The case in question involves Mr. Afzal Alimahomed, who appealed against a discovery assessment and a closure notice issued by HMRC. The primary issue revolved around the remittance basis of taxation under section 809L of the Income Tax Act 2007 (ITA 2007). The Appellant, a non-domiciled but UK-resident individual during the relevant years, was accused by HMRC of making taxable remittances to the UK, which he disputed.

Mr Alimahomed joined his father’s packaging business in 1986. The business was sold in 2006, with the proceeds deposited into a bank account in Guernsey. He and his family moved to Dubai in 2007. By remaining a non-UK tax resident for more than five years, the proceeds from the business sale were considered “clean capital” for remittance purposes. However, inadvertently, some overseas income was credited to this account, creating a mixed fund under section 809Q(6) ITA 2007.

The Appellant then transferred money from the Guernsey account to a personal Barclays Bank account in the Isle of Man, which also became a mixed fund. He made further transfers to his personal bank account in Dubai to cover living expenses and other payments. During these transactions, he operated a credit card based in Dubai, which was paid from his Dubai account.

In 2014, the Appellant began spending significant periods in the UK to assist in recovering the family business, which had gone into administration under new ownership in 2009. Due to these extended stays, he became a UK resident for tax purposes during the relevant period covered by the discovery assessment and closure notice.

Points Discussed

1. Discovery Assessment and Closure Notice: The discovery assessment for the tax year ending 5 April 2016 and the closure notice for the tax year ending 5 April 2017 were issued because HMRC considered that the Appellant made taxable remittances to the UK. The amounts in question were £89,546.24 and £133,681.90, respectively.
2. Remittance Basis of Taxation: The central issue was whether the Appellant had received or used property in the UK derived from foreign income. HMRC’s case rested on whether international bank transfers and the use of an offshore credit card for UK purchases constituted taxable remittances under section 809L ITA 2007.
3. Legal Arguments: The Appellant argued that for there to be a remittance, he must receive or obtain property in the UK. He contended that electronic bank transfers do not constitute remittances as no physical money is brought into the UK, referencing the legal precedents in Foskett v. McKeown and R v. Preddy & Ors.

Issues

1. Definition of Remittance: The primary legal issue was whether the Appellant’s actions constituted remittances under section 809L ITA 2007. This involved interpreting the terms “brought to” and “used” in the context of the legislation and whether electronic transfers could be considered as bringing money to the UK.
2. Mixed Funds: Another issue was the treatment of mixed funds, where both clean capital and foreign income were present in the same account. This required the application of the ordering rules in section 809Q(6) ITA 2007 to determine the taxable amounts.
3. Deliberate or Careless Behaviour: HMRC needed to prove that any under-assessment of tax was due to deliberate or careless behaviour by the Appellant or a person acting on his behalf to justify the discovery assessment under section 29(4) of the Taxes Management Act 1970 (TMA).

Findings in the Tribunal

1. Deliberate Behaviour Not Established: The tribunal found that HMRC did not substantiate the claim of deliberate behaviour by the Appellant. The evidence presented did not demonstrate an intention to mislead, and the cross-examination did not support the allegations of deliberate tax evasion.
2. Interpretation of Remittance: The tribunal agreed with the Appellant’s argument that electronic transfers do not involve the physical movement of money to the UK. However, it held that the remittance basis could apply to such transfers under certain conditions, rejecting the argument that no remittance occurs if the transfer is to the UK bank account of a non-relevant person.
3. Application of Mixed Funds Rules: The tribunal recognized the complexity of the mixed funds in the Appellant’s accounts and the need to apply the ordering rules to determine the extent of taxable remittances. The tribunal found that HMRC did not sufficiently disaggregate the transactions to support their case.

Outcome

The tribunal allowed the appeal in part. It set aside the discovery assessment for the tax year ending 5 April 2016 in full, concluding that HMRC failed to demonstrate that the under-assessment was due to deliberate behaviour. The tribunal also addressed the closure notice for the tax year ending 5 April 2017, considering the specific transactions and the application of the remittance basis rules.

The decision emphasized the importance of clear evidence and precise legal arguments in tax assessments. It also highlighted the need for HMRC to properly substantiate claims of deliberate or careless conduct before issuing discovery assessments.

This case underscores the complexities involved in the application of the remittance basis of taxation and the interpretation of mixed funds. It also illustrates the rigorous standards that HMRC must meet to justify discovery assessments, particularly when alleging deliberate or careless behaviour. The tribunal’s decision reflects a balanced approach, considering both the technical legal arguments and the practical realities of international banking transactions.

The case sets a precedent for future disputes involving the remittance basis of taxation, providing clarity on the interpretation of key statutory provisions and the evidential standards required for tax assessments.