On appeal from High Court [2010] EWCA Civ 83

The long running litigation involving Gaines-Cooper, which started with an appeal hearing in front of the UK Special Commissioner in October 2006, reached a conclusion in the UK Supreme Court last month. The UK Supreme Court upheld the decision of the Court of Appeal, and finding in favour of HMRC, held that the taxpayers remained resident in the UK.

Following the UK High Court's refusal to grant permission to apply for judicial review of the determinations by HMRC that the taxpayers in this case were resident and ordinarily resident in the UK, the case was brought to the Court of Appeal, where permission for judicial review was granted but the taxpayer's substantive application was dismissed. The case was heard before the UK Supreme Court and the judgement of that Court was delivered on 19 October 2011.

The judgement of the UK High Court [2010] EWCA Civ 83 was reported on in the March 2010 issue of tax.point.

Background

This case concerns the UK residence rules and HMRC guidance (known as IR20) which set out the circumstances in which an individual would, or would not be treated as resident in the UK for the purpose of their liability to UK income and capital gains tax.

British born Robert Gaines-Cooper, who is based in the Seychelles, contended that IR20 should apply to his circumstances and furthermore it gave a binding assurance to him that based on the number of days he spent outside the UK, he would be treated as not resident and not ordinarily resident in the UK for the years under review.

Other taxpayers party to this case, Davies and James, contended that IR20 contained a more benevolent interpretation of the circumstances in which a taxpayer becomes non-resident than the ordinary law. Further it was contended by them that it was HMRC's practice to adopt such benevolent interpretation. They asserted that in accordance with section 2.2 of IR20 they were entitled to be treated as non-resident and not ordinarily resident as they left the UK for full time employment in Belgium in March 2001. Further, they were entitled to such treatment by virtue of sections 2.7 – 2.9 of IR20 because they left the UK indefinitely, for an established purpose. Alternatively, they contended that HMRC's practice of interpreting IR20 gave rise to a legitimate expectation on their part that they would be regarded as not resident or ordinarily resident in the UK. HMRC's benevolent interpretation of IR20, they claimed, changed from 2005.

Judgment

The Supreme Court dismissed the two appeals on the grounds that the proper construction of IR20 did not support their claims and that there was insufficient evidence of any settled practice on the part of HMRC by way of departure from the IR20 Guidance.

According to that court, “in law an individual who has been resident in the UK ceases to be so resident only if he ceases to have a settled or usual abode in the UK”. Considering IR20 as a whole, this “informed the ordinary sophisticated taxpayer that he had to leave the UK permanently, indefinitely or for full-time employment; had to do more than to take up residence abroad; and had to relinquish his usual residence” in the UK”.

The court held that the claims by the taxpayers that HMRC had departed from IR20 as a matter of settled practice was not supported. “Such a contention requires evidence that the practice was so unambiguous, so widespread, so well-established and so well-recognised as to amount to a specific commitment of treatment in accordance with it but the Appellants’ evidence to this effect was far too thin and equivocal.”

This case is sure to have ramifications for many British tax exiles who had considered themselves non-resident in the UK and therefore outside the charge to UK taxes. The case also highlights the complexity of the British residency rules for individuals which have long been deemed unclear. Recognising these complexities, the UK Government undertook a consultation on the British tax residency rules in June of this year with a view to legislating for a statutory residence test in Finance Bill 2012.

The full text of the Supreme Court judgement and accompanying press release can be accessed here http://www.supremecourt.gov.uk/decided-cases/index.html