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Gaines-Cooper judicial review

Gaines-Cooper loses landmark IR 20 judicial review case in Court of Appeal

The Court of Appeal issued its ruling on the landmark Gaines-Cooper hearing on 16th February 2010, confirming the importance of HMRC guidance on residence. The decision involved the joined cases of Davies, James and Gaines–Cooper. They sought judicial review on the basis that HMRC was not following its own guidance in the IR20 booklet on residence of individuals. They also claimed that HMRC had secretly changed its approach. Lord Justice Moses declared firmly that HMRC guidance is binding and that they may only change it prospectively. However, the Court held that, on the facts, HMRC’s approach fell within the scope of the general guidance set out in the booklet and the taxpayers all lost on this point. Davies and James had moved to Belgium to avoid paying capital gains tax on a disposal; their question was whether each met the conditions of full-time employment abroad. That was a matter for the Tribunal to determine. Mr Gaines-Cooper lost on the basis of the findings of fact by the Special Commissioners.

Interpretation and application of HMRC guidance

Although all three taxpayers lost before the Court of Appeal, the case is of fundamental importance to taxpayers who have relied upon HMRC guidance concerning their residence status. It is particularly important given that the law in this area is substantially based on late nineteenth and twentieth century case law. The case confirms that HMRC are bound by their published guidance, and cannot resile from it. The Court found that HMRC’s residence guidance in IR20 “was plainly within the Revenue’s powers of providing statements of practice and identifying how it proposed to deal with the residential status of taxpayers in particular circumstances”. It refused to endorse HMRC’s assertion that IR20 is “no more than guidance".

The taxpayers lost because evaluation of an individual’s residence position involves difficult questions of fact and judgement, and they could not show that HMRC had applied their guidance incorrectly in those cases. In particular, an employee is not treated in any year as non-resident because he has left the UK for full-time employment abroad unless the employment has commenced by the start of that tax year. Also, if a taxpayer claimed to be non-resident because he had left the UK permanently or indefinitely, that reasonably implied that he had made a clear break with his social and family attachments in the UK. In both cases the Court found that the Revenue’s view of IR20 was the right one. When IR20 talks of “leaving” the UK, what that means is taken from the context. “Leaving” the UK to work abroad is not the same as “leaving” the UK to live abroad permanently or indefinitely. The latter implies a clear break, and reducing family and social ties. In cases where individuals are required to show a clear break from the UK, the Court noted that the quality of the links to the other country are relevant, but not determinative, since the extent of ties retained in the UK is also relevant.

Social and family ties in the UK

One of the most interesting features for employers is the Court’s clear finding that an employee who leaves the UK to work full-time abroad is not required by the IR20 guidance to have given up his social and family connections for the period that he is abroad. “There is no need to be concerned with any persisting social or family ties in the UK, unless those ties themselves cast doubt on whether the employment is genuinely full time”. The Court noted that following publication of a statement about the residence position of “mobile workers” in 2001, HMRC had assured tax advisers that long-distance commuters who worked full-time abroad would not be treated as remaining UK resident on account of their social and family ties in the UK

Advisers complained that in recent years HMRC had re-interpreted IR20, so that it was more difficult for individuals going abroad to be treated as non-resident, but had not announced any change of practice. This had been described as a “betrayal of trust” making IR20 into a “trap”. Counsel for the taxpayers argued that in recent years HMRC had started to argue that employees working full-time abroad must have left the UK in the residential sense, i.e. made a clear break before they may be treated as non-resident. HMRC admitted that they had started to investigate non-residence claims more thoroughly, but stoutly denied any change of practice. On this issue the Court supported HMRC, noting that the evidence against HMRC was not conclusive.

However, it must be noted that IR 20 has now been replaced by HMRC 6, which contains similar but not identical wording. Revenue guidance in HMRC6 no longer offers an assurance that HMRC will treat an employee as non-resident despite him being employed full-time abroad. But providing he does not continue to live in the UK while working abroad there is judicial precedent for treating such an employee as non-resident even if he has not made a clear break with the UK. It is hoped that HMRC will clarify the position shortly as part of their review of the guidance in HMRC 6.

Seeking professional advice

The practical significance for those considering emigrating from the UK, is to emphasise the essential need for them to take top notch professional tax advice. This case is the culmination of a number of cases that have been heard before the courts, and is recognition of the increasing scrutiny paid by HMRC when considering the tax affairs of those who claim to have ceased to be UK resident. The case underlines the need to sever contact with the UK when a taxpayer intends to become resident abroad either permanently or indefinitely. Pending further clarification from HMRC this may be a requirement also for those leaving for full time employment abroad. All individuals becoming non-resident should make a careful evaluation of their position on leaving the UK, considering in particular the provisions of any employment contract, UK connections and return visits to the UK. 

Deloitte’s private client services team, together with our dedicated tax risk and resolution and litigation teams, can provide professional tax advice on becoming non-UK resident from preparing to go to defending an enquiry, and litigating the position if required.

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