Recent Court of Appeal decision clarifies that individuals seeking to leave the United Kingdom, or who have already left, need to ensure that they are non-resident for tax purposes based on HMRC’s most recent standards. Professional advisers and their clients should review their advice accordingly to ensure their non-residence planning continues to be effective.

Gaines-Cooper

On 16 February 2010, the UK Court of Appeal released its decision in R (on the application of Davies, James & Gaines-Cooper) v HM Revenue & Customs [2010] EWCA Civ 83. The Court of Appeal unanimously dismissed the appellants’ judicial review claims that Her Majesty’s Revenue & Customs (HMRC) failed to interpret its formal guidance correctly and unlawfully refused to apply it, and that HMRC had, in 2005, implemented and applied an unannounced change of policy in its approach to non-residence claims.

The significance of this decision is that it confirms the status of HMRC guidance generally and interprets such guidance with regard to the circumstances in which an individual ceases to be resident in the United Kingdom for tax purposes. This case therefore has implications for anyone who is UK resident and is planning on becoming non-UK resident, or individuals who have left the United Kingdom and believe they are currently non-UK resident.

Background

Whether or not an individual is tax resident in the United Kingdom is a starting point for determining whether that individual is subject to income tax and capital gains tax in the United Kingdom. This means that residence is an important issue both for those individuals arriving in the United Kingdom and, in particular, for those planning to leave the United Kingdom.

The law on residence has for many years been an unsatisfactory combination of statute, case law and HMRC practice. The uncertainty inherent in this situation has been compounded further by a number of recent decisions in the UK courts which have led many practitioners to believe there had been an unannounced change in HMRC’s practice, and in particular, by the withdrawal of HMRC’s IR20 guidance and its replacement with HMRC6 from 6 April 2009. Unfortunately, despite calls from tax professionals to remedy these uncertainties by way of the introduction of a coherent statutory residence test, the HMRC announced in January that such a test will not be in the 2010 Finance Bill. It is unclear at this stage when a statutory residence test may be enacted.

The appeals heard in this case related to tax years to which the old guidance, IR20, was applicable and focused on those paragraphs of the guidance which set out the circumstances in which an individual would, or would not, be treated as resident in the United Kingdom and therefore be liable to UK income and capital gains tax. Mr Gaines-Cooper sought to rely on paragraphs 2.7 to 2.9 of IR20 which are applicable to persons leaving the United Kingdom permanently or indefinitely. These provide that a person who has left the United Kingdom permanently, for at least three years, will be treated as non-UK resident from the day after the date of leaving, provided the person’s absence from the United Kingdom covers at least a whole tax year and visits to the United Kingdom since leaving have totalled less that 183 days in any tax year and averaged less than 91 days per tax year (with the average calculated over a period of up to four years). Mr Gaines-Cooper had scrupulously kept his visits to the United Kingdom to under 91 days on average. HMRC argued, however, that he had never ceased UK residence, despite limiting his physical presence, because there was no distinct break in the pattern of his life.

The Special Commissioners held that Mr Gaines-Cooper had failed to demonstrate that he had made a “clean break” from the United Kingdom – he still had social, domestic and family ties to the United Kingdom. The case was referred to the Chancery Division of the High Court which upheld the Commissioners’ decision as one of fact. Mr Gaines-Cooper then applied for judicial review in the Court of Appeal.

Mr Gaines-Cooper argued that he was entitled to rely on HMRC’s guidance as set out in IR20 without reference to a “distinct break”; on a proper interpretation of the relevant provisions of IR20 and properly applying those provisions to his particular circumstances, he was non-UK resident for UK tax purposes in the tax years in question; and HMRC had unfairly changed its practice in relation to residence after he had left the United Kingdom (and should be bound by its earlier practice, in reliance on which he had claimed non-resident status).

The Decision

In its ruling, the Court of Appeal stated that it is a precondition of becoming non-resident that an individual must establish that they have permanently (or indefinitely) left the United Kingdom, at which point they can no longer be considered tax resident. An individual can leave the United Kingdom, however, ensure that they are present in the United Kingdom for less than 91 days a year and still be considered resident in the United Kingdom if their original departure is not considered to be sufficiently permanent. The Court of Appeal considered retention of strong links with the United Kingdom as an aspect of tax residence along with time physically spent in the United Kingdom. Moses LJ held that, on the facts found by the Special Commissioners, Mr Gaines-Cooper had failed “to establish a distinct break” from his social and family ties in the United Kingdom, and did not meet the criteria for establishing non-residence, as set out in IR20. In particular, the Court of Appeal noted Mr Gaines-Cooper’s UK house and business interests, and that his wife and son had lived in the United Kingdom for long periods.

In relation to Mr Gaines-Cooper’s argument that HMRC had changed its practice unfairly and should be bound by its earlier practice, the Court of Appeal found that it was not a case of HMRC unfairly changing its practice but rather that HMRC had legitimately increased its scrutiny of taxpayers by applying its existing policy more rigorously. Nevertheless, the Court of Appeal decided that a statement formally published by HMRC can be regarded as binding, subject to its terms, in relation to any case falling clearly within the terms of that statement.

Comment

Over the years many individuals who have left the United Kingdom without taking up full-time employment abroad had thought that they could escape the UK tax net as long as they were not present in the United Kingdom for more than 91 days per tax year. Following this decision, which is consistent with other recent decisions, it is clear that this will be insufficient to achieve non-resident status without a distinct break in the pattern of the individual’s lifestyle. Individuals seeking to leave the United Kingdom now face increased uncertainty especially if they wish to maintain any ties to the United Kingdom. Similarly, individuals who left the United Kingdom some years ago need to ensure they are non-resident based on the most recent standards. Professional advisers and their clients should review their advice accordingly to ensure their non-residence planning continues to be effective.