The recent Court of Appeal decision in Gaines-Cooper v HMRC has raised a number of issues for those who consider themselves to be non-resident in the UK or are planning to become non-resident.
Despite the importance of the distinction between residence and non residence for individuals in relation to their tax affairs, there is no statutory definition of residence. HMRC has produced guidance on the issue under IR20 and now (applying from 6 April 2009) HMRC6. Under IR20, which was the guidance under scrutiny in Gaines-Cooper, a person could be treated as non-resident if they were absent from the UK for at least a whole tax year and during that period of non-residence, any visits to the UK totalled less than 183 days in any tax year and averaged less than 91 days a tax year (averaged over a maximum of four years).
Mr Gaines-Cooper fell within these guidelines and, understandably, thought he was home and dry. However, according to HMRC, IR20 distinguished between those individuals who were working abroad and those who had simply left the UK to live elsewhere. In the latter case, HMRC argued that it was implied in the wording of IR20 that there was a requirement to make a distinct break from the UK. The Special Commissioners decided that this requirement had not been met by Mr Gaines-Cooper and that as a result, he was resident in the UK for income tax purposes.
The appeal was made by Mr Gaines-Cooper who argued that HMRC had, on a strict interpretation of IR20, implied that he ought not to be treated as resident or ordinarily resident in the UK and that HMRC had changed its practice and tried to apply this retrospectively.
The Court of Appeal released its judgment on the long-awaited judicial review of the decision in Gaines-Cooper v HMRC on 16 February 2010. It dismissed Mr Gaines-Cooper's claim and confirmed HMRC's interpretation of IR20 was correct, in that a taxpayer who has left the UK to work abroad full-time, does not need to demonstrate a distinct break from the UK (note that this has not been reflected in HMRC6). In other cases, they must demonstrate this break from social and family ties in the UK. Mr Gaines-Cooper had not been able to prove this. The court also said that, rather than representing a change in their interpretation and application of IR20, HMRC had simply decided to apply its interpretation more stringently.
It's not all bad news, as the Court of Appeal did confirm that HMRC is effectively bound to honour guidance like IR20 (and now HMRC6) and that fairness dictates that HMRC cannot change the construction of its policy and retrospectively apply such changes.
However, as the facts of the case were settled in HMRC's favour and given that it appears HMRC can imply important wording into its guidance, it muddies the water for those trying to ascertain whether they will be non-resident in any particular tax year. For one thing, it's now certain that a taxpayer cannot simply rely on the 91 day test.
We hope that there will be a statutory definition of residence soon, but this is unlikely in the next year, at least. As HMRC looks ever closer at the issue of residence, individuals who are concerned about the implications of their work and living arrangements on their UK tax status should consider carrying out a full review of their affairs.
More information
For more information about this case and its implications, please contact Lesley Lintott, Laura Dadswell or Michael Cash.