When an enquiry by HM Revenue & Customs makes it into the news, there is often a personal dimension that makes the enquiry newsworthy.
This can obscure the reality that for many people and businesses an enquiry by HMRC is a routine step, and an inevitable part of a tax system that relies on self-assessment.
It is important to remember that an HMRC enquiry does not necessarily mean that HMRC disagrees. In many cases, having received further information, HMRC will be satisfied with the position taken by the taxpayer.
It's subjective
Fundamentally, enquiries are both necessary and difficult to predict because the UK’s tax rules – and in some cases the international tax treaties by which the UK is bound – are often applied by reference to highly subjective matters and can be difficult to apply to specific circumstances.
Take, for example, an individual from the US who starts working in London and buys a house there, but continues spending significant amounts of time in the US.
Where is that person resident for the purposes of the tax treaty between the US and the UK?
That can depend on where their 'centre of vital interests' lies and answering that question turns on whether their 'personal and economic relations' are closer to the US or the UK.
These questions, which essentially encapsulate the nature and identity of an individual’s life, cannot be answered without considerable reflection.
At a time when individuals are increasingly mobile, the answer to these questions will often be a matter of fine judgments.
Even when a taxpayer has reached their own conclusion, it is entirely possible that one or both of the tax authorities involved will disagree with the answer the taxpayer comes to, or even with each other.
At least residence is a term that is recognised across the world and is largely determined by reference to objective factors.
If a taxpayer gets onto the question of where they are domiciled, this is a term that does not exist in many jurisdictions and, in our example above, it has different meanings in the US and the UK.
In the UK, the test depends on where the taxpayer intends to remain 'permanently or indefinitely'.
The UK’s tax rules abound with tests that depend on the taxpayer’s purpose, motive or intentions. While intentions may be judged by reference to objective matters, they are inherently subjective.
Now assume that the taxpayer has business interests and investments in the US. As is common for wealthy individuals with US connections, they use a US limited liability company to hold their assets.
LLCs are normally transparent for US tax purposes, but HMRC will often take a different approach when it comes to applying the UK’s tax rules, enquiring into the nature of the company in order to decide whether it is genuinely transparent.
