The real legacy of Gaines-Cooper
Over the last few years, Robert Gaines-Cooper has repeatedly contended in court that HMRC incorrectly interpreted its published guidance in assessing his residence position for tax purposes and unlawfully refused to apply it. The latest – and last – battle in this war was his appeal to the Supreme Court against the decision of the Court of Appeal in relation to his claim for judicial review.
Although, as anticipated, the Supreme Court’s judgment added little to the current understanding of the meaning of residence, the real legacy of the Gaines-Cooper saga is a much clearer understanding for taxpayers and tax advisers who wish to know the extent to which they can rely on guidance issued by HMRC when planning their, or their clients’, tax affairs.
As many people will recall, Mr Gaines-Cooper (and a second set of appellants) had relied on certain paragraphs of “IR20: Residents and Non-Residents – Liability to Tax in the United Kingdom”, HMRC’s previously published guidance on tax residence, now replaced by HMRC6. Mr Gaines-Cooper sought to demonstrate that he had left the UK and become (and remained) non-UK resident for tax purposes, in accordance with the guidance in IR20. The appellants contended that certain paragraphs of IR20 contained a more benevolent interpretation of the circumstances in which an individual will be treated as non-UK resident and not ordinarily resident than is contained in the ordinary law and that they had a legitimate expectation as to how they would be treated by HMRC based on that guidance, to which the courts should give effect.
Residence as a matter of law
By a majority of four to one, the judges of the Supreme Court held that there is clear case law to the effect that an individual who has been resident in the UK only ceases to be resident if he has made a “distinct break” from the UK.
The relevant paragraphs of IR20 set out three situations in which an individual would be regarded as non-UK resident and ordinarily resident, provided that he also met the “day count proviso” (by ensuring that his visits to the UK following departure were under six months in any tax year, or less than 91 days on average in each tax year taken over a period of four years). The two sets of appellants asserted (albeit on slightly different bases) that the three situations were simplified forms of the requirement to show that you had made a distinct break and that, therefore, merely by complying with one of the situations and the day count proviso, an individual would be accepted as non-UK resident and ordinarily resident.
However, Lord Wilson, giving the leading judgment for the majority, took the view that, when all of the passages in IR20 were considered together, the general requirements which the “ordinarily sophisticated taxpayer” would take from the guidance were that:
(a) he was required to “leave” the UK in a more profound sense than that of travel, namely permanently or indefinitely or for full-time employment;
(b) he was required to do more than merely take up residence abroad;
(c) he was required to relinquish his “usual residence” in the UK;
(d) any subsequent returns on his part to the UK were required to be no more than “visits”; and
(e) 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 his opinion, the “ordinarily sophisticated taxpayer” would have concluded that these general requirements in principle demanded a multifactorial evaluation of his circumstances, which could be summarised as requiring a distinct break.
However, the judges felt that the controversial requirement in the Court of Appeal’s judgment for a “severance of social and family ties” in order to establish a distinct break pitched the requirement at too high a level. Rather, Lord Wilson felt that a substantial loosening of such ties was sufficient.
Lord Mance, who gave the dissenting judgment, disagreed with the assertion that the requirement of a distinct break was implied from a complete reading of IR20. Rather, he was of the opinion that the guidance introduced a series of specifically delineated cases; if a taxpayer fell into one or more of these, he would be treated, without more, as non-UK resident and ordinarily resident. He felt that it was remarkable that, if the requirement of a distinct break was intended, it was not clearly expressed.
Status of HMRC guidance
HMRC accepted that it was capable of being bound by its guidance if properly construed. There was a crucial acknowledgement by HMRC that its guidance could give rise to a legitimate expectation that it would assess an individual’s case by reference to that guidance (even if it did not reflect the ordinary law). This directly contradicts statements made by HMRC in earlier hearings in the Gaines-Cooper case. As such, it will be of some reassurance to taxpayers and their advisers, whose confidence had been undermined by HMRC’s earlier statements that no reliance could be placed on its published guidance.
However, Lord Wilson held that, for the appellants to have had a legitimate expectation in respect of the representations in the guidance, the relevant representations must have been clear and unambiguous. He held that their clarity must be assessed on how it would appear to the “ordinarily sophisticated taxpayer” in the light of an appraisal of all of the relevant statements in the guidance, read as a whole. Moreover, no legitimate expectation would exist where the taxpayer was attempting to rely on the representations for the purpose of tax avoidance.
It was noted that the preface to IR20 stated that the guidance it contained was general and that its application to a particular case would depend on its facts. It was also considered to be important that the guidance advised that, if there was any difficulty in applying the rules to their particular case, individuals were advised to consult a Revenue tax office.
The judges noted that the three paragraphs in contention were “very poorly drafted”. Of potential concern is Lord Wilson’s statement that, if the guidance were presented in a confusing manner, it would probably lack the clarity required by the doctrine of legitimate expectation. This has led some commentators to wonder whether it is therefore in HMRC’s interests to retain a level of ambiguity in its published guidance.
The Supreme Court’s decision reinforces the need for clarification of the UK residence rules, which are widely considered to be unclear and ill-adapted to the international nature of modern life. It is to be hoped that, with the proposed introduction of a statutory residence test (now due in April 2013 – for further details, click here), taxpayers will have a much clearer basis upon which to know whether they are, or are not, UK resident. It is interesting to note that some of the factual matters highlighted in the Gaines-Cooper case (such as the presence of family members in the UK, or a home) will form key elements of the new statutory test of residence – one of the enduring effects of this important case. However, its most important message remains that individuals and their advisers need to use caution when relying on HMRC guidance when planning their tax affairs, particularly when using a narrow interpretation of the guidance to support an otherwise arguable case.
If you would like to discuss any of the issues raised in this article, please speak to your usual contact at MTG.
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