Gaines-Cooper fails the non-residency test!

David Anderson solicitor and chartered tax adviser and Andinee Pillay Jagambrun trainee solicitor both at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.

Please note that international tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

The Supreme Court has now delivered its judgment in the long running cases involving HMRC and a number of individuals claiming non-UK residency, including Robert Gaines-Cooper. Mr Gaines-Cooper challenged HMRC in its application of IR20, which was the guidance issued by HMRC on its approach to residency. He believed that he had established non-residency in the UK by complying with the application of IR20, in particular the day counting proviso. His claim was based on the argument that HMRC had departed from IR20 and its established practice. However, the Supreme Court, by a majority of 4-1, decided in favour of the HMRC.

Background

There is no statutory definition of resident or ordinarily resident in the UK. Accordingly, individuals have often sought to rely on case law and tax legislation to ascertain whether or not they are considered resident or ordinarily resident in the UK. To assist individuals further, HMRC published the guidance booklet known as IR20 on residence and ordinary residence in UK.

In IR20, HMRC provided general guidance on the meanings of “residence” and “ordinarily residence”. It also set out circumstances where it would consider an individual to not be resident or ordinarily resident in the UK, provided they complied with the day counting proviso. Some of the circumstances listed where it would consider an individual as non UK resident were as follows:

• if the individual left the UK to take up full time employment abroad, or
• left the UK permanently or for at least three years, or
• went abroad for a settled purpose and remained abroad for at least a whole tax year.

Provided in each case that any visits to the UK totalled less than six months in any one year and averaged less than 91 days each year.

Basis of the case

By way of a very brief summary of the facts, Mr Gaines-Cooper had claimed to have left the UK in 1976. He maintained various links to the UK and returned here on occasion, although the time he spent in the country did not exceed the average of 91 days per year.

By reference to the ordinary law, it had been conclusively decided that Mr Gaines-Cooper was resident and ordinarily resident in the UK. However, Mr Gaines-Cooper contended that his status should be determined by reference to IR20 and to HMRC’s established practice. This was on the basis that HMRC had a sufficiently settled practice (allowing individuals who complied with the day counting rules to be considered non-resident) that he could conclusively rely on this test. He therefore contended that it was sufficient for him to live abroad for at least three years and to satisfy the day counting proviso in order to achieve non UK residence. He believed, as did many tax advisors, that it was not necessary to show a distinct break in his pattern of life in the UK.

Decision

The majority of the Supreme Court held that IR20 should be read as a whole and on the proper construction of the entire the document, it could not accept that HMRC had intended the individual circumstances given in separate parts of IR20 to be freestanding.

The Supreme Court made specific references to paragraphs 2.7 to 2.9 under the heading of “Leaving the UK permanently or indefinitely”, and how they interlinked with one another. According to the majority of the Supreme Court, paragraph 2.9 (which sets out the day counting proviso) had an express link to paragraph 2.8, which required an individual to leave indefinitely in order to be considered non-resident. It agreed that the wording of IR20 could have been much clearer, but as a whole, the ordinarily sophisticated taxpayer would have known from the guidance that he had to leave the UK permanently, indefinitely or for full-time employment, and had to make a distinct break from his usual residence and pattern of life in the UK.

It further held that there was insufficient evidence to show the HMRC had an established practice departing from its guidance given in the IR20. As a result, simply keeping your days in the UK below 91 each year would not be conclusive as to non-residency under the old practice of HMRC.

It has generally been accepted that when assessing “residency”, the word should be given its ordinary meaning. It must be questionable whether this decision achieves this aim. An individual who has moved to a country and established a home there, spends most of their time there, has family there and conducts business there could still be considered UK resident if he returns here on occasion and maintains interests in the country. If you asked an objective onlooker whether this person was resident in the UK or elsewhere, what answer would you expect to receive? It is for this reason that the law needs to be firmed up so that, at least, an element of certainty can be provided.

HMRC6

From 6 April 2009 the IR20 guidance was replaced with the guidance provided in HMRC6 – Residence, Domicile and the Remittance Basis. This guidance makes it clearer to an individual that “it is not simply a question of the number of days you are physically present in the UK during a tax year, although this is an important consideration”. It provides a list of other relevant factors which will be considered together to determine the individual’s residency status. It goes further to state in part 8 that “the act of leaving the UK does not necessarily make you not resident and not ordinarily resident. You must also make a definite break from the UK and any remaining ties you have with the UK must be consistent with not being resident here”.

Future development - Statutory Residence Test Consultation

There are currently proposals for legislation on this subject. The Government believes by introducing a statutory definition of tax residence for individuals, it will encourage individuals and businesses to invest in the UK as it will provide certainty and predictability. It is hoped that draft legislation will be available ahead of Budget 2012 with the intention of it coming into force from 6th April 2012. Below are some of the key points.

The Statutory Residence Test (SRT) will take into account both the amount of time the individual spends in the UK together with the other connections they have with the UK. It will have 3 parts.

Part A: Conclusive non-residence factors

Individuals will not be a resident in the UK for the tax year if they:

• Were not resident in the UK in all of the previous three tax years and are present in the UK for fewer than 45 days in the current tax year; or
• Were resident in the UK in one or more of the previous three tax years and are present in the UK for fewer than 10 days in the current tax year; or
• Leave the UK to carry out full-time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B: conclusive residence factors

Individuals will be resident in the tax year if they:

• Are present in the UK for 183 days or more in a tax year; or
• Have only one home and that home is in the UK (or have two or more homes and all of these are in the UK); or
• Carry out full-time work in the UK.

Part C: other connecting factors and day counting

Part C would apply only to those individuals whose residence status is not determined by Part A or Part B and, therefore, whose circumstances are less straightforward.

Factors would include:

• Family
• Accommodation
• Work in the UK
• UK presence in the previous year
• More time in the UK than in other countries

This will operate by firstly determining how many connecting factors you have with the UK. Depending on the number of factors that apply to you, you will then be allowed a maximum number of days in the UK whilst remaining non-resident. The more factors that apply, the fewer days you can spend in the UK and remain non-resident.

It should be noted that the proposals distinguish “arrivers” to the UK and “leavers”. Arrivers are individuals who have been non-UK resident in all of the past three years whereas everyone else counts as a leaver. The government recognises the risk of legislation deterring individuals from coming to the UK and so to encourage high net worth overseas nationals to the UK, arrivers will have a slightly easier time in proving they are non-resident. Arrivers will be conclusively non-resident if they spend fewer than 45 days in the UK. Leavers will be conclusively non-resident if they spend fewer than 10 days.

Conclusion

The decision of the Supreme Court will come as a blow to individuals who left the UK some time ago and sought to rely on what was considered by advisers to be a firm practice of HMRC. It may be that HMRC seeks to review other individuals’ claims to non-residency from those periods in light of the decision. The current practice of HMRC remains impractical as it lacks certainty. It is hoped that the introduction of a statutory test will, at least, provide certainty. On the face of the proposals the test appears to be “transparent, objective, and simple to use”. However, we have yet to see the draft legislation which may not be as straightforward as what has been proposed in the consultation. Whether or not the draft legislation will provide certainty and predictability for the investors and businesses remains to be seen.

Determining your residency status is generally difficult and complicated. It is encouraging that the Government intends on simplifying this matter of residency and indeed, it is welcomed by most. However, it should not be forgotten that even if the legislation came into force by 6 April 2012, an individual may still need to refer to any existing double tax treaties and possibly the domestic legislation of the country in which he is leaving or moving in order to determine his residency status.

October 2011

David Anderson
Solicitor and Chartered Tax Adviser
Andinee Pillay
Trainee solicitor