Locations
The long running saga of Robert Gains-Cooper ended with the decision of the Supreme Court given on 19 October 2011. The Court confirmed that taxpayers do not have a legitimate expectation, based either on HMRC published guidance, or any previous practice by HMRC, to be treated by HMRC as non-UK resident for tax purposes. Pending the issue of a statutory test of residence, expected to be enacted with effect from April 2013, taxpayers should consider seeking an express ruling on their residence status from HMRC and seeking careful professional examination of that ruling.
The Supreme Court has dismissed, by a majority of four to one, both appeals in the joint judicial review cases of Davies (and another) and Gains Cooper v HMRC [2011]. These were appeals against an earlier decision of the Court of Appeal to refuse applications for judicial review of HMRC's determination of residence, and the extent to which HMRC should be bound by its published guidance in IR20- Residents and non-residence - liability to tax in the United Kingdom ("IR20").
The facts
In the appeal:
- Mr Davies and Mr Jones, successful property developers who had expanded their business into Belgium, challenged HMRC's finding that they had remained resident and ordinarily resident in the UK for the 2001/2 tax year, notwithstanding that, prior to 6 April 2001, they had commenced living in rented accommodation in Belgium and working full time for a Belgian property development company. Their families remained in the UK during this period. The case had not been heard previously before the Special Commissioners.
- Mr Gains-Cooper, a successful entrepreneur who was born and educated in the UK, claimed to have left the UK to live in the Seychelles because the UK tax system was unfavourable. He maintained at least two homes in the UK. In 1993 he married a wife of Seychelles descent who lived in the UK and their son was born in the UK in 1998. Mr Gains-Cooper challenged HMRC's decision that he had been resident and ordinary resident from the tax years 1993/4 to 2003/4. Mr Gains-Cooper's residence had previously been examined at a ten day hearing before the (then) Special Commissioners who held that he was domiciled, resident and ordinarily resident during these years.
Can HMRC's guidance in IR20 be relied on?
Both taxpayers argued that HMRC's guidance IR20, which contained HMRC's view on the law of residence, ordinary residence and domicile, and their prevailing practice, contains a more "benevolent" interpretation of the circumstances in which an individual becomes non resident and not ordinarily resident in the UK than is reflected in the ordinary law and that this gives rise to a legitimate expectation that this more benevolent interpretation should be applied.
The lead judgment was given by Lord Wilson who reviewed IR20 in detail and concluded that the guidance, when considered as a whole, should inform "the ordinary sophisticated taxpayer" that to lose UK-resident status:
- he was required to "leave" the UK in a more profound sense than simply travel, namely permanently or indefinitely or for full time employment;
- he was required to do more than to take up residence abroad, i.e. he was required to relinquish his "usual residence" in the UK;
- any subsequent returns on his part to the UK were required to be no more than "visits"; and
- any property retained by him in the UK for his use was required to be used for the purpose only of visits rather than as a place of residence.
In summary Lord Wilson considered that IR20 required there to be a "distinct break" in order to lose UK resident status.
Lord Wilson concluded that all IR20 achieved was to set out certain factors which HMRC had to take into account but that IR20 could not be construed by taxpayers as constituting a more generous treatment than that available under the ordinary law.
Can HMRC's "settled practice" on interpreting residence be relied on?
As a secondary argument the taxpayers contended that HMRC's settled practice had been to apply a more benevolent interpretation so a legitimate expectation arose in any event.
Lord Wilson also dismissed the taxpayers' second contention that, even if IR20 did not provide a more generous treatment than under the ordinary law, HMRC's settled practice was to determine claims to non-residence on that basis and that this practice continued throughout the relevant tax years. The taxpayers contended that it was only after that date that HMRC's practice changed.
Lord Wilson said that to prove this point the taxpayers would need evidence "beyond the generalised, anecdotal understanding of their witnesses, however highly regarded".
The one hard piece of evidence of HMRC's settled practice relied on by the taxpayers was a letter, unrelated to the cases before the court from a Revenue Inspector, Mr Wilkes, to an accountant, Mr Sawyer, dated 7 July 1999 which was never published. It was considered that this letter was not sufficient to reflect a settled practice on the part of HMRC to depart from the ordinary law and from IR20.
Can statements on residence by HMRC be relied on?
The Supreme Court confirmed that HMRC can be bound by statements made to taxpayers and that this is the case even if those statements are contrary to UK tax law. However, for HMRC to be bound by its statement, it must be "clear and unequivocal".
Conclusion
The outcome of these appeals is a disappointment to taxpayers who have relied upon the interpretation of residence, ordinary residence and domicile contained in HMRC's published guidance. It is clear that taxpayers cannot now rely on HMRC's published guidance unless it is clear and unambiguous.
IR20 was replaced on 6 April 2009 by HMRC6 on six days notice and without consultation and has since been revised. HMRC6 makes it clear that it comprises only general guidance which may be altered or withdrawn. The revised version of HMRC6 published in February 2010 also makes it clear that to lose UK-resident status a distinct break from the UK is required.
Where residence status needs to be determined taxpayers should in future consider seeking professional advice rather than relying on guidance published by HMRC. An individual can also request an advance ruling from HMRC. In this situation professional advice should also be sought to ensure that the ruling given by HMRC is clear and unequivocal and is not ambiguous in any respect.
The outcome of these appeals emphasises the urgent need for a clear statutory test of residence which was a reform first recommended by the Consolidation Committee as long ago as 1936. There has been a consultation on the proposed new statutory test of residence which has now closed. Legislation introducing a statutory test of residence is currently expected to be implemented with effect from April 2013.