Wednesday saw the long awaited decision for Robert Gaines-Cooper in the Supreme Court, where the appeal was dismissed by a 4-1 majority. This case was not only about the UK residence rules (which by the Supreme Court’s own admission are “very poorly drafted” and “should have been much clearer”) but also about clarity in the UK tax system. Does the taxpayer have a legitimate expectation to rely on HMRC guidance and settled practice to determine UK residence?
Mr Gaines-Cooper’s case contained a complex set of facts. A British citizen, Mr Gaines-Cooper was born and educated and for many years lived in the UK. By 1974 he had formed the view that the tax regime in the United Kingdom was unfavourable and on that basis he began to establish overseas interests. He did so first in Canada and then in the Seychelles, where he purchased a house and he was granted a residence permit in the Seychelles in 1976, where he has had close links ever since.
Mr Gaines-Cooper was very careful never to stay more than 91 days in the UK in any given year, a widely accepted measure of residence in the UK. However, the Supreme Court concluded that in principle the requirements of IR20 (HMRC’s former guidance booklet on tax residence, now replaced by HMRC6) demanded an overall evaluation of Mr Gaines-Cooper’s circumstances and that he also “had to make a distinct break” from the UK (an underlying principle established by UK case law). In Lord Wilson’s view, IR20 when read as a whole provides the following general requirements to demonstrate a distinct break: that an individual “leaves” the UK in a profound sense - namely permanently or indefinitely or for full time employment; that an individual does more than take up residence abroad: that an individual relinquishes his usual residence in the UK; and that any subsequent returns on an individual’s part to the UK are no more than “visits”. Any property retained for use by an individual who leaves the UK must be used for the purpose only of visits rather than as a place of residence.
Lord Wilson concluded that Mr Gaines-Cooper (together with Mr Davies and Mr James, joint appellants to this appeal) failed to establish that HMRC had departed from an adopted settled practice applying criteria different from case law or IR20 read as a whole and consequently, there was no legitimate expectation to which the Supreme Court could give effect.
However, as Lord Mance in the sole dissenting opinion points out, it is remarkable that the requirements of a “distinct break” were not more clearly expressed in HMRC’s guidance. As so many practitioners had believed, IR20 was intended to reflect the “law and practice” and set out the “main factors” of determining tax residence in the UK. This was the taxpayer’s intention when going abroad as to the overall duration of his absence and counting the days of any return visits). Although not binding in law and not affecting the taxpayer’s right of appeal, IR20 was (as everyone understood it) intended to remove any need for a taxpayer to look further.
It is important to note that HMRC accepted that an individual would have a legitimate expectation of having his case appraised in light of operative guidance, notwithstanding that such guidance “failed to reflect the ordinary law”. The point to take away from this case is a reminder that HMRC’s guidance on residence was specifically expressed to be “general guidance only”. This was clearly stated at the preface to the booklet. It appears therefore that such general guidance cannot be relied upon as a substitute for proper professional advice in complex areas of law.
Despite the revised guidance in HMRC6 having improved on IR20, the Gaines-Cooper case has prompted the Government, for the first time, to propose a statutory definition of tax residence for individuals and is expected to be introduced in April 2012. No doubt the importance of this case will reduce over time with the new statutory test, though individuals will still need to be careful when relying on HMRC’s guidance.