October 6, 2023

In the dynamic landscape of UK tax law, domicile remains a crucial factor, and recent cases shed light on the courts’ approach to determining domicile status. This update highlights key insights from a notable case, Strachan v HMRC (July 2023).

Strachan v HMRC: Challenging Domicile of Choice

Mr. Strachan’s case revolved around his claim to have abandoned his domicile of origin in England, establishing a domicile of choice in Massachusetts for tax purposes. He filed self-assessment tax returns (SATRs) for five tax years based on this claim, triggering HMRC enquiries. The central question was the time limit for investigation.

Key Points:

1. Domicile of Choice Criteria: The court emphasized that a domicile of choice is established when an individual voluntarily fixes their ‘sole or chief residence’ in a jurisdiction with the intention of residing there indefinitely.
2. Evidence Requirements: Acquiring a domicile of choice demands ‘clear, cogent, and compelling evidence.’ In Mr. Strachan’s case, having a home in Massachusetts was insufficient; the totality of relevant factors needed evaluation.
3. Careful Consideration: Determining chief or principal residence requires a meticulous examination of all facts and circumstances.

Factors Against Mr. Strachan:

1. Time Spent in London: Mr. Strachan spent the majority of each year in London, not Massachusetts.
2. Work Importance: His paid work, even post-retirement, tied him to London due to its vital importance.
3. Official Documents: Official documents listed his London address, including his US tax return, wills, and power of attorney.
4. Charitable Donations: Significant donations to UK charities and active engagement in London’s social, cultural, and sporting life.

FTT’s Verdict:

The First-tier Tax Tribunal (FTT) ruled that Mr. Strachan retained his domicile in England, emphasizing his intent to move to Massachusetts only if unable to continue his London life. The FTT stressed the need for up-to-date advice in the face of significant life changes.

Deemed Domicile and Lessons Learned:

Mr. Strachan’s assumed domicile of choice led to deemed domicile, highlighting the importance of regular advice updates. While the FTT found him careless, HMRC failed to prove that tax loss would be avoided with timely advice, limiting the investigation window.

Takeaway: This case underscores the critical role professional advice plays in navigating changes impacting domicile status. Taxpayers are reminded to seek guidance, especially during significant life changes, to ensure accurate tax assessments.

HMRC is inviting taxpayers to make a voluntary disclosure of Income Tax or Capital Gains from crypto assets.

Crypto assets include exchange tokens, e.g. bitcoin, NFTs (non-fungible tokens) and utility tokens.

There are currently two voluntary disclosure options being publicised. The first option is known as the digital disclosure for those who are not up to date with their tax affairs, or the second option is the contractual disclosure facility for those who want to admit tax fraud and want to avoid criminal sanctions.

Most individual investors will be subject to Capital Gains Tax (CGT) on gains and losses on crypto assets. For CGT purposes, a capital loss may be claimed if a crypto asset becomes of negligible value.

Digital disclosure

HMRC gives taxpayers three options to disclose to get their tax position up to date:

• Despite taking reasonable care to make sure you paid the right amount of tax.
• Through carelessness
• Through deliberate actions

Contractual disclosure facility

The contractual disclosure facility: if you want to make a disclosure because your deliberate behaviour has caused a loss to HMRC of any of the taxes, duties, levies, or payments it administers.

Please contact our team for further information.

In light of the recent government autumn statement, we would like to bring to your attention the key updates that may impact your financial planning. The government has responded to the prevailing economic challenges, and the Chancellor has outlined three primary priorities: stability, growth, and public services. To support these priorities, a series of fiscal measures have been proposed. Here is a summary of the key points:

• Income tax rates will remain the same for 2024/25 and income tax personal allowance and basic rate limit will remain fixed at £12,570 and £37,700, respectively until 2028.

• The Chancellor has confirmed that the capital gains tax (CGT) annual exempt amount will be reduced from £6,000 to £3,000 from 6 April 2024 for individuals.

• Dividend tax rates will remain the same however the government will reduce the Dividend Allowance from £1,000 – £500 from 6 April 2024.

• Major changes to National Insurance Contributions (NICs) as the government will cut the rate of Class 1 NICs from 12% to 10% from 6 January 2024.

• Class 2 self-employed NICs will be abolished from 6 April 2024. Self-employed individuals will retain access to the contributory benefits, contingent upon their profit levels.

For a detailed overview of these changes, please refer to our summary HERE. If you have any questions or require further clarification, feel free to contact us.

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

Crypto compliance could be a part of the agency’s push to utilizing artificial intelligence as part of the compliance process, noting that with everything else on the agency’s plate, the IRS “literally doesn’t have the manpower.” This could make AI a tool for crypto compliance.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule regarding beneficial ownership reporting under the Corporate Transparency Act (CTA). Starting January 1, 2024, domestic (U.S.) and foreign (non-US) companies are subject to novel reporting requirements concerning beneficial owners. The rule intends to protect U.S. national security while strengthening the integrity and transparency of the U.S. financial system. It will aid in detecting criminal actors such as oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

The final rule has an extended timeline for implementation. The rule goes into effect on January 1, 2024. Reporting companies established or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. However, any reporting companies established or registered after January 1, 2024, will have 30 days to file their initial reports. Following the initial report’s filing, current and new reporting companies must provide updates within 30 days of any change in beneficial ownership information. FinCEN is dedicated to enforcing these statutory duties and imposes significant penalties for non-compliant reporting companies.

The final rule defines” reporting companies “as domestic and foreign corporations registered to do business in any state or tribal jurisdiction in the United States.

Cryptocurrency brokers, including exchanges and payment processors, would have to report new information on users’ sales and exchanges of digital assets to the Internal Revenue Service (IRS) under a proposed U.S. Treasury Department rule published recently. The rule is part of a broader push by Congress and regulatory authorities to crack down on crypto users who may be failing to pay their taxes.

A proposed new tax reporting form called Form 1099-DA is meant to help taxpayers determine if they owe taxes and would help crypto users avoid having to make complicated calculations to determine their gains, the Treasury Department said.

Under the proposal, the definition of a “broker” would include both centralised and decentralised digital asset trading platforms, crypto payment processors and certain online wallets where users store digital assets. The rule would cover cryptocurrencies, like bitcoin and ether, as well as non-fungible tokens. Brokers would need to send the forms to both the IRS and digital asset holders to assist with their tax preparation.

The Treasury proposed that the rules would be effective for brokers in 2025 for the 2026 tax filing season.

The IRS currently requires crypto users to report on their tax returns many digital asset activities, including trading cryptocurrencies, regardless of whether the transactions resulted in a gain. Users are required to make that calculation themselves, and the platforms on which digital assets trade do not give the IRS that information.

Portugal plans to scrap tax breaks for foreigners who become Portuguese resident by spending more than 183 days a year in the country. Launched in 2009, the schemes benefits include a special 20% tax rate on Portuguese- sourced income derived from high value added activities, such as doctors and university teachers. Other benefits of the scheme are the Non- Habitual Resident regime which include tax exemptions on almost all foreign income if taxed in the country of origin and a 10% flat tax rate on foreign pensions. These benefits were also available to Portuguese citizens who have lived abroad for at least 5 years.

It was originally introduced to attract investors and professionals to Portugal which had suffered greatly from the financial crisis. However now the prime minister, Antonio Costa, has promised to close the scheme for new applicants in 2024, saying the scheme had “inflated the housing market” and calling it a “fiscal injustice that is no longer justified”.

The scheme will remain in place for those who have already qualified for it. The announcement follows on from the decision made earlier this year to abolish the ‘golden visa’ programme. The next budget announcement should give more details about this and what this will mean for individuals who want to live in Portugal.

On 22 November 2017, HM Treasury gave notice that the scheme would close. This means the Certificate of Tax Deposit scheme closed for new purchases on 23 November 2017.

HMRC will continue to honour existing certificates until 23 November 2023.

The value on HMRC’s books is £89m and Certificates need to be used by 23 November 2023. The deadline for using a certificate of tax deposit (CTD) to settle a tax bill is 23 November 2023.

After that date, the normal process for making a withdrawal will apply. However, HMRC is encouraging certificate holders to withdraw their deposits well before the scheme closes on 23 November 2023 if they are not planning to use their deposit to settle a tax liability. The current value of outstanding CTDs not yet resolved, or in the process of being resolved, is £89m.

HMRC has written to each holder of a CTD. The outstanding balance suggests that many holders still need to take action.

The Finance Act 2022 included legislation to reform the way trading profits are allocated and taxed. The purpose of the legislation is so that profits are time apportioned to the tax year instead of the accounting date. This reform affects individuals who are self-employed, including partners in trading partnerships, if their accounting periods are not aligned to the tax year (dates from 31 March to 5 April inclusive are treated as aligned to the tax year for this purpose). The changes will take effect from the 2024/25 tax year, with transitional rules applying in 2023/24.

Special rules apply for the first year of a trade – where the individual will be allocated profits from when the trade commenced up to the end of the tax year.

Individuals and partnerships may consider if changing their accounting period to align with the tax year is beneficial. This may help to save on additional accounting and associated costs.

Where additional liabilities are generated in the transitional year, there is potential relief by spreading the additional profit over a 5 year period.

The Upper Tribunal has overturned a First-tier Tribunal decision that allowed a taxpayer to utilize the “exceptional circumstances” provision regarding the UK’s Statutory Residence Test. Last year, a case (A Taxpayer v HMRC) saw the taxpayer argue that certain days spent in the UK during a tax year should be disregarded due to exceptional circumstances. However, the Upper Tribunal ruled that the circumstances were not truly “exceptional,” making the taxpayer a UK tax resident for that year.

The “exceptional circumstances” provision allows ignoring up to 60 days for SRT purposes under specific conditions. The recent judgment clarified that this provision must be objectively verified, emphasizing that circumstances must truly prevent the taxpayer from leaving the UK, not merely hinder them. Additionally, moral or conscientious inhibitions don’t qualify as exceptional circumstances.

The ruling raises questions about when moral obligations may constitute exceptional circumstances, creating a challenge for taxpayers dealing with circumstances affecting family members. The Tribunal’s decision suggests a stringent interpretation of exceptional circumstances, requiring clear evidence for each day a taxpayer seeks to discount. Practitioners should warn clients that HMRC may challenge claims based on moral obligations, emphasizing the importance of comprehensive record-keeping for substantiating exceptional circumstances claims. Despite the judgment’s implications, further discussions and debates are expected to reconcile tensions between the Tribunal’s remarks and existing legislation or HMRC guidance. Taxpayers and advisors should be prepared for thorough scrutiny of exceptional circumstances claims by HMRC.