Last year we had the Court of Appeal ruling in the high profile UK tax residency case of Robert Gaines-Cooper, where the Court of Appeal upheld the High Court decision that he had not left the UK
Last year we had the Court of Appeal ruling in the high profile UK tax residency case of Robert Gaines-Cooper, where the Court of Appeal upheld the High Court decision that he had not left the UK ?permanently or indefinitely?. It deemed he had been UK tax resident, even though he claimed he was not, and potentially liable for UK taxes going back over thirty years and amounting to around ?30 million. The case is currently under appeal so we do not yet have a final judgement, but in the meantime another long running residency case has been concluded ? and in favour of HM Revenue & Customs.
The latest case won by HMRC is that of Lyle Dicker Grace, someone who is not even a UK national. It demonstrates the lengths HMRC will go to examine residency issues and claim that someone has been UK resident for tax purposes.
Grace was born in South Africa and grew up there and in Kenya. He is a British Airways long haul pilot and went to work in the UK in 1987. He bought a house in Horley and was UK resident until August 1997 when he decided to return to live in South Africa. He bought or rented property in South Africa, his parents and siblings live there and he does not have family ties in the UK.
He continued to work for British Airways and commuted to the UK as necessary. He kept his Horley house and used it as a place to stay immediately before or after a flight, or occasionally when the time between flights was too short to be worth returning to South Africa. He relied on the rules in IR20 (now HMRC 6) and did not break the 91 day limit in relation to days spent in the UK (although he would have done under the newer HMRC 6 where midnights are counted).
He claimed that for the five years after 1997 he was not UK tax resident. HMRC disagreed, and based their argument on the fact that he owned a house in the UK for his use when he flew planes into Gatwick.
This turned into a long-running dispute. Originally the Special Commissioner ruled that Grace was not UK resident, but in November 2008 HMRC appealed to the England & Wales High Court and won ? the judge said that the only possible conclusion from the facts was that Grace was UK resident. The next year Grace appealed to the Court of Appeal, which sent the case back to the Tax Tribunal (which replaced the Special Commissioners) to start again.
The UK?s First-Tier Tax Tribunal has now published its final judgement. It found that although Grace had become a resident of South Africa, he had also retained his UK residency since he failed to sufficiently demonstrate he had made a distinct break from the UK.
The Tribunal found that, although not continuous, Grace?s presence in the UK was a permanent feature of his life. He had a ?settled abode? there and his presence was ?indefinite? while his employment with British Airways continued. Judge Mosedale said: ?When staying in the UK he was much more than a visitor: he had a settled and regular presence here staying in his own house that had been his only home up to September 1997 and I find continued to be a home after that date.?
He found that Grace?s actions were not enough to amount to a definite break with the UK, and while he did create new ties elsewhere he did not sever his main ties with the UK.
Day counting did not help with the decision, since Grace spent roughly equal amounts of time in the UK and South Africa.
This case is another example of how HMRC can attack your claim to have left the UK if you retain a property there. They may argue that your overseas property is more of a holiday home than a permanent base. They may also argue that day counting does not have any relevance until it is established that you have really left the UK for a settled purpose. Maintaining a property, with perhaps your spouse returning frequently to the UK and staying there, could call into question your claim to be non UK resident.
To be non-resident, you must first establish that you have left the UK either permanently or indefinitely. If you have not, then day counting is irrelevant.
Living in a country with a Double Tax Treaty with the UK may not protect you as much as you may think. Even if you spend enough days a year in a country to be deemed tax resident there, HMRC can still argue that you remain a UK tax resident if you have not made a distinct break from the UK and cannot prove that you moved abroad to live ?permanently or indefinitely?, particularly if you maintain a UK home available for your use.
Double Tax Treaties exist to determine the matter in favour of just one country, forcing the other to drop their residence claim, and tie breaker rules will be used to determine where you are tax resident. If all tie breaker tests are indeterminate, it comes down to nationality.
Residence is a matter of common law; there is no statutory definition, which makes planning all the harder. Each case is different, and if you spend much time in the UK and/or have a home available for your use, you may want to seek advice from an international tax advisory firm like Blevins Franks to gain peace of mind.
By Bill Blevins, Managing Director, Blevins Franks
10th February 2011