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Taxpayer loses residency appeal

By DAVID FRANKS [email protected]

David Franks is an accomplished and experienced practitioner in both UK and overseas taxation. He lectures widely on taxation issues, in particular in relation to investment planning. David holds the Investment Management Certificate and is the Chief Executive and Finance Director of the Blevins Franks Group.

One of the great myths of tax planning is that spending less than 91 days (or nights) in the UK is sufficient for an individual not to be treated as resident there. The reality is that this is not, and never has been, the case and the test of whether or not an individual should cease to be treated as UK resident is much more complicated and uncertain – as the Gaines-Cooper decision, released on Monday February 15, found.  

In order to cease to be treated as UK resident, a taxpayer has to make a distinct break of his ties with the UK and to properly establish himself in another jurisdiction. As such, it is a question of fact in each case and a question of all the facts of an individual’s lifestyle, not simply the number of days spent in the UK.  

As the Court of Appeal noted, while an individual who spends over 91 days a year in the UK will be treated as UK resident (although not always the case), spending less than 91 days a year in the UK does not necessarily mean that he will be non-resident. It is apparent from case-law that it may be possible for someone who does not step foot in the UK for a whole tax year still to be treated as UK resident for tax purposes if they have not properly established themselves abroad.

This case does not represent a change in the law but reinforces what has always been good advice to individuals seeking to lose UK residency. They should make a complete break with the UK and keep their visits to a bare minimum, well below 91 days, and not to exploit perceived loopholes in HM Revenue & Customs’ (HMRC) guidance.

Background to the case

In October 2006, the Special Tax Commissioners determined that despite Gaines-Cooper becoming a resident of the Seychelles, he had remained resident in the UK. Gaines-Cooper’s case was that he had relied on written guidance issued by HMRC in a publication known then as IR20 (since reissued  as HMRC 6), that set out the circumstances in which an individual would, or would not, be treated as resident in the UK and therefore liable to UK income and capital gains tax.  

A key part of the guidance that Gaines-Cooper relied on was that spending less than 91 days a year in the UK would mean that he could not be treated as UK resident.  In particular he had relied on days of arrival in and departure from the UK not being counted for the purposes of the 91-day test to spend the weekend in the UK, flying in on Saturday and out on Sunday to avoid the visit being counted.  This led to the Special Commissioners deciding that in his case the number of nights in the UK should be counted rather than the number of days. This approach has since been enshrined in HMRC guidance, with a ‘day’ now meaning presence at midnight. Gaines-Cooper claimed that he had a legitimate expectation that the guidance set out in IR20 would be applied and as such, if he followed it, it gave him a binding assurance that he would not be treated as UK resident.

The decision

The Court of Appeal decided that a statement formally published by HMRC can be regarded as binding, subject to its terms, in relation to any case falling clearly within the terms of that statement.  However, IR20 set out a limited number of specific situations in which a taxpayer would be treated as non-UK resident. If the taxpayer fell within those situations HMRC had said that they would treat the taxpayer as falling within that guidance and would not change its mind.  However, the taxpayer had to fall clearly with the terms of the guidance, and Gaines-Cooper had not.

There has been an enormous amount of interest in this case and in particular that Gaines-Cooper was found to have never left the UK, notwithstanding that he claimed to have spent less than 91 days a year there.  The UK tax authorities have for the past two years been taking a far more aggressive approach, especially with anyone who has accommodation available for their use in the UK (which they do not necessarily have to own) or where their spouse has remained UK tax resident.

Where now?

HMRC 6 sets out current guidance for taxpayers seeking to establish residence in or out of the UK.  It makes it clear that it is only HMRC’s interpretation of the law and cannot be relied on in court.

The uncertainty in the UK residency rules that has given rise to this case is unhelpful and is one of the main factors that is increasingly driving wealth creators away from the UK and placing the UK at a competitive disadvantage in an international context.  HMRC has confirmed that despite extensive consultation they would not be introducing a statutory residence test in the Finance Bill this year, which would remedy the uncertainty.  They are allowing this unsatisfactory position to continue, so that even an individual who leaves the UK for a whole tax year and does not return for a single day cannot definitively be said to be non-UK resident.  

Anyone who has any doubt over their residency position should seek advice from specialist tax advisers to see what steps they might take to shore up their non-UK residency position.

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