Court Backs HMRC In Key UK Residency Case

By Editorial 20 October, 2011

International businessman Robert Gaines-Cooper has lost his long-running dispute with the UK tax authority, HM Revenue and Customs, with the UK's highest court ruling in favour of the taxman in a contentious dispute over the interpretation and application of residency guidance.

The ruling comes at the conclusion of the Gaines-Cooper v The Commissioners for Her Majesty’s Revenue and Customs case, with the judgment handed down by the Supreme Court on October 19. The controversy surrounds the understanding of the phrases "residence" and "ordinary residence" for the purposes of an individual’s liability for UK income and capital gains tax.

The case hinged on the interpretation of guidance booklet IR20, which Gaines-Cooper argued contained a more "benevolent" interpretation of the circumstances in which an individual becomes non-resident and not ordinarily resident in the UK than did the ordinary law. In addition, they claimed that, prior to 2005, it was the settled practice of HMRC to adopt such a benevolent interpretation of IR20.

Explaining the reasoning behind its 4-1 majority decision the court said that while guidance on how to achieve non-residence "should have been much clearer", the guidance, when taken as a whole, informed taxpayers that one would need to leave the UK permanently, indefinitely or for full-time employment, and do more than to take up residence abroad and relinquish ‘usual residence’ in the UK. Information was also provided that subsequent returns to the UK had to be no more than ‘visits’ and that any ‘property’ retained in the UK by the taxpayer for their use could not be used as a place of residence.

The judgment follows a Court of Appeal judicial review hearing in February 2010 which also found in favor of HMRC, after it was found that Gaines-Cooper did not fully meet non-domiciled status requirements.

Gaines-Cooper migrated to the Seychelles in 1976, and spent less than 91 days each year in the UK in accordance with non-domicile residency rules. He owns a house in England, which is occupied by his second wife and son. He keeps classic cars and a collection of paintings at the property, and sent his son to a British public school. He also had his will drawn up under English law.

It was Gaines-Cooper's links with England that led the Court of Appeal to find that the UK remained Gaines-Cooper’s “center of gravity of his life and interests” – a decision which has prompted tax experts to accuse HMRC and the courts of “moving the goalposts.”

The government is set to introduce a Statutory Residence Test in April next year to clarify the rules surrounding residence and domicile in the UK.

Commenting on the ruling, Alex Henderson, partner at PwC, said: "Today's judgment was ultimately about whether HMRC guidance can be relied upon by tax payers. Gaines-Cooper had followed what he thought were the rules on residency but HMRC had claimed its guidance was not binding. Yet it's always been the case that the underlying law needs to be considered and the revenue's guidance is exactly that: guidance. Clarification on this issue is welcome, even if it's come at the eleventh hour since we expect to have a statutory residency test next year."

"Under the new rules we hope there will be some transitional measures to give certainty to the internationally mobile, multinational businesses and their employees. This certainty should help encourage enterprise into the UK at a time when growth is sorely needed. Ultimately residency is a question of fact and it's obviously enormously helpful for people to know clearly where they stand."

"The case highlights that the century old tax code on residency has not kept pace with modern life. It rests on case law based on Edwardian lifestyles rather than internationally mobile individuals and businesses. Part of the problem is that it's an 'all or nothing' rule: once you're resident all your worldwide income can be taxed. There's room for debate on how to achieve the balancing act of enhancing tax contributions without scaring people off. The UK needs these wealth creators."

Dhana Sabanathan from law firm Harbottle & Lewis said that while the judgment was not unexpected, it should not impact on those thinking of leaving or coming to the UK.

"The new statutory residence test should greatly simplify the law in this area, which as this judgment highlighted is currently in an unsatisfactory state. Greater clarity will mean international individuals can plan their affairs with more confidence," Sabanathan said.

Tags: Individuals | Expatriates | Court | Capital Gains Tax (CGT) | Tax | Business | Tax Avoidance | Revenue Guidance | Law | United Kingdom | Offshore | Legislation | Tax Planning | Regulation | Individual Income Tax |


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