The Supreme Court handed down their judgment in the case of Mr Gaines-Cooper on 19 October. It may be remembered that Mr Gaines-Cooper was seeking a judicial review of HMRC’s refusal to regard him as non UK resident in accordance with their established practice in IR20. HMRC acknowledged that if Mr Gaines-Cooper satisfied the terms of IR20 they would be bound to honour it and treat him as not resident nor ordinarily resident. The Supreme Court decided that he did not do so.
The leading judgment was that of Lord Wilson which contained some interesting features.
Lord Wilson confirmed that to become non resident it is not necessary to sever your family and social ties. He made it absolutely clear that the test set out by the Court of Appeal is wrong – that severance of such ties is too strong a word. A distinct break is required and this only encompasses a substantial loosening of social and family ties. He pointed out that as a taxpayer is permitted to make limited visits to the UK, this clearly foreshadows the continued existence of family and social ties in a loosened form.
Whilst this is extremely helpful, because the idea of severing family and social ties was obviously excessive, we are no nearer clarity with a test that says you must “loosen” such ties. It would have helped to have some indication about the extent to which loosening is necessary.
Lord Wilson emphasised the need for a distinct break both for the strict legal position and for IR20. He suggests that a distinct break is an appropriate description for the necessary degree of change in the pattern of an individual’s life if his settled or usual abode in the UK is to cease. A distinct break requires a multi factorial enquiry i.e. you need to look at all the facts. He was not impressed by the fact that the whole concept of distinct break does not and never has featured in IR20. In his judgment HMRC were right to say that leaving the UK requires a distinct break and therefore the meaning of IR20 corresponds with the general law. However, this leaves open the question that if IR20 corresponds with the general law, what is the point of IR20?
There are passages in Lord Wilson’s judgment which may seem a little harsh. He criticises Mr Gaines-Cooper for not seeking advice from a tax office still less a ruling on residence when he left the UK. Mr Gaines-Cooper was advised by his father who was a tax officer with the Inland Revenue; he submitted all the relevant forms and responded to appropriate enquiries from HMRC. Some may think it would be reasonable to conclude that having made a claim to non residence in such circumstances, and having dealt with the reasonable enquiries from HMRC on the matter, if HMRC had any issue with his residence they would have said so – not wait for 20 years before contacting him again. For Mr Gaines-Cooper to be required to chase them is an obligation that some may feel is unreasonable.
The most important part of the judgment is the analysis of the key paragraphs of IR20. These are the paragraphs which say that HMRC will treat you as non resident if you leave the UK for the purposes of full time work abroad, or for a settled purpose or permanently or indefinitely for a period of more than 3 years. Providing you do not make visits to the UK of more than 90 days each year, you will be regarded as non resident.
Lord Wilson explains that you have to be extremely rigorous in your examination of IR20.
The taxpayer must understand that he was required to do more than take up residence abroad. This is a reference to the possibility that a person may be dually resident so he may become resident in another country without necessarily ceasing to be resident in the UK. This is clear from paragraph 1.4. However the taxpayer might have difficulty reaching this conclusion when reading paragraph 2 because it does not say HMRC will treat you as resident in the other country (leaving open the possibility that you may remain resident in the UK as well) – it says HMRC will treat you as being non resident, thereby excluding the possibility that you would be remaining resident in the UK.
The next point for the taxpayer to appreciate in paragraph 2 is that any subsequent returns to the UK are required to be no more than “visits”. This is a reference to the day count test and the taxpayer must understand that when paragraph 2 talks about visits to the UK not exceeding 90 days, the word “visit” is very significant – it means that the periods of presence in the UK must have the character of a visitor. The significance of this term may have been missed by many people and that bears particularly harshly on the lay taxpayer.
The taxpayer must also understand that it is essential for him to relinquish his “usual residence in the UK”. He should know this because of paragraph 2.1 of IR20 which says that you remain resident if you usually live in this country and only go abroad for short periods – for example on holiday or business trips. However, the taxpayer reading paragraph 2.1 will recognise that he is not going on holiday or on short business trips; he is leaving the UK to live somewhere else. It would be easy for him to draw the conclusion that paragraph 2.1 has no relevance to his circumstances. However, this would be an error. It is relevant – or at least part of it is; the bit referring to where you usually live.
Lord Wilson says that the ordinarily sophisticated taxpayer will surely have concluded that these general requirements demanded a multi factorial evaluation of his circumstances. Not all taxpayers may have readily reached that conclusion – but they know now. However, it is interesting that this multi factorial evaluation of the circumstances does not apply in the case of leaving the UK for full time work abroad. In those circumstances, no further enquiry is required – the full time employment is enough. It may be thought difficult for the ordinarily sophisticated taxpayer to understand why a multi factorial evaluation of his circumstances is required in some circumstances surrounding his departure but not others.
Interestingly, and disappointingly, Lord Wilson reveals that in the event that his analysis is wrong, IR20 would be so unclear as to communicate to its readers nothing to which legal effect could be given.
Whilst this judgment will be a severe disappointment to those involved and to taxpayers generally, the Supreme Court has spoken. This is the law and just like the batsman who wishes to challenge the umpire’s decision, the response is the same: look in the scorebook. Nevertheless, although this may be the law, there will be a feeling of unease regarding the conclusion. As far as residence issues are concerned this may be short lived because we will soon have a statutory residence test, but the approach to HMRC statements has a much wider application.
IR20 is one of hundreds of statements of practice operated by HMRC and it is clear from Lord Wilson’s judgment that they must be subject to the most rigorous examination. Furthermore, you would be unwise not to seek confirmation from HMRC that you have not missed any shade of meaning. To think that you can read a statement of practice which is in apparently clear terms and reach a conclusion (which you and your advisers consider is the only conclusion on the wording) would be seriously irresponsible now.