NEWS
Feb-23-2010 Status of residency after the Court of Appeals judgment in Gaines-Cooper v HMRC
The English Court of Appeal ruled on February 16, 2010, that the HMRC has not breached entrepreneur Robert Gaines-Cooper’s legitimate expectations in its determination that he was a UK tax resident, and therefore liable to pay UK tax, despite his spending less than an average of 91 days a year in the country.
The case
The saga of British-born Gaines-Cooper, who has set up companies in Canada, the US, Italy, Singapore, Jersey, Cyprus and the Seychelles, has been well documented in the press.
Mr Gaines-Cooper claimed that HMRC’s determination that he was a UK resident and ordinary resident breached his “legitimate expectation” that IR20 (the precursor to the current HMRC guidance on Residence, Domicile and the Remittance Basis (“HMRC 6”)) would be applied and that, on its proper construction, IR20 gave a binding assurance that he would not be treated as resident in the UK and therefore liable to UK income tax and capital gains tax.
Specifically, Mr Gaines-Cooper contended that as he was spending less than 91 days a year in the UK, he could not be treated as UK-resident.
The decision
The Court of Appeal decided that it would be against principles of public law if the HMRC were able to disregard at will a statement formally published by it. Thus, taxpayers could legitimately expect IR20 to be regarded as binding, subject to its terms, in relation to any case falling clearly within the terms of that statement.
Hence, since IR20 does set out a limited number of specific situations in which a taxpayer would be treated as non-UK-resident, HMRC is bound to accept that an individual is non-resident if he falls within those specific situations in IR20. However, while the HMRC is bound to follow its own published guidance in IR20, the application and interpretation of previously published guidance lends itself to value judgments and determination of factual questions, and thus a number of different conclusions may be possible. Hence, provided that the conclusion as to residency reached by the HMRC is within the ambit of reasonableness, it is open to the HMRC to determine whether the taxpayer falls within the terms of its guidance as to residency.
In this case, Mr Gaines-Cooper failed to satisfy the criteria as to non-residence, because England had remained “the centre of gravity of his life and interests”.
AFP observations
(1) While the case is important, as it was a Court of Appeal judgment, the question before the court was strictly in relation to whether or not the appellants would be granted leave for judicial review for the breach of their “legitimate expectations”. The Court of Appeal did not have jurisdiction to overrule the fact-finding determination of the Special Commissioner as to whether or not Mr Gaines-Cooper had satisfied the criteria for non-residence. The question before the Court of Appeal was whether the Inland Revenue had acted contradictorily to their own guidance in IR20 (the predecessor to the current HMRC 6), and therefore breached taxpayers’ legitimate expectations that IR20 would be applied for the appellants’ cases. In dismissing this appeal, the Court of Appeal did consider what “residence” entails, and there is some guidance as to the application of the non-resident rules, but any opinion of the Court of Appeal on the interpretation of IR20 (in relation to the definition of “residence”) was obiter dicta and should be read accordingly.
(2) Secondly, the judgment relates to the interpretation of becoming non-resident under IR20, not the current HMRC 6. IR20 was withdrawn following the decision in the earlier Gaines-Cooper case and has since been replaced with HMRC 6, which sets out HMRC’s current guidance for taxpayers seeking to establish residence in or out of the UK. HMRC 6 makes it clear that it is only HRMC’s interpretation of the law and does not have any legal effect. Further, the application of HMRC 6 to a particular case will depend on the facts of the case.
(3) What the Court of Appeal affirmed is that there are two separate routes to becoming non-resident - through either overseas employment or leaving the country permanently or indefinitely. Once an individual has left the UK to take up overseas employment, he or she is deemed to be non-resident from the time he or she leaves the UK. Under the foreign employment route to non-residence, there is no requirement to sever family and social ties with the UK and no need to dispose of all available accommodation in the UK. However, for an individual seeking to become non-resident through “leaving the UK permanently or indefinitely”, the requirement to sever family and social ties becomes crucially necessary. The press has made much of the fact that Mr Gaines-Cooper lost his appeal because he didn’t sever his family and social ties in the UK and didn’t sell his house. This would NOT have been a requirement had Mr Gaines-Cooper taken up full-time employment abroad.
(4) There is a common misconception that if an individual spends less than 91 days (or nights) in the UK, he/she will not to be treated as a UK resident. This is definitely not the case. As the Court of Appeal explains, the satisfaction of the 91-days test does not mean an individual is non-resident in the UK. If the 91-days test is not satisfied, then non-resident status will be lost automatically, even if a taxpayer satisfies the other criteria as to non-residence (i.e. having full-time employment or leaving the UK permanently or indefinitely). However, the opposite does not follow, and satisfaction of the 91-days rule does not mean that an individual is non-resident. To establish non-residence, a taxpayer either must have full-time employment abroad or must have left the UK permanently or indefinitely, having severed all family and social ties in the latter situation.
The future
HMRC is tightening the regulations on tax exiles, and the Court of Appeal ruling in Gaines-Cooper follows a move last year to replace the IR20 guidance on residency with a new booklet called HMRC 6.
It is unfortunate that earlier in February 2010, the HMRC confirmed that despite extensive consultation, there would be no introduction of a statutory residence test in the Finance Bill this year, which would have gone some way towards clarifying the uncertainty.