The Gaines-Cooper case has opened up the debate on what constitutes residence and domicile, with regard to taxation, and means expatriates need to consider cutting ties with the UK
The rules on UK residence and domicile were recently brought into the spotlight in the case of Robert Gaines-Cooper v HM Revenue & Customs (HMRC) Commissioners.
These rules determine the extent to which someone who lives abroad should be taxed in the UK and, in particular, the extent to which an individual can rely on HMRC published guidance.
Gaines-Cooper has had a complex lifestyle to say the least. He has for a number of years had residences in the UK, the Seychelles, where he claimed to be resident, and elsewhere. He also has extensive worldwide business interests and spends a considerable amount of time each year travelling.
The case, therefore, concentrated on two aspects to determine whether or not he was UK resident: had he spent sufficient days in the UK to be regarded as resident here? And if the answer was yes, was he resident here for a temporary purpose only and therefore exempt from tax on his Schedule D income?
HMRC guidance on how it interprets residence in the UK is set out in its publication IR20 and states among other things that normally days of arrival and departure are not counted in arriving at the total number of days spent in the UK. This effectively means someone could arrive here on a Monday morning and leave on Wednesday evening having effectively spent three days here, but having only one counted for the purpose of establishing the total number of days here in a year.
Certainly, if the Revenue's normal guidance was applied then Gaines-Cooper spent less than 91 days per annum here on average over a four-year period. However, this was by no means a straightforward case of deciding whether Gaines-Cooper was resident in the UK or the Seychelles, because he spent time in many other countries and an average of 150 days per year travelling.
The burden of proof was on Gaines-Cooper to satisfy that the Commissioners that he was not resident and ordinarily resident in the UK. Unfortunately for him, the Special Commissioners agreed with HMRC that he was UK resident. It was felt he had a lot of the hallmarks of someone who habitually lived in the UK. It was where his son went to school, where his wife was resident for a number of years, he had been a badge holder at Ascot for 30 years and kept vintage cars in the UK. In addition, he socialised in the UK with friends and family and had a regular pattern of visits for shooting.
Consequently, the Special Commissioners found Gaines-Cooper had a settled abode in the UK and was resident and domiciled in the UK for the tax years under review. In reaching this decision an alternative approach was adopted to the day count. Instead of ignoring travelling days, HMRC counted all days when he was in the UK at midnight, which meant he exceeded the permitted average of 90 per year.
Although Gaines-Cooper's case is perhaps extreme, we have nevertheless seen over recent years a rising number of British people moving abroad either on a full or part-time basis. Many of those moving abroad still have close ties to the UK. They may continue to work in the UK on a reduced basis or perhaps work abroad but have close family ties and consequently want to spend as much free time as possible in the UK.
Cheaper and more flexible travel has made this easier to achieve. This case is therefore of great concern to those people who choose to live partly in the UK and partly abroad, particularly where reliance is being placed on HMRC's own published guidance.
The rules on determining whether or not someone is a UK resident and domiciled are unfortunately not set out in black and white in legislation, so over many years various cases have been heard before the courts, which have set precedents.
HMRC has published guidance on how it interprets both the legislation and case law. It is fairly lengthy and sets out how the Revenue will decide someone's residence status. However, and what seems to have been overlooked by Gaines-Cooper, is that HMRC has always said its guidance will normally be applied, but may not be in cases where it perceives the fairly generous rules are being abused.
Notwithstanding the guidance on the number of days allowed in the UK before someone is regarded as resident, the purpose of the visit also needs to be considered. The legislation will still exempt someone from income tax on Schedule D income, which includes business profits, interest and foreign income, if the person is only resident here for a temporary purpose.
Undoubtedly, because Gaines-Cooper is a wealthy businessman with significant worldwide income that would not otherwise be taxed in the UK, HMRC felt this was a case worth challenging.
This case may prove to be a timely reminder that IR20 does say days of arrival and departure are not normally included in the day count, which leaves it open for HMRC to say that in some cases they can be included in determining residence status based on a whole range of facts.
While this case does not alter the law (there is little legislation on residence), it does emphasise the fact IR20 has always left it open for various factors to be taken into account in determining residence status. In particular, the guidance in IR20 is not a statement of the law on residence and the Revenue has always said it may not apply the guidance in unusual cases.
It is not necessarily surprising that someone who regularly visited the UK for three days and counted each visit as only one day has been challenged. Furthermore, this case demonstrates that where a dispute arises between HMRC and a taxpayer, the courts will consider previous cases on residence to determine the position rather than take into account the provisions of IR20.
Where this case, and the 2005 case of Shepherd v HMRC, fell down is that neither could demonstrate sufficient evidence of a clear and distinct break in the pattern of the individual's life to show they had left the UK to live permanently in another country; a significant burden of proof is needed to achieve this.
Anyone contemplating moving abroad and becoming non-resident in the UK needs to sever as many ties as possible with the UK, which may involve giving up club memberships, letting property and moving assets abroad. They should ensure visits to the UK do not become part of their habitual lifestyle and keep the number of visits where arrival is on one day and departure on the next to a minimum, because a very different picture of residence can emerge where these days are included.
Although in light of this case HMRC may be expected to amend its guidance, this may be delayed until after any appeal has been heard. Because there are significant amounts of tax at stake, an appeal is almost certainly expected so there may yet be further developments.
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