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UK Tax Residence 31 October 2011 UK Tax Residence Supreme Court decision in Davies and Gaines-Cooper SUMMARY The UK Supreme Court has handed down its judgment in Davies and Gaines-Cooper, two judicial review cases on the tax residence of individuals. The taxpayers argued that HM Revenue and Customs had said in guidance, and consistently taken the view in practice, that it would treat individuals in their circumstances as not resident in the United Kingdom. HMRC was refusing to apply that treatment, so the court should intervene and hold HMRC to its word. HMRC succeeded in convincing the court that the taxpayers had misunderstood the guidance and that there was no settled practice of the sort the taxpayers claimed. Why it matters The guidance itself has now been extensively revised. However, the Supreme Court’s judgment and the litigation leading up to it do raise wider issues. The decision underscores the risks in relying on HMRC guidance and – even more so – any supposed general HMRC practice. It will be an uphill struggle for taxpayers to convince the courts that HMRC has bound itself to take any particular approach. The judgment also offers a reminder of the current law on what a taxpayer must do to shed UK- resident status: among other things, the taxpayer must show a distinct break from his or her life in the UK (going abroad to work full-time will often qualify). The case points up the pressing need to move to a clearer statutory definition of residence, as the government proposes to do. Finally, the litigation has raised points on: whether a taxpayer should apply for judicial review of the way HMRC has exercised its discretion before it begins a dispute on the law through an appeal to the Tribunal (in the circumstances, yes); and whether the public is entitled under the Civil Procedure Rules to see the skeleton arguments HMRC provides to judges (in general, yes). New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com RESIDENCE Statute “Residence” and “ordinary residence” are key connecting factors for UK income tax, capital gains tax and sometimes inheritance tax. Nonetheless, the UK Parliament has never fully defined what it means for an individual to be “resident or ordinarily resident in the United Kingdom” for tax purposes. Even the judges have complained: “… the facility of communications, the fluid and restless character of social habits, and the pressure of taxation have made these intricate and doubtful questions of residence important and urgent in a manner undreamt of by Mr. Pitt, Mr. Addington or even Sir Robert Peel. The Legislature has, however, left the language of the Acts substantially as it was in their days …” (Viscount Sumner, commenting in 1928).1 In 1936 the Income Tax Codification Committee proposed a statutory definition. But this was never enacted. Case law The task of defining what it is for an individual to be “resident” in the UK has fallen, by default, to the courts. Many of the cases are old, although there has been a fresh spate since 2000.2 Judges have identified several factors as relevant: whether an individual has accommodation available to him3 in the UK; whether he is employed abroad; the length, purpose and frequency of his visits to the UK; and the extent of his ties to the UK. The result is a test which is highly fact-sensitive and difficult to apply in practice. It causes most problems for the many peripatetic individuals who visit the UK for extended periods and/or work here but also live and work elsewhere. The test does not simply depend on counting days spent in the UK. In particular, the strict legal position is that taxpayers leaving the UK and claiming to be non-UK resident/ordinarily resident must make a “distinct break” with the pattern of their life in the UK, unless they are leaving to work abroad full-time. Guidance In practice, however, HMRC (formerly the Inland Revenue) has played a significant role, both by adopting extra-statutory concessions and by publishing guidance. It is the guidance known as IR20 which was at issue in Davies and Gaines-Cooper4. The Inland Revenue published the first edition of IR20 in 1973 and 1 Levene v. The Commissioners of Inland Revenue 13 TC 486 at 502. 2 Most recently Grace v. Revenue and Customs Commissioners [2011] UKFTT 36 (TC). 3 Or, in a couple of cases, “her”. 4 R (on the application of Davies and James) and R (on the application of Gaines-Cooper) v. HMRC [2011] UKSC 47. -2- UK Tax Residence 31 October 2011 the one at issue in 1999. In January 2007, following the Special Commissioners’ decision in Gaines- Cooper5, HMRC issued Business Brief 1/2007, giving HMRC’s interpretation of IR20 (which HMRC claimed had always been the same). HMRC then replaced IR20 with HMRC66 in 2009. Consultation Since 1928 “the facility of communications, the fluid and restless character of social habits, and the pressure of taxation” have increased by leaps and bounds. This, coupled with the inadequacy of HMRC’s guidance and the lack of clear law, has given rise to a general concern that the existing rules are unacceptably vague, especially for the many internationally mobile individuals whose role is so important to the UK economy. On 17 June this year HM Treasury and HMRC published a consultation document entitled “Statutory definition of tax residence: a consultation”.7 The government proposed that a new statutory definition of residence for individuals would be included in the Finance Bill 2012 and apply from 6 April 2012. The proposals were not intended to change the position of most taxpayers. The consultation closed on 9 September and received a broadly positive response. THE CASES A. GAINES-COOPER The facts Mr Gaines-Cooper was born in the UK and remains a British citizen. A serial entrepreneur, Mr Gaines- Cooper left the UK in the mid-1970s to live overseas, principally in the Seychelles, where he was granted a residence permit in 1976. Since the 1970s he has had business interests in several countries outside the UK. Mr Gaines-Cooper retained properties in the UK, returned to the UK to visit family, and his wife and son maintained a home in the UK from 1998 until 2005 while his son attended school. The litigation HMRC determination. HMRC issued assessments and amendments against Mr Gaines-Cooper’s self- assessments for the tax years 1992-93 to 2003-04, claiming that throughout that period his domicile, residence and ordinary residence were in the United Kingdom. Appeals. Mr Gaines-Cooper’s case before the Special Commissioners8 was that he was not domiciled, resident or ordinarily resident in the UK for the period in question. (There was one exception: he accepted that he was resident in the UK in the tax year 1992-93. For that year only, the fact that he had a 5 Gaines-Cooper v. Commissioners for HMRC (2006) SpC 568. 6 “Guidance on Residence, Domicile and the Remittance Basis”, www.hmrc.gov.uk/cnr/hmrc6.pdf. A version of IR20 including Business Brief 1/2007 as an appendix and noting that it is no longer current is available at www.hmrc.gov.uk/pdfs/ir20.pdf. 7 See our client memorandum of 25 July: www.sullcrom.com/UK-Tax-Residence-07-25-2011. 8 The appellate body now superseded for most purposes by the First-tier Tribunal (Tax). -3- UK Tax Residence 31 October 2011 house in the UK made him resident automatically. That rule was then abolished.) The Special Commissioners found that, as a question of fact, Mr Gaines-Cooper had not demonstrated a sufficient break with the UK to shed his UK domicile, nor to establish that he was neither resident nor ordinarily resident in the UK for those periods. Mr Gaines-Cooper appealed to the High Court on the question of UK domicile. The High Court9 upheld the Special Commissioners’ finding that Mr Gaines-Cooper remained UK-domiciled. Mr Gaines-Cooper did not appeal this decision. Application for judicial review. Between those two appeals Mr Gaines-Cooper also applied to the High Court for judicial review of HMRC’s conduct in determining his residence and ordinary residence.10 HMRC had failed, he said, to apply to him the policy set out in IR20 or (alternatively) HMRC’s settled practice. It was this that fell to be considered by the Court of Appeal, and subsequently by the Supreme Court. B. DAVIES AND JAMES The facts Mr Davies and Mr James are both British citizens and property developers who moved from the UK to Brussels in 2001 in order to set up a new property development business. They left the UK (and claimed that their full-time employment abroad began) before 6 April 2001. They rented apartments in Brussels and worked full-time for the Brussels business for a number of years. Mr Davies and Mr James retained their homes in the UK, and returned to the UK to attend local functions and to visit their families, who remained in the UK. The litigation HMRC determination. HMRC issued determinations against Mr Davies and Mr James, claiming that they were resident and ordinarily resident in the UK in the tax year 2001-02, when they had made significant asset disposals for capital gains tax purposes. HMRC considered that their work did not start until after 5 April 2001: as they were not employed full-time for the whole tax year 2001-02, they could not establish non-residence in the UK for the 2001-02 tax year either as a legal matter or on the basis of the IR20 practice on full-time work abroad.
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