Gaines-Cooper ruling shows futility of guidance

THE LATEST, and perhaps most important, ruling in the seemingly never-ending dispute over Robert Gaines-Cooper’s residency status provided little comfort for the multi-millionaire, with the Supreme Court ruling in favour of HM Revenue & Customs.

Reaction to his loss has mainly focused on what this means for other people who are unsure about their residency status. But the statutory residency test, currently under consultation, lessens the impact in this sphere. There have been concerns that the Revenue will now go after similar outstanding cases. But, despite the announcement this week of a crackdown on overseas property owners, there is no suggestion yet that HMRC will be reviewing the residency status of other taxpayers.

In the wider scheme of things, the ruling might have more implications for the legal status of HMRC guidance, such as that relied upon by Gaines-Cooper. So will the ruling help advisors and taxpayers who wish to rely on HMRC diktats?

Take a break

This case centres on the then Inland Revenue’s IR20 pamphlet, which was meant to clear up issues around an individual’s residency status. Gaines-Cooper claimed that he adhered to the rules within the guidance, as he was abroad for at least three years and satisfied the day-count proviso – that is, fewer than 90 days spent in the UK.

But the judges ruled that several passages in the guidance meant that Gaines-Cooper had to prove there had been a “distinct break” from the UK, a phrase first used in case law in 1932. Because of his ongoing links with the UK – family set up, accommodation and even membership of clubs – he had failed to prove this distinct break. This was the crucial test of whether he was non-resident, a test he failed.

An interesting element to the case was that the term “distinct break” was never mentioned in IR20. Lord Mance argued that if “distinct break” was the crucial criteria, it should have been made explicit. The other four Lord Justices, however, found that there was a strong implication within the guidance and this was sufficient.

Their conclusion was that guidance can only be relied upon when it was clear and unambiguous. But the implications of this are worrying for taxpayers and advisors. As Jonathan Levy, partner at RPC put it: “Cynics would say it is in HMRC’s interests to leave issues cloudy.” It was noticeable that HMRC6, the follow-up to IR20, was at pains to point out that it was only guidance and had no legal basis.

Although the Gaines-Cooper case has reaffirmed the principle that guidance constitutes a “legitimate expectation” for the taxpayer, this has simply meant that generic statements are the norm.

This raises an interesting point about what and who the guidance is for. IR20 stated: “If you have any difficulty in applying the rules in your own case, you should contact an Inland Revenue Tax Office.” This was an important point for the judges.

PwC criticism

They were critical of PwC, the accountants for Robert Davies and Michael James, the other appellants in the case. Lord Wilson added there was “no sign” that Gaines-Cooper’s professional advisors contacted the Revenue. “Nor did [Davies & James], who were at all material times advised by PricewaterhouseCoopers, seek such advice,” he said.

Lord Walker went further in his criticisms. “The appellants had expert professional advisors and it was well known to them that a large amount of tax was at stake. The guidance of IR20 is far from clear,” he said. “Yet there is no suggestion that any attempt was made to seek clarification from an office of the Inland Revenue, still less that any specific guidance or assurance was given on the particular course of action proposed by the appellants. It seems possible that the preferred strategy was to let sleeping dogs lie, despite the obscurity of parts of IR20”

This criticism has been rejected by some advisors, pointing out that few advisors would ever contact the Revenue about a client’s residency status as it would always create more problems than it would solve.

These are fair points. But there are factors that make this case different: Gaines-Cooper left the UK partly to mitigate his tax liabilities; there is £30m at stake; and lest we forget this is a trial that has already lasted six years and looks set to run further. In other words, this is not a run-of-the-mill case. Guidance, on the other hand, is meant for run-of-the-mill cases – the “ordinary sophisticated taxpayer”, as Wilson put it.

There is a facility for taxpayers who are, to use Wilson’s phrase, more sophisticated than the ordinary taxpayer. The non-statutory clearance system for taxpayers with queries that are ambiguous or involve high sums. If the unit give the taxpayer prior clearance for their tax position, this gives the individual a legitimate expectation and HMRC will not challenge them – but usually, the taxpayer would not get a definitive statement.

This all suggests that the taxpayer will not be able to rely much on guidance when an action is undertaken in contentious areas, such as tax planning, because it is not in HMRC’s interests to provide clear guidance for these cases. Taxpayers and advisors in these situations will have to argue on case law and legislation – a lesson Gaines Cooper has learnt the hard way.


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