The eagerly awaited judgment in the joined cases of Gaines-Cooper, Davies & James has been given by the Supreme Court. By a majority of 4-1, the taxpayers have been held as UK resident, as they did not establish a distinct break from the UK. The ruling has further clarified residency law, and has shed light on how to achieve a distinct break from the UK. The cases have also confirmed that taxpayers have a legitimate expectation that HMRC will appraise its affairs with reference to their guidance. Furthermore, the judgment appears to have enhanced HMRC’s power to make extra-statutory concessions.
The Supreme Court has delivered the eagerly awaited judgment in the joined cases of Gaines-Cooper, Davies & James.
Mr Gaines-Cooper, along with the other taxpayers involved, have been held, by a majority of 4 to 1, to have been UK resident as they did not establish a distinct break from the UK.
The specifics of the Gaines-Cooper case in particular, are well known; however, both cases concerned whether or not the taxpayers were resident in the UK for tax purposes.
Key to understanding this was the interpretation and application of HMRC’s guidance leaflet on residence – IR20, whether or not HMRC had retrospectively changed its practice on it, and the legitimate expectation that taxpayers could rely on it.
Mr Gaines-Cooper moved to the Seychelles in 1976 and from this time claimed to be non-UK resident, non-UK ordinarily resident and to have acquired a domicile of choice in the Seychelles.
He contended that he had fulfilled the day-counting test stated in IR20 since this date and was therefore non-resident.
However, he retained strong ties to the UK including his family, who still lived here, a substantial house and a classic car collection.
HMRC contended that Mr Gaines-Cooper was in fact UK resident in the period from 1993 to 2004.
Mr Davies and Mr James had moved to Belgium in March 2001.
They claimed to be non-resident in 2001/02 because they had left the UK with the intention of working full time in Belgium and had satisfied the day-counting test in every year since then.
Their wives and Mr Davies’ daughters remained resident in the UK and the taxpayers returned frequently to the UK for short periods.
HMRC argued that they were in fact UK resident during the tax year 2001/02.
In both cases the taxpayers relied upon an interpretation of the guidance set out in IR20, in particular the day-counting test, to show they were non-resident.
However, HMRC argued that the guidance itself required taxpayers to make a ‘distinct break’ from the UK if they contended to be non-UK resident, and that day counting alone was insufficient.
The extent to which the taxpayers could rely on HMRC guidance was the subject of the judicial review application to the Court of Appeal last year.
While it was held in that appeal that HMRC is in fact bound by its guidance, which was a partial victory for the taxpaying public, the taxpayers lost as they could not show that HMRC had actually applied IR20 incorrectly.
In their appeal to the Supreme Court, the taxpayers argued that the proper construction of the guidance as set out in IR20, or HMRC’s settled practice in interpreting it, was more benevolent than that provided by the general law and that using this interpretation or practice would give them non-UK resident status.
They contended that they were entitled to rely on this interpretation.
However, the Court held that neither of these contentions was correct.
While accepting that the taxpayers had a legitimate expectation of their affairs being dealt with according to HMRC guidance and established practice, the Court’s conclusion was that IR20, when read as a whole, informed the ‘ordinarily sophisticated taxpayer’ of the need to consider his full circumstances, rather than rely on specific paragraphs in isolation and should have determined that a clear break from UK residence was needed.
In the judgment, it was noted that an important feature of IR20 was the reference to ‘visits’ to the UK which further underlined the need for a change in the individual’s usual residence and therefore, by ready inference, for a ‘distinct break’ in the pattern of their lives in the UK.
If this was wrong, then the majority considered the booklet was so unclear that there couldn’t be any legitimate expectation.
The Court also ruled that there was insufficient evidence of any settled practice of HMRC’s interpretation of the guidance, as the evidence produced by the taxpayers was ‘thin and equivocal’.
Accordingly, all the taxpayers were considered to be UK resident for the periods in question, because that was the only correct reading based on the principles set out in IR20.
Although it will be of little comfort to the taxpayers, the Court did note that the guidance in IR20 could have been much clearer.
The ruling has limited implications to those intending on becoming non-resident from 6 April 2012 due to the planned move to a statutory residence test.
However, it will be of obvious importance to individuals who already claim to be non-resident or who intend on becoming non-resident before the statutory residence test comes in.
In the leading judgment, delivered by Lord Wilson, there was some clarification of IR20:
Obviously, although there is more certainty regarding the rules around residency, HMRC will now have greater power in contending residency.
While much will be written about the Supreme Court’s judgment on residency, there is one aspect that the decision touched upon which is likely to have an enduring importance – the defence of ‘legitimate expectation’ and the impact this will have on the status of HMRC's technical manuals and other published technical material where guidance tends to be clear and unequivocal.
In the earlier proceedings at the Court of Appeal, Lord Justice Moses stressed that the importance of the extent to which thousands of taxpayers may rely upon guidance, cannot be doubted.
This theme is picked up again by Lord Wilson and he expressly endorsed the comments made by Lord Justice Moses.
It is a clear inference from the statements made in Lord Wilson's leading judgment of the Supreme Court, that HMRC accept that it would be bound if either the proper construction of one of their publications, or its settled practice, would give rise to a legitimate expectation that a taxpayer should determine their tax position by reference to the view expressed.
In fact an entire section of Lord Wilson's judgment is devoted entirely to the law relating to legitimate expectation.
Had it been found that IR20 made the representations contended by the taxpayers, ‘then for so long as the representations remained operative, the taxpayers’ would have had, and therefore would have been able to enforce, a legitimate expectation that HMRC would appraise their case by reference to their guidance, notwithstanding that it failed to reflect the ordinary law.
Counsel for HMRC referred to the case of R v. IRC ex p. MFK Underwriting Agencies Limited in an attempt to limit the number of cases where a legitimate expectation could arise, and to a certain extent this move seems to have been successful.
Lord Bingham’s judgment in the MFK underwriting case provided that in assessing the weight and effect that could reasonably be given to statements made by HMRC it was necessary to look at the factual context, including the position of HMRC itself.
In that particular case it was held that HMRC's statements about whether the sale or redemption of certain bonds would be treated as being subject to capital gains tax or income tax had not been sufficiently clear to give rise to any legitimate expectation as to the way the proceeds would be taxed.
However, there was an inference from what Lord Bingham said in MFK that the comments made by HMRC would only be binding on cases falling within the ambit of HMRC's guidance and there was no requirement for the guidance to be clear, unambiguous and devoid of any relevant qualification.
Lord Wilson has said that this further qualification is wrong; it is a precondition that the statement is clear, unambiguous and devoid of any relevant qualification.
However, this clarity has to be judged in light of an appraisal of all relevant statements in the publication concerned and read as a whole; and will depend upon the identity of the person to whom it is made, irrespective of whether that person is in receipt of professional advice.
The target audience against which the test has to be applied is taken to be the ‘ordinarily sophisticated taxpayer’.
This has effectively moved the boundaries as to when the law will be applied but at the same time reinforcing its effectiveness.
This suggests that some of the blander and more ambiguous HMRC statements will fall outside the rule, but it will mean that the status of some statements has been enhanced.
It should also mean that published statements made in the technical manuals and guidance will fall entirely within the operation of the rule where it is clear, unambiguous and without qualification.
This will make it difficult for HMRC to change its published position without ensuring that it takes steps to safeguard the position of taxpayers who are adversely affected as a result.
Another interesting point to emerge reflects on HMRC’s ability to make extra-statutory concessions.
This ability had been thought to be limited following an earlier judgment in Wilkinson, but the Court pointed out that although the primary duty of HMRC is to collect the tax properly due under the legislation,
'... it is lawful for the Revenue to make concessions in relation to individual cases or types of case which will, or may, result in the non-collection of tax lawfully due provided that they are made with a view to obtaining overall for the national exchequer the highest net practicable return ...'
HMRC may thus apply a cost:benefit approach.
Hence the Supreme Court agreed that the Revenue were entitled to gloss the law of residence in their published guidance, even though in this case they had not done so very successfully.
This clarification may lead to more extra-statutory concessions in the future.
Finally, it is worth noting Mr Gaines-Cooper’s statement published on his website after the Supreme Court ruling: ‘My next step is to seek the views of my legal advisers with a view to referring my case to the European Court.’
This intriguing story may not yet be over ...
Bill Dodwell, Head of Tax Policy, Deloitte
Patricia Mock, Director, Deloitte
