ExpatBriefing: Landmark UK Tax Court Win For British Expats

07 November 2017

The UK's High Court of Justice has ruled in favor of the taxpayer in a landmark case concerning limits to HM Revenue and Customs's powers to investigate the affairs of UK expats and non-resident persons who have permanently cut ties with the UK.

In Tony Michael Jimenez v. HMRC ([2017] EWHC 2585), the High Court provided a ruling on how HMRC should conduct itself in matters relating to non-UK individuals, recognizing that once a person leaves the UK, the degree to which HMRC can inquire into their tax affairs is much reduced.

Jimenez, the claimant, was represented by Steve Thomas of Excello Law, Rory Mullan of Counsel, and Gary Brothers of Independent Tax. Commenting on the October 20 ruling, Thomas said the ruling is "a game changer for the powers vested in HMRC" and "will also greatly interest non-domiciled residents who have made their permanent domicile outside the UK." HMRC will no longer be able to examine their UK tax affairs, he said.

Thomas explained that Jimenez, who had left the UK in 2002, had cooperated with HMRC's questioning about his residence status but the agency had tried to force matters by issuing him with a production notice at his Dubai residence. As a non-UK taxpayer, who lives outside the UK and has done so for many years, Jimenez, the former co-owner of Charlton Athletic Football Club, challenged HMRC's right to issue a production notice to his house in Dubai, Thomas explained, and eventually he decided to bring the case for judicial review in London.

According to Thomas, the key dispute was the degree to which HMRC can exercise its powers outside the UK. Jimenez's case centered on powers accorded to HMRC to issue notices under Schedule 36 to the Finance Act 2008 (Schedule 36), which the claimant's legal team argued do not "extend to subvert the sovereignty of foreign states;" as a general rule, countries will not assist other countries to collect tax unless they have a reciprocal arrangement.

It was argued that HMRC has no extra-territorial effect, and that HMRC therefore has no power to issue a notice against the taxpayer when they are resident in Dubai. However, HMRC asserted that Jimenez is a taxpayer for the purposes of Schedule 36 and, therefore, the agency does have the power to issue a notice to taxpayers like Jimenez who live outside the UK.

Explaining the ruling in favor of Jimenez, Thomas said Justice Charles agreed that HMRC's approach was both unlawful and unreasonable. "[Justice Charles] held that 'Schedule 36 does not provide a power to give the taxpayer notice that was given to the Claimant in Dubai and so the Revenue should not have given it.' He added that 'the taxpayer notice sent to him was not lawfully given and should be quashed.' Thus, HMRC did not have power to insist that UK citizens based in another sovereign country comply with their orders. The judge ruled that the correct approach in that situation is to make a request of the appropriate tax authority abroad under a reciprocal arrangement. He ordered HMRC to pay Mr Jimenez's costs."

Thomas added: "This important judgment has provided a clear safeguard to former UK-resident taxpayers who have moved permanently from the UK once they leave – then HMRC's capacity to enquire into their tax affairs is much reduced. In the case of Mr Jimenez, it was many years before HMRC asked to review matters."

Jimenez said following the ruling: "For a long time HMRC have held the view that distance was no object to their powers meaning any expats outside of the UK were in their sights long after they had left the UK. Young or old, rich or poor, retired or not or simply wanting to move to warmer climates and having made the decision to no longer be a resident of the UK, made no difference the attitude that HMRC adopted towards these expats. This ruling shows that this is fundamentally not the case and that HMRC's powers actually stop at the UK border."