The Court of Appeal has released its judgment on UK tax residency in the Gaines-Cooper case. This is probably the most important case on UK tax residency for a generation.
The short
The Court of Appeal has released its judgment on UK tax residency in the Gaines-Cooper case. This is probably the most important case on UK tax residency for a generation.
The short background is that an entrepreneur, Robert Gaines-Cooper, asserted that he had become non-resident in the UK.
He had set up businesses with branches in the UK, USA, Seychelles, Cyprus, Canada, Italy and Jersey. In 1976 he bought a French style plantation in the Seychelles and spent over $2.5m renovating it. He has asserted all the way that his intention is to spend his last days there as he ?fell in love? with the Seychelles. However, he maintained his 27-acre country estate in Henley and his second wife and son continued to live in the UK. His son went to an English school and in 2002 he made a Will under English law.
He left the UK in 1980 to develop his world-wide business interests.
The main thrust of the Revenue?s argument was that he had never made a ?clear break? from the UK, so had never established a period of non-residence. This decision was upheld by the Special Commissioners, and by the High Court.
Gaines-Cooper argued that he relied on the Revenue?s own published guidance, known as IR20.
Gaines-Cooper?s case centred on the assumption that the word ?leave?, which is used in part 2 of IR20, must have the same meaning throughout. This has now been judged to be incorrect as it must be read in context. In part 2.2 (see Note 1 below) the word is given no greater significance than that of depart, while in sections 2.7-2.9 (see Note 2 below) it is generally followed by ?permanently or indefinitely?. It was decided that this denotes a much greater break than simply ?getting on the Eurostar to Brussels?.
It is the quality of the absence that is of prime importance for the purposes of establishing non-residence, not the quantity.
The question which really arises from the Gaines-Cooper case is: If someone?s family remains in the UK, can he really be seen to have left ?permanently or indefinitely??
If the answer to the above can only be no, the question then comes down to: What is a settled purpose? This is not clearly defined in case law or the tax guidance or tax legislation. Moses LJ suggests that it must be consistent with a distinct break, sufficient to cut existing ties.
This argument also seems to hinge on the individual cutting family and social ties with the UK.
Having decided that the Revenue are correct in their interpretation of the legislation and their guidance, the judgment then goes on to consider whether there has been a change in policy of the Revenue in residence cases.
Moses LJ contends that the Revenue have not changed their practice, but have just taken a stricter view of residence cases. The Revenue?s reasons for increased scrutiny include an increase in the number of people claiming to be non-resident, a move to self-assessment and the abolition in 1993 of the rule meaning that those with accommodation in the UK were resident there.
The question being asked was whether the Revenue?s practice of applying part 2.2 of IR20 was the same as their practice of applying parts 2.7-2.9, and if this changed after 2004/05.
It was a widely held professional view that, if you left the UK for any purpose and lived elsewhere for more than 3 years, you would be treated as non-resident and not ordinarily resident, so long as you abided by the day counting limit (i.e. no more than 92 days spent in the UK averaged over four years, and no more than 183 days in any one year). It is clear from the judges? opinions that this is not enough and an individual must sever all links with the UK.
In the judgement, a letter from a Revenue inspector (see Note 3 below) is cited clearly giving credence to the profession?s view. However, a distinction is drawn by the judge as the question being asked was whether the Revenue practice applied to part 2.2 was the same as that applied to part 2.7-2.9. The letter in question clearly defined it as only applying to section 2.9 and in later correspondence, describes section 2.2 differently. As Moses LJ states, this letter ?does not establish that the Revenue?took the same approach to 2.2 as it took to 2.7-2.9?.
The letter from the inspector in Note 3 clearly shows the Revenue?s previous practice in relation to UK residence. If you lived abroad for more than 3 years and kept your visits below the day count, you would be considered to be non-resident. Moses LJ avoided this conclusion by structuring the question differently ? did Revenue practice in applying parts 2.7-2.9 follow their practice in applying part 2.2?
The letter and subsequent correspondence showed that the Revenue practice relating to part 2.2 has always differed from that relating to part 2.9, rather than that the practice relating to part 2.9 had not changed.
Moses LJ concludes ?on a proper interpretation of [IR20], the taxpayers fell out with the circumstances which would have gained them non-resident status?. It appears that he had decided the taxpayers were UK resident and this may have influenced his decision to find that the Revenue had not changed their practice.
While Moses LJ and Dyson LJ were in full agreement, Ward LJ appears to have had more sympathy with the taxpayer, suggesting that Gaines Cooper is resident abroad. However, he does agree with the other judges that to become non-resident in the UK, a clear or clean break must be made ? i.e. the severance of social and domestic ties with the UK.
Ward LJ also agrees that there is not enough evidence, besides the ?surprise of a large body of professional opinion? that there has been a change in policy. He agrees that a ?more rigorous scrutiny? of the compliance cases does not amount to a ?root and branch change in policy?.
Conclusion
Gaines-Cooper has sought leave to appeal the decision to the Supreme Court. It is for the QC?s to differentiate between a change in policy and a more rigorous scrutiny. The simple conclusion from the judgement provided in this case is that, to establish non-residence in the UK if you are not taking up full time employment abroad, it is necessary to show a clear break of social and domestic ties with the UK.
This case clearly now has wider implications for all those who have sought to claim non-resident status, but retained links to the UK. It may be worth a review of the position and a change in lifestyle may be required if an individual is not to be regarded as UK resident.
Check List
Assuming you have not left the UK for employment overseas (and not simply your own company set up for the purpose) then consider:
i. Selling your house.
ii. Moving possessions, pets, cars etc overseas.
iii. Spouse / partner to move with you.
iv. Sever sporting, clubs, associations etc with UK.
v. Change medical practitioners to overseas.
vi. Close UK Bank Accounts & Credit Cards.
vii. 91-day limit may not apply ? keep UK visits down to (say) less than 30. Remember any time you are in UK at midnight, is a day in the UK.
Note 1 – PART 2.2
Working Abroad
If you leave the United Kingdom to work full time abroad under a contract of employment, you are treated as not resident and not ordinarily resident if you meet all the following conditions:
– Your absence from the UK and your employment abroad both last for at least a whole tax year;
– During your absence any visits you make to the UK:
– Total less than 183 days in any tax year, and
– Average less than 91 days per tax year.
Note 2 ? PART 2.7-2.9
2.7 ?If you go abroad permanently, you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more a year??
2.8 ?If you claim that you are no longer resident and ordinarily resident, we may ask you to give some evidence that you have left the UK permanently, or to live outside the UK for three years or more. This evidence might be, for example, that you have taken steps to acquire accommodation abroad to live in as a permanent home, and if you continue to have property in the UK for your use, the reason is consistent with your stated aim of living abroad permanently or for three years or more. If you have left the UK permanently or for at least three years, you will be treated as resident and not ordinarily resident from the day after the date of your departure providing:
Your absence from the UK has covered at least a whole tax year, and:
b) Your visits to the UK since leaving:
-have totalled less than 183 days in any tax year and;
-have averaged less than 91 days a tax year.?
2.9 ?If you do not have this evidence, but you have gone abroad for a settled purpose (this would include a fixed object or intention in which you are going to be engaged for an extended period of time), you will be treated as not resident and not ordinarily resident from the day after the date of your departure providing:
Your absence from the UK has covered at least a whole tax year and;
b) Your visits to the UK since leaving:
-have totalled less than 183 days in any tax year and;
-have averaged less than 91 days a tax year?
c) Evidence becomes available to show that you have left the UK permanently;
Providing in either case your visits to the UK since leaving have totalled less than 183 days in any tax year and have averaged less than 183 days in any tax year and have averaged less than 91 days a tax year.?
Note 3
??I?m writing to confirm the way we approach the residence status of individuals who leave the UK for purported permanent residence but who cannot produce the sort of evidence mentioned in paragraph 2.9 of IR20.
Subject only to the caveat that the following guidance is general and particular cases will always need to be decided on their own specific facts, I can say that provided such an individual lives outside the UK for 3 years or more from the date of departure, and after departure has not visited the UK for as much as 183 complete days in any one tax year or 91 or more days a year on average.
Then we will, after the three years has elapsed, accept the claim to have become not resident and not ordinarily resident.
Specifically, circumstances such as:
– The spouse and/or children having continued to live in the UK
– A residence having been maintained here
– Duties having continued to be performed in the UK will not prejudice the claim to non-residence?.
By David Franks, Chief Executive, Blevins Franks
2nd March 2010
