Residence: Gaines-Cooper [2010] EWCA Civ 83

 In Tax

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Mr Gaines-Cooper’s appeal against assessment to £30 million of back taxes was heard with two other appeals regarding the same issue; namely, the apparent change in HMRC’s interpretation of the law and their use of the IR20 leaflet.

Mr Gaines-Cooper and his co-appellants contended that HMRC had misapplied and misconstrued paragraphs 2.7-2.9 of IR20 which deals with “Leaving the UK permanently or indefinitely”.

Those paragraphs say:

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“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:

(a) 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:

(a) 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) Your absence actually covers three years from your departure, or

(d) Evidence becomes available to show that you left the UK permanently

(e) 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 91 days a tax year.”

All the appellants argued that on the construction and application of these paragraphs by HMRC before they departed the UK they would have been treated as non-resident. The subsequent mis-construction amounted to an unannounced change of policy which infringed their legitimate expectations.

Is it necessary for a taxpayer to demonstrate he has severed his ties in the UK?

The appellants argued that ‘to leave’ the UK connoted no more than a departure rather than cutting social and family ties. This argument was given short shrift by LJ Moses. The use of the word ‘leave’ in paragraph 2 was always going to be dependent on its context.

If during the absence the taxpayer was to be engaged in full-time employment abroad for at least a whole tax year there is no requirement to sever family and social ties in the UK – within paragraph 2.2 IR20. However, the leaving the UK “permanently or indefinitely” in paragraphs 2.7 – 2.9 is different – it clearly requires consideration of the quality of the absence.

Par.2.9 requires a ‘settled purpose’ to the absence – a term undefined in case law as well as in 2.9. However, L J Moses said it must be consistent with a distinct break, sufficient to cut pre-existing ties. Par.2.9 applies to a taxpayer who contends that he has left the UK indefinitely or permanently but does not have the evidence to support that contention.

Change of policy?

The appellants contend that it was not until 2004/5 that HMRC sought to require taxpayers to demonstrate that they had made a distinct break from ties in the UK in order to establish that they had left permanently or indefinitely.

L J Moses accepted that specific assurances that taxpayers were to be treated as non-resident in the circumstances identified in IR 20 amounted to a Statement of Practice which HMRC was obliged to apply until it promulgated a change of practice for the future.

However, it was down to the taxpayers to establish the existence of previous settled practice and to do so specialist advisers gave evidence. HMRC conveniently do not keep files for more than 6 years and there is no central store for files so the picture is bound to be partial and incomplete.

By contrast, L J Ward “entertained more doubt about the result of the appeal than my Lords betray”. He was persuaded however, that “the change which has been perceived by the profession in the assessment of taxpayers’ claims to be treated as not resident and not ordinarily resident in the UK is the effect of a closer and more rigorous scrutiny and policing of the growing number of claims which it is permissible for HMRC to conduct and not a root and branch change in policy.”

Practice points

  1. IR20 was not the law – but taxpayers can rely on HMRC statements of policy as being a guarantee of certain treatment under the law in defined circumstances;
  2. Leaving the UK permanently requires a taxpayer to sever family and social ties unless the departure is to work abroad as an employee – this is probably more than most people are able to do in reality.
  3. Do re-visit your clients’ evidence of departure and severance of social and family ties and encourage renewed care in the light of the more rigorous scrutiny by HMRC.
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