Residency and the Gaines Cooper judgement
On February 16th 2010 Gains Cooper returned to court. He had previously challenged HMRC in 2006
In the Gaines Cooper 2006 decision, HMRC and the Commissioners ignored guidance in IR20 and looked at an individual’s UK and overseas family, business and property ties.
They stated that the rules in IR20 only apply when an individual had left the UK and that therefore you could be in the UK for less than 90 days on average and still be classed as UK resident.
Nothing substantial has actually changed but alerted many individuals residing abroad to review their residency to avoid conflict or challenge from HMRC.
Gaines Cooper was prompted to take legal action to try a different technicality. Having been defeated before the Commissioners and the Courts – he attempted a judicial review of the guidance on non residence in IR20 and how it was applied by HMRC.
In terms of actually becoming non resident the position is the same. You need to show that;
- There has been a distinct break from the UK
- and that you have no substantial ongoing connection with the UK (The Court of Appeal explained it as you don't have your 'centre of gravity' in the UK).
The Court of Appeal reviewed IR20 and the terms relating to the establishment of non residence status.
IR20 provided for two key ways of becoming non UK resident.
- There are the provisions for anyone going overseas under a full time contract of employment.
- There are the provisions that apply when you go abroad for a permanent or indefinite absence (lasting for at least 3 years).
Gaines Cooper was looking to challenge via the second option.
A synopsis of what the court of appeal delivered is:
The correct interpretation of section 2 of IR20, in the context of the document as a whole, created a clear distinction between sections 2.2 (headed "Working abroad") and 2.7 to 2.9 (headed "Leaving the UK permanently or indefinitely").
Section 2.2: the taxpayer need establish no more than that he had left to work full-time abroad and had continued for at least the whole of the tax year in respect of which he asserted, for capital gains tax purposes, non-resident status; and to come within section 2.2 a taxpayer had to leave for and remain in full-time employment throughout the relevant tax year.
Full time employment throughout any subsequent tax years did not affect the date when a taxpayer first attained a non-resident status; that date was determined by reference to the date the taxpayer left to work full-time abroad.
Section 2.7: if a taxpayer claimed to have left permanently or indefinitely, and thus to have ceased to be resident and ordinarily resident in the United Kingdom, he had to demonstrate a distinct break from former social and family ties within the United Kingdom’.
The actual wording of IR20 such as 'full time employment' and 'permanent departure' is vague and e would therefore create conflicts with HMRC and taxpayers.
The Gains Cooper case had previously found that there had not been a distinct break from the UK and that there were still substantial UK ties. Therefore even based on IR 20 he would still be classed as UK resident as he had not left the UK 'permanently or indefinitely'.
The Court of Appeal said that the "insuperable difficulty" for Gaines-Cooper were the findings of fact made by the special commissioners.
He said the commissioners found that England remained the "centre of gravity" of his life and interests, his chief residence was in the UK, he had a "settled abode" in Henley-on-Thames and he spent more time in the UK than the Seychelles or anywhere else.
Therefore he remained UK resident because he did not meet the requirements of IR20.
IR20 vs. HMRC 6
IR20 was withdrawn post April 2009 and replaced by HMRC 6 but the two methods of establishing non residence are still included
- Employment and
- Permanent or permanent absence
Interestingly there are now much stricter statements to ensure that the non residency is genuine and that the individual has genuinely left the UK.
The Court of Appeal reiterates the previous tests in terms of ensuring there is a distinct break and avoiding having a centre of ‘vital interests’ in the UK.
For individuals with multiple residences ensuring the 'chief residence' is overseas may be vital.
The ruling issued should be held to be binding on HMRC. This does clarify the tax treatment of employees who work overseas.
The judgment clearly stated that HMRC should rely on UK tax residency guidance as outlined in IR20 and that employees were not required to sever family or social ties with the UK.
Whilst IR20 no longer applies it does provide a confirmation of the judicial view of the different options for non residence