Should I stay or should I go?

They were first enacted to control the tax affairs of aristocrats touring Europe in the last days of Empire and, since then, residency rules have never ceased to be controversial.

In the latest twist, tycoon Robert Gaines-Cooper has landed a final hearing at the Supreme Court to clarify his residency status as part of a marathon battle with HMRC.
Gaines-Cooper will challenge the taxman’s claim that he is liable for UK taxes because of his strong ties to the country, even though he complies with the rule which says he can spend no more than 90 days here to be non-resident. This looks set to cause trouble for advisers.

Redefining the rules

If the Supreme Court judges side with HMRC, the tax profession could see the redefinition of the residency rule to include criteria outside the 90-day test.

Tax advisers who have only ever used this test as part of their advice could then find themselves facing angry wealthy clients demanding to know why their non-resident status no longer holds. Queue an avalanche of lawsuits against advisers.

The rules, described as “inherently ambiguous” by Mike Warburton of Grant Thornton, are a minefield for clients and accountants alike.

Advisers are now considering a real threat of litigation. Not least if they have super-rich clients with deep pockets to pay for expensive lawyers.

Jonathan Russell, vice-president of the UK200Group and partner at accountants ReesRussell, said advisers will have to ensure any guidance given comes with a caveat that it was the “best advice given under the rules at the time”.

If not, advisers may have to hope the courts decide that the advice came with an implicit understanding that it was the best available at the moment it was offered.

“I can see a series of potential professional indemnity claims happening for firms who may have clients who are caught,” said Russell. “Certainly there must be concern over advice given in the past and anyone giving advice now must take [Gaines-Cooper’s unresolved issue] into account.”

The cat in the flat

The “strong ties” argument, around which the Gaines-Cooper case revolves is still in need of clarification for advisers and potential non-resident tax payers alike. For example, does a person living in Monaco still have strong links if they maintain a property here for children attending boarding schools?

HMRC has been determined to use strong ties to establish residency among the rich for some time. One story circulating among advisers is that of the taxmen who claimed that one taxpayer was indeed resident because he had a cat in a Birmingham flat. The cat, the officials claimed, was evidence of a significant link to the UK.

Elsewhere tax officials challenged another non-resident’s status on the basis that he paid a congestion exemption fee for one of his London-based staff. It’s clear HMRC is keen to prove a point.

There are other complicating factors. The Gaines-Cooper developments coincide with government plans to rework the residency rules. The case could, however, force ministers to hold off.

People close to the issue say they have met with Treasury secretary David Gauke and plans are definitely being shaped. But what is the government’s likely next step?
There are a number of options available.

New strategy

The Treasury could try to stick to the current 90-day rule. However, leaving the rules as they are may not be an option. A Supreme Court ruling could essentially force a change, plus the old rule does not address the vexed political question of the super-rich apparently jetting in and out of Britain as they please but retaining non-resident status.
The Treasury could reduce the number of days non-residents are allowed to stay in Britain, but that could be politically and economically risky if it staunches commerce as people steer clear of the UK.

A new statutory residence test would have to be comprehensive enough to cover all the bases but the diverse dispositions of non-residents would mean that the test is unlikely to be bullet proof.

Legal experts say a major problem lies in case law for residency stretching back to the days when a “gentleman” might reside in a hotel for the shooting season or spend months sailing between the UK and India – clearly unsuitable when applied to the modern world.

Because there is such a gap between the legal precedents and modern life, there will always be more cases like Gaines-Cooper's to resolve.

And how far back does the government go in these investigations? Probes normally go back six years, but can stretch to 20. The government may have to find a balance between the potential sums brought in and the length of time it can devote to each case.

HMRC has confirmed more cases are in the pipeline, but would not speculate on whether they would look at historic tax returns. Each case is unique because every person has a particular set of circumstances, the taxman says. HMRC is now looking at more compliance cases across the board.

In that context there are also questions about taxpayers much lower down the food chain that HMRC could target, raising the risk of further claims against advisers.

Many taxpayers who are not multimillionaires have had periods of non-residency, especially for capital gains tax purposes, and may now be worried about their positions.
It is a sensitive issue for advisers. They are hoping to avoid their fears about litigation becoming a self-fulfilling prophecy.

“No one wants to flag up the fact that litigation is a possibility,” said a one adviser.
“This case is important because further judicial guidance is needed before taxpayers can have anything like the clarity about their tax affairs to which they are entitled,” said Peter Vaines, Gaines-Cooper’s lawyer at Squire, Sanders & Dempsey.