UK Supreme Court Blog

EDITORS: Dan Tench, Emma Cross, Zainab Hodgson, Francesca Knight, James Warshaw and Natalie Haefner (CMS)
Hugh Tomlinson KC, Matthew Ryder KC, Dévante Gravesande-Smith and Rebecca Khan (Matrix)

On 16 February 2010, the Court of Appeal (Ward, Dyson and Moses LJJ) released its decision in the joined cases of R on the application of Davies (and another) v The Commissioners for Her Majesty’s Revenue & Customs and R on the application of Gaines-Cooper v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 83. All the taxpayers were unsuccessful in their challenges to HMRC’s decision to treat them as UK resident during the relevant tax years. Mr Gaines-Cooper’s case is considered below.

 

 

Mr Gaines-Cooper was born in England in 1937. He was educated in the UK and worked here until 1974. From 1974, he travelled extensively to establish and manage businesses internationally. In 1975, he bought a house in the Seychelles and from 1976 onwards, he spent, on average, several weeks a year in the Seychelles. In almost all of the relevant periods, he had a home available to him in the UK and he spent on average about three months a year in the UK. In 1993 he married a woman who had been born in the Seychelles, but who had lived in the UK since 1977. In 1998 they had a son, who was born in the UK.

 

Mr Gaines-Cooper contended that he had acquired a domicile of choice in the Seychelles in 1976, and that from 1993/94 onwards he was neither resident, ordinarily resident or domiciled in the UK.

 

The Special Commissioners rejected these contentions. Mr Gaines-Cooper appealed the Special Commissioners’ decision in relation to his domicile status only; and the Chancery Division upheld the decision of the Special Commissioners ([2008] STC 1665). Mr Gaines-Cooper then applied for judicial review of HMRC’s conduct in assessing him to tax on the basis that IR20 (when properly construed) gave a binding assurance to him that he would be treated as not resident and not ordinarily resident since 1976.

 

 

There is no statutory definition of residence; and the principles derive mainly from 19^th and early 20^th century jurisprudence. HMRC’s guidance on the issue of residence was, at the relevant time, contained in IR20 (for tax years after 2008/09, HMRC6 replaces IR20). Most relevantly, it provided:

 

“Leaving the UK permanently or indefinitely

 

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. ….

 

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;

 

§          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…”

 

The taxpayers argued that, originally, HMRC construed (correctly) those paragraphs as meaning that an individual who claims to have left the UK permanently or indefinitely need meet only the “day-count” rules to be treated as non-UK resident. The taxpayers also argued that in 2004/5 (after they had left the UK), HMRC fundamentally changed their policy by (incorrectly) interpreting IR20 as requiring taxpayers to first demonstrate that they had made a distinct break from ties in the UK in order to establish that they had left permanently or indefinitely.

 

 

The Court of Appeal held that the taxpayers’ interpretation of IR20 regarding the “day-count” test was “an impossible construction.” The adverbs “permanently” and “indefinitely” that are used throughout IR20 show that there must be a distinct cutting of pre-existing ties to break the adhesive quality of residence, not merely a limit to the time spent in the UK. Thus, where a UK taxpayer has set up a house in another country, the first question to address is whether he has left the UK for permanent or indefinite residence abroad. If (but only if) the taxpayer can show that he has left for this purpose and therefore become non-UK resident, then the day-count rules will be applied in order to determine whether the taxpayer has, nevertheless, again become UK resident for tax purposes. It is not the number of return visits that establishes non-residence; the number of return visits are important only in determining whether non-resident status, once acquired, is lost subsequently.

 

Addressing the taxpayers’ second argument, the Court of Appeal accepted that there was some correspondence that supported their case that HMRC in 1999 did not insist on severance of ties with the UK in cases under paragraphs 2.7 to 2.9 of IR20. However, that correspondence was not of sufficient weight to support the case that there had been a paradigm shift in policy by HMRC that unfairly prejudiced them. Whilst Ward LJ, in particular, expressed some sympathy for the taxpayers, the Court of Appeal concluded that HMRC’s policy had always encompassed the concept of cessation of familial and societal ties for those who claim to have left the UK permanently or indefinitely. The change perceived by the taxpayers (and a significant number of professional advisers) was, instead, the effect of closer and more rigorous scrutiny by HMRC of the growing number of non-residency claims made by taxpayers.

 

Mr Gaines-Cooper is seeking leave to appeal to the Supreme Court; whether the Supreme Court accepts that his case is of sufficient general importance that the test for leave is satisfied is yet to be known. (Out of 88 applications made between 1 October 2009 and 4 February 2010, permission has been granted in only 24 cases. As yet, no taxpayer has made a successful application for leave to appeal to the Supreme Court.)

 

 

The Court of Appeal emphasised that IR20 is binding on HMRC: if a taxpayer is able to demonstrate that his or her facts fall within the guidance, then he or she is to be treated accordingly by HMRC. IR20 has now been replaced by HMRC6. It is clear that HMRC6 is simply ‘guidance’ and that individuals will need to consider carefully (and be advised accordingly) as to what steps need to be taken in their particular case to ensure that they lose their UK residence status.

 

Taxpayers who are contemplating becoming non-UK resident need to be cognisant of the fact that simply spending time in another jurisdiction is unlikely to be sufficient evidence that they have left the UK permanently and have become non-resident and not ordinarily resident in the UK. There must be clear evidence of a distinct break from previously held ties in the UK. There is one exception to this rule: going abroad to work full time. Under paragraph 8.5 (of HMRC6) evidence of severance of social and family ties in the UK is not required in this instance (however, there are separate tests that must be satisfied).