The Supreme Court has recently dismissed, by a 4-1 majority, two taxpayer appeals in prominent tax residence cases on whether HM Revenue & Customs had correctly interpreted its own guidance.
Robert Gaines-Cooper’s had contended that the relevant guidance set out in the now-superseded IR20 contained a more benevolent interpretation of how an individual could cast off UK tax residence than the ordinary law. Alternatively, he said that it was the settled practice of HMRC to apply this more benevolent interpretation of IR20. Either the construction or the practice led to a legitimate expectation that such an interpretation would be applied to confirm their non-residence status for tax purposes.
Gaines-Cooper believed that, under the guidance in IR20, he should have been treated as non-resident by virtue of having left the UK for at least three years and having observed the “day-counting test”. Therefore, he said he had a legitimate expectation that HMRC would apply IR20 to determine that he had become non-UK tax resident.
In each case, the taxpayers argued that the relevant tests for residence in IR20 were less onerous than the tests under the ordinary law and, in particular, did not impose a requirement for them to make “a distinct break” with the UK. However, although the court criticised IR20 as being unclear and poorly drafted, the majority held that IR20 should not be interpreted as the taxpayers contended. It held that the “ordinarily sophisticated taxpayer”, reading the relevant paragraphs in IR20 in context, would learn that to become non-resident he had to:
(a) leave the UK permanently, indefinitely or for full-time employment;
(b) do more than take up residence abroad;
(c) give up his “usual residence” in the UK;
(d) only be a “visitor” to the UK if he returned; and
(e) use any retained property only for the purpose of visits, rather than as a place of residence.
This, the court said, could be summarised by the ordinarily sophisticated taxpayer as making “a distinct break”.
In truth, the ordinarily sophisticated taxpayer, as determined by the court, would need to be an “extraordinary sophisticated taxpayer”, given the labyrinthine complexity of the necessary textual analysis.
So thought Lord Mance, who made the point that IR20 “was, and is, intended to obviate any need for a taxpayer to look further”. In his dissenting judgment, he found that the relevant paragraphs of IR20 referred only to the taxpayer’s intention in leaving the UK, rather than to the quality of his absence. He held that there was no express requirement for the taxpayer to make “a distinct break” from his life in the UK, nor did the wording of IR20 support that interpretation.
The Supreme Court judgment strikes a cautionary note for taxpayers who want to rely on HMRC guidance – particularly badly drafted guidance. IR20 had been widely relied on by taxpayers and their advisers in navigating the complex residence tests set out in many years of case law.
Bad guidance is good for lawyers
It seems that, unless the guidance is clear and the particular facts fall squarely within it, taxpayers must look to the position under the ordinary law (consulting a lawyer rather than an accountant), no matter how complex that law. They cannot safely rely on unclear guidance. That HMRC is capable of producing unclear guidance is regrettable; that the effect of producing unclear guidance works against the taxpayer even more so, even if (in theory) there is the option to the taxpayer of obtaining a ruling.
Interestingly, given that it is impossible to find any adviser who would admit pre-2006 to have interpreted IR20 in the same way as HMRC did post-2006, the evidence of settled practice found by the court was surprisingly underwhelming. It held that the taxpayers had not provided sufficient evidence of HMRC having a settled practice of taking a less onerous interpretation of the tests.
It may not be much consolation for Gaines-Cooper that the ensuing widespread debate on the UK’s non-statutory tax residence test prompted a clarification of the rules for determining residence. IR20 was replaced with HMRC6, which will in turn be replaced by a new statutory test. The new statutory test is likely to combine a day-counting test with a range of other factors to consider when determining tax residence. The number of relevant factors is likely to depend on the number of days spent in the UK, as well as whether the individual is coming to or leaving the UK.
It is unlikely that the new statutory test would have brought a different result for Gaines-Cooper (although he surely would have arranged his affairs and travel plans differently), but it should give greater certainty in the future to individuals who have connections with the UK and other countries.
Gaines-Cooper is considering taking his case to the European Court of Justice. Whatever the outcome, it is hard to believe that other purportedly non-resident taxpayers will not find their affairs coming under scrutiny, and, given the amounts of tax at stake, they are unlikely to give up without a fight.
Jeremy Cape is a partner and Helen Dayananda is an associate at SNR Denton UK LLP
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