The recent decision of the Court of Appeal in Gaines- Cooper (R (on the application of (1) Robert John Davies (2) Michael John James) v Revenue & Customs Commissioner: R (on the application of Robert Gaines- Cooper) v Revenue & Customs Commissioners  EWCA Civ 83) has attracted a great deal of publicity. In fact, some private equity firms and fund managers which had offered employees an opportunity to work abroad and cease UK tax residence (primarily to avoid the 50% income tax rate which came into effect on 6 April 2010) have had to reconsider as a result of the decision. It now appears that such a move may largely be futile if family ties and other connections remain in the UK.
The Gaines-Cooper case is one of the leading cases on when an individual is (i) domiciled and (ii) resident in the UK for tax purposes.
In the latter scenario, Mr Gaines-Cooper sought to appeal, by means of judicial review, an HMRC decision that he was both resident and ordinarily resident in the UK. Mr Gaines- Cooper argued that he had a legitimate expectation to be treated as not resident and not ordinarily resident, because he had satisfied the relevant criteria in IR20 (HMRC’s then published guidance on residence) and that HMRC had departed from that guidance. He further argued that HMRC should consider itself bound by the contents of IR20 regardless of the position at law.
The High Court refused Mr Gaines-Cooper’s application for judicial review. It held that HMRC’s exercise of its statutory powers can only be challenged by judicial review if HMRC failed to discharge that duty, acted ultra vires or abused its powers. Specifically it held that IR20 was guidance only, and was consistent with the current law. It was satisfied that HMRC had properly discharged its duties, acted within its powers and had not abused its powers.
Mr Gaines-Cooper appealed against the High Court’s refusal to allow judicial review. In February 2010, the Court of Appeal unanimously dismissed Mr Gaines-Cooper’s judicial review claims. Specifically, the Court held that a taxpayer must sever ties with the UK to establish that he or she has become non-resident in the UK. The so called days test in IR20 prevents that taxpayer from subsequently becoming resident again. However, satisfaction of the days test is not enough to establish non-UK residency in itself. The Court also confirmed that taking full time employment overseas, may, in the right circumstances, cause the taxpayer to become non-UK resident (without the need to sever ties with the UK) as long as the taxpayer satisfies the days test. The decision means that Mr Gaines-Cooper is now liable to pay UK tax despite establishing a base in the Seychelles and spending less than 91 days in the UK in a calendar year.
Those individuals that wish to sever UK tax residency should seek advice prior to leaving the UK. In addition, they should continue to be alert to the wide range of indicators of residence that HMRC will consider so as to avoid unwittingly triggering UK residency going forward.