework for decades may be on its way out. This perhaps somewhat antiquated and arguably no longer fit for purpose regime has for many years allowed wealthy “foreigners” living in the UK to benefit from favourable tax treatment on their foreign income. The approximately 70,000 non-UK domiciled individuals currently claiming such tax status on their UK tax returns (broadly speaking those who reside here for a fixed period and ultimately intend to leave the UK) are only liable for UK taxes on UK source income and gains; their foreign income and gains are subject to the remittance basis of taxation meaning they are taxed only to the extent that they bring this wealth to the UK. A system which encourages wealthy individuals to accumulate wealth outside of the UK and punitively taxes them for bringing funds to the UK seems counterintuitive (leaving aside a discussion around the complex Business Investment Relief rules introduced in April 2012).

The story so far

Recent public scrutiny around Akshata Murphy (Mrs Sunak) has called the effectiveness of this regime once again to the forefront (there were significant attempts at reform back in 2008 fervently opposed by Greek shipowners and again sweeping changes came in in 2017) with political promises to enhance transparency and equality in the tax system an undeniably challenging objective to achieve whilst also importantly not compromising the attractiveness of the UK (London primarily) as a well positioned and well established global financial hub. Migrants represent a significant percentage of high income, high productivity occupations in financial and professional services in banks/ hospitals alike and there is no desire to haemorrhage worker bees. Reportedly wealthy individuals are already leaving the UK in favour of establishing domicile status in tax havens like Monaco, Switzerland, and Dubai. Migration consultancy Henley & Partners and data firm New World Wealth say more than 12,000 rich individuals have left the UK since 2017. The 2017 reforms significantly limited the tax advantages for long-term non-doms by introducing the concept of deemed domicile for income tax and capital gains tax so once UK resident for more than 15 of the previous 20 tax years, individuals could no longer shelter wealth from these taxes. The changes to the taxation of excluded property trusts (beyond the scope of this article) also further eroded the benefits for some long-term UK resident non-UK domiciled individuals.

Key fiscal objectives

It must be that we have moved away from a tax system pinned to an archaic concept of “foreignness” (the idea of “domicile” could easily just be put back into an area of law distinct from tax where Dicey originally did not intend for it to live!) and when we consider the two Chelsea bankers living next door to each other, one originally from Germany and one with strong ancestral roots in the UK, they ought to be taxed on the same basis. But what if one plans only to stay here for 5 years- should he be treated differently to the other? It is also true that we want wealth creation and investment in the UK and there is a balance to be struck.

Will abolishing the non-dom regime prompt a significant mobility response? And what ought we to replace it with some kind of unwieldy (particularly when considering double tax treaty benefits) US style citizenship regime? A Canadian style exit tax on departure? Or a Swiss style arbitrary annual charge to benefit from a more favourable tax regime?

There are many questions to engage with before significant steps are taken and considering the context of the regime and where it sits as part of a wider fiscal policy is vital. When raising questions around the future of the non-dom regime one might consider its long-term usefulness as a potential mechanism to tax and encourage wealth re-distribution in this country? Any reform of the non-dom rules ought to interrelate to the proposed review of IHT- a tax on the transfer of wealth. What will no question cause a non-dom to flee the UK would be a 40% tax on death on his worldwide estate not long after he arrives here!

What about an all-round more effective system of taxation around accumulated wealth rather than income creation. That would prompt serious consideration around trust protections even since 2017 it is still possible for well advised non-UK doms to shelter significant wealth in trust wrappers. The non-dom regime should not be reviewed or reformed in a vacuum there is a wider conversation to be had and the atmosphere is as ripe as it ever has been for whole scale long lasting reform. It must be that to protect the future of our position on the global stage there needs to be serious political and economic certainty.

Conclusion

Striking the right balance between maintaining competitiveness on the global stage (keeping a keen eye on regimes promoted in competing jurisdictions) and amending a somewhat broken non-dom regime to make it fit for purpose in the modern world will require careful consideration and even more careful drafting of any new rules with the correct amount of attention paid to any transitional period. What is needed is a cross party consensus and not faux attempts at lazily drafted legislative reform carrying a distinct whiff of vote winning by simply saying what the often-ill-informed populace want to hear.

Full magazine can be read here.

On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Set out below are the key changes implemented as a result of this publication.

What is COP9?

COP9 is a process whereby a person whom HMRC suspects is guilty of tax fraud is given the opportunity to make a disclosure setting out the background/reasons for any non-compliance and make good any potentially unpaid tax. In exchange, subject to the exceptions listed under “Key Change 2” below, HMRC will formally agree not to open a criminal investigation. This agreement is called the Contractual Disclosure Facility or “CDF”.

Key Change 1 – Broadening the Definition of Tax Fraud

Previously, tax fraud was defined as “dishonest behaviour that led to or was intended to lead to a loss of tax”. Under the new COP9 however, this has been extended to “dishonest behaviour that led to or was intended to lead to a risk of loss of tax”. It further confirms that an individual will still fall within this definition even if the fraud is in respect of tax owed by another, even if the individual does not personally make any gain.

Key Change 2 – New Guidance on Circumstances When HMRC Can Escalate to Criminal Investigation

Pursuant to the new COP9, HMRC may still conduct a criminal investigation under the following circumstances:

1. Deemed rejection: if a response to the CDF offer is not received by HMRC within 60 days;
2. Rejection: the taxpayer expressly rejects the offer;
3. No Outline Disclosure (as defined in COP9) is provided with the standard Acceptance Letter;
4. Incomplete Outline Disclosure: if HMRC suspect an individual of further tax fraud not disclosed, they can still conduct a criminal investigation into such fraud. Any fraud disclosed in the Outline Disclosure may still be exempt from any subsequent criminal investigation;
5. False statement or false documents submitted;
6. Incorrect or incomplete Formal Disclosure documents;
7. Withdrawing the admission of deliberate behaviour: HMRC will still consider any explanation offered as to the reason for a renewed position as regards behaviour but such a change in approach will (in the absence of a good reason) be considered a repudiation of the CDF. Any material disclosed prior to the repudiation of the CDF may be used as evidence in any subsequent criminal investigation.

Key Change 3 – Personal Attendance at Meetings

The new COP9 guidance emphasises the importance HMRC now places on the individual attending meetings, stating “we view your attendance and your cooperation at meetings if we ask you to attend them as a strong indication of your engagement with the investigation.” Whilst an advisor may accompany the individual, under the updated COP9 procedure, it is clear that personal attendance by the individual is expected.

Key Change 4 – Payment to HMRC

Included within the new terms of the CDF is an expectation that the individual will make a payment on account of any arrears of tax or duty. This obligation arises at the stage of making the Outline Disclosure but there is also an expectation that the individual will make payments on account throughout the investigation as well as upon completion of the Formal Disclosure.

For further advice on COP9, please contact Helen McGhee hmcghee@jha.com