The Taxman Wins Again – Latest Ruling In Long-Running UK Residency Case

08.11.11

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Many British expatriates have been following the Gaines-Cooper UK residency case and we now have the latest ruling in this long-running saga. The courts have again ruled in favour of

Many British expatriates have been following the Gaines-Cooper UK residency case and we now have the latest ruling in this long-running saga. The courts have again ruled in favour of HM Revenue & Customs (HMRC) and against international businessman Robert Gaines-Cooper.

The issue was whether Gaines-Cooper, who had moved to the Seychelles in 1976, was in fact technically a UK resident and therefore liable to UK tax. He had never spent more than 91 days a year in the UK (under the guidance issued by HM Revenue at the time), but last year the Court of Appeal ruled that he still had enough close connections with the UK to make him resident and that he therefore owed HMRC back taxes.

His bid to overturn the earlier rulings in favour of HMRC has been rejected by the Supreme Court.

Court rulings in the Gaines-Cooper case have always been considered significant because of the impact they could have on other British expatriates and tax exiles.

This latest ruling has less significance because we now know that HMRC will finally be introducing a statutory definition of tax residence next April and expatriates will then have set rules to follow rather than just guidance, but it does not mean that this latest ruling will not have consequences for people who are already expatriates.

Jason Collins, partner at McGrigors law firm, has described the ruling as ?a significant blow for taxpayers? and warned that it could ?open the floodgates for HMRC to pursue thousands of British tax exiles for backdated tax?.

There are a considerable amount of ongoing residency cases and these would be judged using the old IR20 and newer HMRC 6 residency guidance rather than the new statutory test coming in next year, and this Gaines-Cooper judgement could be a precedent for their rulings.

There is speculation that HMRC could now target higher-profile expatriates like rock stars and business magnates, and many internationally mobile employees could be brought under the taxman?s microscope.

Under the proposals for the new statutory residency test there are different rules for ?leavers?, ?arrivers? and those ?working full time abroad?. According to the consultation document, leavers are ?defined as individuals who were resident in one or more of the previous three tax years.? Therefore, although the new rules start on 6th April 2012, the old IR20 booklet guidance and the Gaines-Cooper case continues to be relevant for those who have already left the UK, and even for those leaving the UK until 6th April 2015.

Until then, even before complying with any day-counting requirements, there must be a ?distinct break? with the UK before any claim to be non-resident will be considered in relation to any UK tax year, including 2011/2012. If you are already non-UK resident, or think you are, it is best to make sure that you have made that distinct break as it may affect your residency position under the new statutory test.

The Gaines-Cooper case

International businessman Robert Gaines-Cooper has lost his long-running dispute with HMRC, 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 19th October 2011. 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 favour 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 ?centre of gravity of his life and interests? ? a decision which has prompted tax experts to accuse HMRC and the courts of ?moving the goalposts.?

Gaines-Cooper has said that he is not giving up and that he is now considering taking his case to the European Court of Justice ? so the saga could continue.

This case shows just how complicated and vague UK residency can be. The fact that statutory residence tests will finally be introduced next year is therefore welcome news. The proposed tests (at the moment we have only seen proposals) are clearer than the old guidance, but they are more complicated than they appear at first glance and can be confusing to the layman.

Not to mention that tax treaties and domestic residence rules in other countries may have an effect on where you are resident, and thus what taxes you pay on what income, gains, and wealth, and what happens to your assets on your death (and the tax on these), and where. So, knowing where you are resident is very important, and can make a huge difference to your wealth, during your lifetime and when this passes after your death.

To be on the safe side and make sure that HMRC cannot attack your residency status in the future, you should still seek specialist advice from an international tax advisory firm such as Blevins Franks.

By Bill Blevins, Managing Director, Blevins Franks

28th October 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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