Perhaps the most significant development came with the Spring Budget, which announced the abolishment of the non-domiciled (non-dom) regime. This had been promised by Labour but there was some surprise at the current Government pre-empting the issue. This regime (a fixture for more than 200 years) allowed UK residents with a foreign domicile to limit the UK tax paid on income and gains made outside the UK. The decision to phase out this status from April 2025 and replace it with a new residency-based regime is prompting many to re-evaluate their personal circumstances.

Read our commentary on the abolishment of the non-dom regime from our private client team.

What is unlikely to change, however, is HMRC’s position with regard to historical domicile positions. HMRC have a long backlog of cases and they have been taking an increasingly robust view with regard to long-term residents, evidenced in cases like Shah v HMRC (on which we commented last year). We have seen no sign of HMRC softening their approach since the announcement of the non-dom rules.

Labour’s Stance on the Tax Gap and what it means for tax investigations in the future

The Chancellor’s announcement in the Spring Budget regarding the non-dom rules has also prompted Labour to act and it has shed some light on how tax investigations may be pursued under a Labour Government. In addition to publishing plans to tighten the regime replacing the non-dom rules even further, Labour proposed that it would raise an additional £5.1bn per year by reducing the “tax gap” – the difference between the amount of tax that HMRC considers is owed and the amount of tax that is actually collected (estimated to be £35.8bn in 2021-22). If successful in the election, Labour’s plan to collect the tax includes providing additional funding to HMRC and encouraging greater focus on the use of HMRC’s criminal powers. Gideon Sanitt, Mark Hunter, and Victoria Braid look at Labour’s plan and what it may mean for future investigations.

As part of their proposal, Labour are considering the use of deferred prosecution agreements (DPAs) to address cases of tax evasion committed by individuals.

In essence, under a DPA an offender may agree to certain conditions (usually including the payment of compensation and a financial penalty) in order to defer prosecution for the offence indefinitely (so long as they do not breach any of the conditions of the DPA). 

The proposal to extend the application of the DPA regime to individuals is a notable one – DPAs currently may only be agreed with companies in the UK. Lorna Emson, Francis Bond, Victoria Braid and Nathan Burgard consider what the use of DPAs might add to HMRC’s already extensive powers.

Developments in the case law

With a focus on what it means for individuals to be “present” in a tax jurisdiction, the Upper Tribunal recently confirmed in Haworth v HMRC [2024] UKUT (TCC) that the tie-breaker test to determine tax residence for the purposes of a double tax treaty (the “place of effective management” test) is not the same as the “central management and control” test applied to determine the residence of a company. In fact, the test is potentially much wider. Jackelyn West considers the Upper Tribunal’s decision and what it means for offshore trustees.

HMRC’s investigation and assessment powers

The changes referred to above may have grabbed the headlines, but we have seen a number of decisions that have put the spotlight on how HMRC collect tax and a tension between the powers of HMRC and the protections afforded to taxpayers.

Most taxpayers will be aware that HMRC have extensive powers to request information, issue discovery assessments and raise penalties based on a taxpayer’s behaviour. However, it is often overlooked by taxpayers that the burden of proof to demonstrate that HMRC have met the necessary conditions in taking these actions rests firmly with HMRC. Taxpayers may be interested to note a number of recent cases, in which the First-tier Tribunal has taken a harder line against HMRC failing to consider, or seeking to shift, this burden. In an article for Tax Journal, Sophie Rhind considers the recent case law, including the decisions in Parker Hannifin (GB) Ltd v HMRC [2023] UKFTT 971 (TC), Boston Consulting Group UK LLP and others v HMRC [2024] UKFTT 84 (TC) and Thompson v HMRC [2024] UKFTT 138 (TC) and discusses the important takeaway points for taxpayers.

In a similar vein, the Upper Tribunal has also recently weighed in on HMRC’s approach to seeking information during the course of an enquiry from a taxpayer in the case of HMRC v Hitchins [2024] UKUT 00114 (TCC), where it was confirmed that the FTT were correct to decide that HMRC’s prolonged questioning amounted to a “fishing expedition” and that closure notices for the enquiry should be issued. Gideon Sanitt, Sophie Rhind and Victoria Braid take a look at the UT’s decision.

With the context above in mind, it is worth noting that HMRC have issued a call to evidence inviting views on how aspects of tax administration could be reformed (The Tax Administration Framework Review). The proposed reforms are focused on HMRC’s enquiry and assessment powers, penalties and safeguards. These are rules that could do with simplifying across various tax regimes but, equally, in HMRC’s eyes, that may mean removing some of the conditions that have caused HMRC procedural issues in the past.

And finally…

No review would be complete without a reference to AI and a First-tier Tribunal case from late last year which generated a lot of commentary for being one of the first UK cases to address the misuse of artificial intelligence in litigation.

The decision in Harber v HMRC [2023] UKFTT 1007 (TC) is a timely reminder that generative AI must be seen as both an opportunity and a potential danger in litigation, and the role of humans to review its outputs is critical. Jackelyn West, Oliver Jeffcott and Blaise Kingan comment on the decision and consider the (possibly inevitable) use of AI in litigation more generally.

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