HMRC Lose Tax Tribunal Appeal in Strachan v HMRC

In Strachan v HMRC [2023] UKFTT 617 (TC), Mr. Strachan submitted tax returns for the five-year period up to 2015/16 based on a chosen domicile in Massachusetts, USA. HMRC contested this and issued discovery assessments and closure notices. With a tax liability of just over £420,000 at stake, the FTT was tasked with resolving the questions of domicile and extended time limits for carelessness. If the tax loss wasn’t attributable to carelessness, two years would no longer be subject to assessment. The taxpayer appealed to the First-tier Tax Tribunal which granted the taxpayer’s appeal. The First-tier Tribunal (FTT) determined that although the taxpayer was unable to establish a domicile of choice in Massachusetts, considering all pertinent factors, HMRC did not succeed in proving a tax loss due to carelessness. While he couldn’t substantiate his chosen domicile, HMRC was unable to demonstrate any tax loss resulting from his alleged carelessness.

The case, heard before the First-tier Tribunal (FTT) in the United Kingdom, dealt with issues of domicile, carelessness, and the burden of proof in tax assessment appeals. Ian Charles Strachan, the taxpayer in question, challenged assessments by His Majesty’s Revenue and Customs (HMRC) for the tax years 2011/12 to 2015/16, claiming that he was domiciled in Massachusetts while HMRC asserted he was domiciled in England. This article provides a comprehensive analysis of the case and its implications.

Our London Tax Solicitors and Barristers have vast experience of tax laws and first hand commercial, litigation and advocacy experience. We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.

Domicile Determination

One of the central elements of the Strachan case was the determination of Mr. Strachan’s domicile. The legal concept of domicile is critical in tax matters, as it often determines an individual’s tax liability in a given jurisdiction. The case tackled three aspects of domicile:

• Domicile of Origin: The FTT found that Mr. Strachan had an English domicile of origin, grounded in his place of birth. This forms a pivotal foundation for understanding his domicile status.

• Domicile of Choice in Connecticut: The FTT held that Mr. Strachan had not acquired a domicile of choice in Connecticut during the relevant period. A domicile of choice is attained by living in a particular place with the intention to make it one’s permanent home. Mr. Strachan’s inability to establish domicile of choice in Connecticut was a significant factor in the case.

• Domicile of Choice in Massachusetts: The central question revolved around whether Mr. Strachan had successfully established a domicile of choice in Massachusetts from 2006 onwards. This determination hinged on the interpretation of the term “chief residence.” The FTT clarified that “chief residence” necessitates consideration of all relevant factors, beyond merely owning a home and having the intention to reside there indefinitely. This interpretation underscores the complexity of establishing domicile in legal contexts.

Carelessness and the Burden of Proof

Another critical aspect of the Strachan case was the question of carelessness in Mr. Strachan’s self-assessment tax returns for the tax years 2011/12 and 2012/13. It was found that he had been careless in these returns due to significant changes in his domicile status since 1987. Mr. Strachan had not sought professional advice during this time, and this lack of professional guidance contributed to his carelessness.

However, a key legal issue was the burden of proof. The FTT ruled that HMRC bore the burden of proving that Mr. Strachan’s carelessness resulted in the loss of tax. This means that HMRC had to demonstrate that had Mr. Strachan sought professional advice before filing his earlier tax returns, that advice would have supported HMRC’s position on his domicile. HMRC was unable to meet this burden in the case.

Implications of Tribunal’s Judgment

The Strachan v HMRC case has significant implications for both taxpayers and tax authorities, as well as the broader field of tax law:

1. Clarity on Domicile: The case provides a detailed discussion of the legal principles surrounding the concept of “domicile of choice.” This clarification is invaluable to individuals and professionals dealing with the complexities of domicile issues in tax matters. It underscores the need to consider all relevant factors when determining domicile and offers insights into how the legal system interprets the “chief residence” concept.

• Burden of Proof: The determination regarding the burden of proof in tax assessment appeals carries important implications. The FTT decision that the burden of proof does not shift to the taxpayer once carelessness is proven may be a disappointment for HMRC. This decision challenges the conventional approach to tax disputes and could potentially lead to further litigation.

• Legal Precedent: Strachan v HMRC serves as a legal precedent for future cases involving domicile issues, carelessness, and the burden of proof in tax assessment appeals. It offers guidance to both taxpayers and tax authorities on how these issues should be approached in a legal context.

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What is the HMRC Tax Appeal Process?

There is a 2-stage process for a taxpayer to dispute a HMRC decision:

Stage 1: Give notice of appeal to HMRC.

A taxpayer can appeal in writing within 30 days of HMRC’s notice of their decision. HMRC will confirm their first decision, amend their decision or agree with the taxpayer’s assessment. HMRC will conduct an internal review of the disputed decision. The review is an entirely internal procedure completed not by the original HMRC decision maker but by a different HMRC officer.

Stage 2: Appeal to the Tax Tribunal.

If the taxpayer’s position cannot be agreed with HMRC in stage 1 then a taxpayer can appeal to the First Tier Tax Tribunal if the taxpayer cannot agree their position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if a taxpayer does not agree with the decision.

Some decisions (e.g. VAT assessments or security notices) can be appealed directly to the First-tier tax Tribunal however HMRC prefers an internal review first. The purpose of the internal review is for HMRC to quash any unreasonable decisions as early as possible however on the vast majority of occasions the decision is upheld.

What is the Importance of Strachan v HMRC?

Strachan v HMRC [2023] UKFTT 617 (TC) sheds significant light on the intricate nuances surrounding the concept of ‘domicile of choice’ in UK tax law. The First-tier Tribunal’s decision to allow the taxpayer’s appeal hinged on HMRC’s failure to demonstrate that the loss of tax was directly attributable to Mr. Strachan’s carelessness. Despite finding him careless in completing his tax returns due to substantial changes in his circumstances, the burden of proof remained squarely on HMRC to establish this causal link. This ruling sets a notable precedent, affirming that once carelessness is proven, the responsibility to demonstrate its direct impact on tax loss lies with the tax authority. This verdict may potentially prompt further legal discourse on this matter in the future.

If you currently reside abroad and are facing requests from HMRC for specific tax returns and payments, LEXLAW is here to offer our expertise in challenging HMRC’s determination of your eligibility for relevant tax reductions. Our experienced team can provide assistance in managing your financial matters while you are living abroad, ensuring that your financial interests are safeguarded.

Expert London Tax Lawyers

If you need HMRC Tax Disputes advice, we are available to aid you at every stage of the HMRC appeals process. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy.

We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].