'Is there a better way to work with HMRC?'

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.  

There are places where it is routine to get sign-off from tax authorities.

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.  

That means clashes can arise, not just with the taxpayer but between tax authorities.  

How then should the taxpayer treat their US entities when completing their UK tax filings?

This last question arose in litigation with HMRC that went on for some years.  

In the Anson v HMRC case, the question of how to apply the UK’s tax rules to a Delaware LLC was considered by four different courts (and 11 different judges) – the First Tier Tax Tribunal, the Upper Tax Tribunal, the Court of Appeal and the Supreme Court.  

The first court agreed with the taxpayer, the second court agreed with HMRC, the Court of Appeal confirmed the decision, before the Supreme Court reversed that decision and finally sided with the taxpayer.  

This back-and-forth shows just how much scope there is for experienced tax practitioners to disagree on quite fundamental principles.

It takes time

The taxpayer who has complex circumstances but wants certainty can therefore face an uphill struggle.  

In the UK, tax returns for an individual are normally due by January 31 after the end of the relevant tax year.  

So, an individual who undertakes a transaction in June 2023 has to declare it in their tax return by January 31 2025.  

HMRC then has a year to raise any questions, which takes our hypothetical taxpayer to January 2026, although HMRC has a further period to raise assessments where they have 'discovered' a tax issue that lasts (typically) for at least four years and so pushes the date to April 2028.  

If HMRC do raise questions in an enquiry, there could be exchanges of correspondence that last for months or even years.  

From a tax practitioner’s perspective, the ability to check points with HMRC in real time would undoubtedly be helpful.

In the hopefully unlikely event of having to take a particular point to court, the process is likely to take years from that point.  

In the Anson case mentioned above, for example, the Supreme Court hearings took place in 2015, but concerned a period between 1997 and 2004.

Checking with HMRC is tricky

At the same time, there is limited scope for checking with HMRC in advance.

There are some specific areas where the tax rules provide for a pre-clearance procedure – for example, in some cases when exchanging shares in one company for shares in another.  

There are other circumstances where HMRC may be willing to discuss issues and provide some comfort, but generally speaking it is rare – and in many cases impossible – for taxpayers to agree a position with HMRC in advance that a taxpayer can confidently rely upon.  

Looking at other countries’ tax authorities, this is not uncommon, but equally there are places where it is routine to get sign-off from tax authorities.

Swiss lawyers, for example, appear to have a very different relationship with their tax authorities.  

For many taxpayers the only thing worse than having your affairs looked at by HMRC is not to have them looked at.

Where a transaction has a Swiss element, it is common for lawyers there to involve the tax authorities as matters progress, making certain that the taxpayer is taking a position that has been pre-approved and therefore has complete certainty.  

Switzerland is not unique in this regard, although there have been criticisms in some other jurisdictions about overly-generous clearances being granted.

The relationship between taxpayer and HMRC and the nature of the business environment in the UK mean that such a process may well be more difficult in the UK, but from a tax practitioner’s perspective, the ability to check points with HMRC in real time would undoubtedly be helpful.  

The irony is that taxpayers who are regarded as high risk, while they will come under greater scrutiny, may actually have greater access to HMRC officers who will be willing to review and offer their view of the taxpayer’s affairs.  

No taxpayer would want the type of publicity to which certain enquiries have been subjected, but for many taxpayers the only thing worse than having your affairs looked at by HMRC is not to have them looked at.

Richard Giangrande is a private client partner at Macfarlanes