Facts
Decision
Comment


Two sets of UK taxpayers recently sought to challenge the interpretation by Her Majesty's Revenue and Customs (HMRC) commissioners of their own guidance on residence and domicile. Judgment in the joint appeal in R (on the application of Davies) v The Commissioners for Her Majesty's Revenue and Customs and R (on the application of Gaines-Cooper) v The Commissioners for Her Majesty's Revenue and Customs was handed down on October 19 2011. The taxpayers' appeals were dismissed.

Facts

Mr Davies and Mr James (the first appellants) and Mr Gaines-Cooper (the second appellant) appealed against a Court of Appeal decision to refuse their application for judicial review. Review had been sought of determinations made by the commissioners on the basis of their interpretation of the guidance on the residence and ordinary residence of individuals, as published in the 1999 edition of Inland Revenue Booklet IR20.

The first appellants had challenged a finding by the Inland Revenue - HMRC's predecessor - that they had been resident and ordinarily resident in the United Kingdom for the tax year 2001/2002. The second appellant challenged a decision that he had been resident and ordinarily resident from tax year 1993/1994 to 2003/2004.

The 1999 edition of IR20 remained operative until 2009, when it was replaced by new guidance, HMRC6. The appellants argued that:

  • on its proper construction, IR20 contained a more benevolent interpretation of the circumstances in which an individual becomes non-resident and not ordinarily resident than was reflected in the ordinary law; and
  • they had a legitimate expectation that such interpretation would be applied to the determination of their status for tax purposes.

Their subsidiary and alternative contention was that the Inland Revenue's settled practice had been to adopt such an interpretation, which gave rise to a legitimate expectation that such interpretation would be applied.

Decision

Lord Wilson held that IR20 should have been much clearer in its exposition. However, he found that when the relevant passages were considered together, they informed the ordinarily sophisticated taxpayer of requirements to achieve non-residence which were unlikely to come as a surprise, and which demanded a "multifactorial evaluation of [the taxpayer's] circumstances on the part of the [Inland] Revenue albeit subject to appeal". The taxpayer might reasonably have summarised what the booklet required as a "distinct break", as required by the ordinary law.

The majority decision (with one dissenting judgment from Lord Mance) was that the guidance did not give rise to a legitimate expectation that a more benevolent interpretation would be applied to the determination of the taxpayer's status.

Comment

This decision is clearly of historical interest only to most taxpayers and their advisers, as IR20 was replaced by HMRC6 in 2009 and a statutory residence test is proposed for tax years from April 6 2012 onwards (for further details please see "Proposed statutory residence test offers greater clarity").

However, there will be taxpayers whose residence status may not be clear-cut for one or more tax years before April 6 2009 (when IR20 was replaced by HMRC6), and who may find or may have found their status challenged by HMRC in relation to those years. For them, the judgment may still be relevant.

If the statutory residence test does not incorporate transitional rules, as the Treasury's consultation suggested it would not, the existing rules for determining residence will remain relevant for a number of tax years after the test's probable introduction for tax year 2012/13. In order to determine how the test applies to them, individuals may need to establish their residence status in as many as three tax years immediately preceding the tax year in question - which potentially takes them back to 2009/10. As such, HMRC guidance may still be relevant to this determination. However, as HMRC6 came into effect from April 6 2009, IR20 and the recent judgment will not be in point.

For further information on this topic please contact Nicole Aubin-Parvu at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).