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Gaines-Cooper case gets Supreme Court hearing

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15th Jul 2011
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The eagerly awaited Gaines-Cooper residency case made it to the Supreme Court last week and is expected to be decided within the next three months.

Robert Gaines-Cooper travelled from his Seychelles home last week for the UK hearing and issued the following statement:

“It remains a mystery to me why this case has come so far over so many years and ended up in The Supreme Court, when all I sought was fairness and the right to rely on published guidance from Her Majesty’s Revenue and Customs when planning my tax affairs.”

The self-made entrepreneur is challenging a 2010 Appeal Court judgment that he qualified as a UK resident. The case, which is reported to be worth £30m, centres on Gaines-Cooper’s residency status after he moved to the Seychelles in 1976.

Despite following HMRC guidance to ensure he did not exceed the 91-day limit in the UK each year, HMRC decided that his close connections with the UK, ownership of a large estate and regular trips to the UK meant he was a resident and liable for backdated tax.

Last month the government started a 12-week “statutory residence test” consultation process. Draft legislation is expected to be with us ahead of Budget 2012 with the intention of it going live from 6 April 2012.

An abridged version of the Supreme Court proceedings that took place on 7-8 July, based on Taxation’s court report, can be viewed below.

Day 1: 7 July

The hearing kicked off with five judges in attendance - Lords Hope, Walker, Mance, Clarke and Wilson. It was noted that Gaines-Cooper was not the only appellant in the IR20 judicial review and was joined with the claims of Robert Davies and Michael James - both represented by David Goldberg QC and Nicola Shaw who opened proceedings.

Goldberg talked through the history of IR20 and said IR20 represented a standalone code, the terms of which should be given their normal meaning.

He was particularly critical of the Court of Appeal’s conclusion that “the requirement to have ‘left the UK’ in paragraphs 2.7 to 2.9 required a severance of ties to the UK, whereas the similarly worded requirement in paragraph 2.2 did not.”

Goldberg referred to correspondence that the ICAEW had in 1993, with the Inland Revenue, showed that the department did not at that stage worry about many ongoing connections with the UK when interpreting IR20, but was interested only in the number of days spent in the UK on return visits and the purpose for leaving the UK in the first place.

Anthony Grabiner, Baron Grabiner QC, assisted by Conall Patton, presented the case on behalf of Gaines-Cooper.

Lord Grabiner noted Gaines-Cooper had made it clear to the Revenue in the late 1970s that he had ceased to reside in the UK and had complied with the tax authorities’ requests for additional information.

Having heard nothing further from them for 20 years Gaines-Cooper assumed they accepted his position.

At first the Revenue misapplied the day-counting test and that the department had wrongly included days of arrival and departure from the UK. It was only when the error was pointed out that the taxman suggested a different approach to IR20 - requiring a severing of UK ties, explained Grabiner.

His second submission was that the Revenue’s construction was wrong, noting the near universal view that the current state of the law of residence is unsatisfactory and subject to consultation.

Grabiner argued IR20 contained powerful indications that family ties could be maintained. He also said the IR20 guidance was within the department’s managerial discretion, as permitted under the Wilkinson principle, because it was based on the case law.

However, it was noted that the correct approach was to interpret IR20 on its own merits, not by reference to the case law.

James Eadie QC, assisted by Akash Nawbatt and Christopher Stone, put forward the Revenue’s arguments. He first accepted that guidance issued by the Revenue was capable of creating a substantive legitimate expectation, but suggested that IR20 did not create such legitimate expectations.

Eadie accepted that the intended reader of IR20 was the ordinary sophisticated taxpayer, who would not be expected to understand all case law, however such a reader should not have obtained comfort from IR20 on which to found a claim for legitimate expectations.

The barrister considered that a tax adviser ought to have been aware of the law and would have advised accordingly.

Day 2: 8 July

The second and final day of the Gaines-Cooper residence appeal continued with Eadie’s submissions for HMRC where he outlined the elements that must be proved in order to show a “legitimate expectation”.

Eadie said that if the court decided against the department on the true construction of IR20 then there should be a declaration of non-entitlement to residence status.

He said a reasonable taxpayer would follow the advice in the guidance and consult with his or her tax office.

Eadie then introduced a new submission that even if a legitimate expectation existed in this case, there is an interrelation between the “unlawfulness” and the relief to be granted.

Lord Wilson expressed worry about the acceptance by the Revenue that not much about this point was argued at the Court of Appeal stage of the case, adding that it was uncomfortably late for the department to be raising it now.

Eadie’s final point was that reliance might be thoroughly important in the cases of Robert Davies and Michael James and the burden of proving reliance and detriment is on the taxpayers.

Ingrid Simler QC then dealt with the following points on behalf of the taxman:

  • The issues and the Revenue’s case
  • Signs of deficiencies in the taxpayers’ cases
  • The correct interpretation of IR20
  • Change of practice
  • Application of the facts: reliance and detriment

Simlar said the taxpayers’ case relied on an alleged unequivocal practice by the Revenue by which it committed itself to disregard the obviously relevant question of whether the taxpayer has left the UK permanently.

She argued that the taxpayers were relying only on a single letter by a case worker back in 1999 and on the consternation by members of the profession – and that consternation had to do with day counts, and not on the question of leaving the UK permanently.

The barrister did not accept the 91-day test determines non-residence, because it does not affect appeal rights. She also contended residence has an “adhesive” nature and “something more” is required to establish non-residence.

Simler explained that the phrase “usually live” involves an examination of the nature of the links with the UK and that a person claiming non-resident treatment under 2.7-2.9 can expect that the Revenue will be interested in whether the person continued to “usually live” in this country.

She said it was about showing that the retention of property must be consistent with the claim that one is no longer resident or ordinarily resident.

Having listening to the arguments and looking at IR20 in detail, Lord Mance referred to IR20 as “not a very logical document”.

The hearing transcript was reported by Keith M Gordon and Ximena Montes Manzano of Taxation, and can be viewed in full on the Taxation website.

 

Further reading:

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Replies (3)

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By frustratedwithhmrc
17th Jul 2011 09:15

I dislike the comments from Ingrid Simler QC

I have not had much sympathy with Mr. Gaines-Cooper in the past as I think that most of the 'real' problems of this case he has brought upon himself - specifically his continual visits to the UK for social reasons, his wife and child coming to the UK for the child’s education, etc.

However, I also find myself at odds with HMRC's viewpoint. I realise that the UK is having difficulty paying its way right now and as such the 50% tax band has been instituted to attempt to cover the deficit (although I've always considered this to be a divisive measure left by the previous government).

This has led to a lot of people wishing to leave the UK for different places, primarily Switzerland, where the cost of living is similar to the UK, but the rate of taxation is somewhat lower. Obviously the purpose of creating a new high rate tax band is not to reduce the overall tax take, but that seems to have been the result.

The comment from Ms. Simler that "residence has an “adhesive” nature and “something more” is required to establish non-residence." is particularly offensive and smacks of HMRC grasping at straws to maintain a legal fiction purely to justify continued income from a departed taxpayer.

To my mind, once a taxpayer leaves the UK and establishes themselves and their family in another jurisdiction, provided they visit the UK no more than any other tourist or non-resident foreigner (and 90-days per year seems a bit too generous), then they should be treated as non-resident from the day of their departure until such time as they die or they resume residence.

This is one of the reasons why I am keen to see a clear statutory residence test, even if it is on the whole more restrictive than the current tests outlined and applied by HMRC. At least with a statutory test we wouldn't get the continuous attempts at reinterpretation, years after the events which we get with HMRC today.

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7om
By Tom 7000
18th Jul 2011 12:22

tax residence

Its hard enough for us involved in tax to interpret some of HMRC musings. What chance does the man in the street have. Surely as part of the role of the office of tax simplification they should be working on this. Keep it easy make it a 90 day rule or a 75 day one. But make it easy so we can all follow it and not have something wishy washy.

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By jamesashburton
12th Aug 2011 16:23

Residence or Domicile

I’m another who has had little sympathy for Mr Gaines-Cooper who in some ways has been trying to have it both ways. In my view he has certainly retained UK domicile status and if that were all that HMRC were arguing it would be fair enough. Trying to say he has retained his residence is another matter. It certainly is something that is concerning people like myself who are non-resident but whose business interests are linked with the UK.

 

Having been born in Scotland of a Scottish father and having lived in the UK for over 50 years I now live and work on the Isle of Man. HMRC seem to accept I am not UK resident – though they still send me a SA return each year – and though I have never formally claimed to have changed domicile I have little doubt I could as I have no property or close family ties in the UK and no desire to return there to live. However I do have business relationships with the UK in that I am a director of companies which have UK subsidiaries and I occasionally travel to the UK to meet with clients. The consultation on the statutory definition could in fact end up with me being able to claim non domicile status but if I'm not careful also classify me as UK resident.

 

Surely some mistake?

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