Residence and Non-residence – Click Here

Hi – I’m Paul Soper and this is one a series of Podcasts focussing on recent developments in Direct Taxation in the U K intended primarily for practitioners – especially small practitioners.  But you know if you are a reasonably financially literate taxpayer should enjoy it too – if enjoy is the right word!

[This was the second podcast and dealt with the issue of residence in the light of the Gaines-Cooper case – which has just reached the Supreme Court.  In this transcript of the podcast my comments in red update the case in preparation for a later podcast which will look at the Supreme Court Ruling in greater detail and the proposed Statutory Residence test. The podcast has been scripted and will be released very soon.]

The recent case concerning Mr Robert Gaines-Cooper has focussed attention on the quite common ploy of seeking to reduce UK liabilities by ceasing to be resident, ordinarily resident and domiciled in the UK.  It also suggests that a new interpretation of one the fundamental principles of residence is about to emerge [although the revenue would deny this as we shall see – but then changed the law anyway].  This podcast is going to look at the consequences of this case for residence and ordinary residence, the next podcast is going to look at the concept of domicile.

Lets remind ourselves of the concepts that apply here and how they can affect liability to tax – Residence is usually considered in the light of two tests,

• the 183-day test – if you are present in the UK for the greater part of a tax year you are resident

• but where taxpayers tried to avoid the 183 day test by limiting their visits to the UK the courts evolved a second test – the 90 or 91-day test as it is variously called, designed to treat taxpayers as being resident if they spend regular substantial periods in the UK in consecutive tax years – this means maintaining an average of more than 90 days in the UK over any 4 year period

Before 1993 there was a third test – now redundant but perhaps with some relevance still – maintaining a place of abode in the UK and spending as little as 24 hours in the UK.  A Belgian multi-millionaire in the case in the 1930s of De Lowenstein v Sallis spent 36 hours in Southampton because of bad weather whilst crossing the Atlantic by ocean liner and also owned a hunting lodge in the Yorkshire moors – enough to make him resident.

A fourth consideration – rarely mentioned these days – is technical residence – originating in cases concerning master mariners who set off to circumnavigate the globe, taking more than a year, but leaving their families behind.  One modern case which considered this concept concerned the entertainer Dave Clark – he of the Dave Clark 5 – he wanted to avoid a liability on $500,000 worth of song rights he’d sold and so moved to California from 1 April 1977 to 30 April 1978 – not setting foot in the UK.  The House of Lords indicated that technical residence might have applied but didn’t in Dave Clark’s case because he moved his home to California.  I bet he was feeling – [Glad All Over – groan!]

So what difference does it make? – From an income tax perspective a person who is not resident in the UK would normally be liable to tax only on sources of income which originate in the UK, whereas a person who is UK resident is liable on their global sources of income.

There is also a concept of ordinary residence – the place where a person habitually resides – this could be considered over a number of years unless someone intends to permanently change their residence status in which case ordinary residence will change as well.  Where a person is ordinarily resident in the UK they remain liable to CGT even though they may not be resident and so no longer liable to tax on overseas income.  You need to watch out for a rule which says that even if you leave the UK and become not ordinarily resident – so avoiding a CGT liability, if you return back to UK within 5 years the assets you owned at the date of ceasing to be resident remain chargeable to CGT.

Robert Gaines-Cooper is a multi-millionaire with business interests spread across the globe.  By his own reckoning he has established some 100 or so businesses in different parts of the world building on the initial success he had in the late 50’s and early 60’s importing juke boxes into the UK.  From here he got involved in a company called MAM, an early music industry conglomerate, becoming one of their directors.  In 1973 he visited the Seychelles for the first time (seagulls sound effect) and fell in love with the place.  He applied for and obtained residence status there in 1976 and on the advice of his parents, who were both tax inspectors, registered himself as not being UK resident.

The Seychelles government wanted new industries and Gaines-Cooper established a plastics factory there, although later nationalised, it was subsequently returned back to him and today manufactures plastic surgical masks.

He purchased an estate in the Seychelles ( seagulls again!) and planted a Coco de Mer tree in the garden of the property

His first wife was Indonesian but following their divorce he married a senior employee of his business empire, a girl born in the Seychelles whom he had known for many years.  She is younger than him and in 1998 they had a son.  He may have fallen in love with the Seychelles but she is, it seems, in love with England, she lives here, has permanent residence status and has applied for British Nationality, their son is on the list to be educated at Eton and Gaines-Cooper has paid his fees in advance.

The case is, in fact, only a preliminary hearing in front of the Commissioners to establish whether Gaines-Cooper is, as the revenue allege, resident, ordinarily resident and domiciled in the UK for the years from 1992/93 onwards.  The main action, not yet commenced, will then focus on his potential liability under two anti-avoidance provisions – s739 – the provisions that apply where a taxpayer transfers assets abroad and s660A (now s617 ITTOIA) where as a settlor of a trust you retain an interest in it, either personally or through your spouse or civil partner.

S739 applies where a person who is ordinarily resident in the UK transfers assets abroad so that the income is received by a person who is not-resident or not domiciled in the UK so placing it beyond the territorial reach of the UK tax authorities.  It was introduced as a reaction to a case where the Vestey family had placed their wealth in a trust which made the governor of the Cayman Islands their principal beneficiary.  He received the income and every year made gifts, which were not assessable as income, back to the family.  The House of Lords held that it was not a sham.

Both s739 and s660A create a self-assessment obligation to return the income under the self-assessment regime where they apply.

Gaines-Cooper, like a lot of taxpayers seeks to rely here on the revenue’s booklet IR20.  Residence and ordinary residence is not defined in statute – it is derived from dozens and dozens of cases over the years from 1873 onwards, and a significant number of these cases date back to the 20’s and 30’s following the introduction of higher rates of tax, at that time called Super Tax.

IR20 seeks to establish a consensus of the law as it applied to residents and non-residents and as a guide for the revenue, practitioners and taxpayers alike is normally referred to by the Commissioners as a reasonable statement of the legal position.

However in attempting to rely upon it there are problems – it was last updated in 1999 so is now some 8 years out of date. [Since this podcast was written the revenue created a new resource called HMRC6 to replace IR20 and may introduce a statutory definition of residence from April 2012 onwards]  It also indicates that it is no more than general guidance and stresses that  “a concession will not be given in any case where an attempt is made to use it for tax avoidance”

As with many taxpayers in a similar situation Gaines-Cooper is relying on the so-called 91 day rule to show that he is not resident in the UK and in doing so he relies on a concession in IR20 which says that in counting these days, those of arrival and departure may be ignored.

Reasonable enough in the 1920’s perhaps when travelling would take the better part of a day or more – but in the 21st century?  Gaines-Cooper would claim that if he comes to the UK on a Tuesday and leaves on the Wednesday that by this principle he has spent no time in the UK at all.  The revenue argue that it is more realistic to look at the nights spent in the UK.  The commissioners said “we are of the view that the revenue’s figures are to be preferred”.  In fact he spent more time in the UK, even on his own count, than he spent in the Seychelles where he claimed to reside, although much time was spent in other parts of the world too.

Gaines-Cooper admits that he was resident in 1992/93, the first year under appeal, because of the place of abode rule that we talked about earlier, which was then abolished.

The Commissioners accept, in accordance with the Lysaght case of 1928, that residence means “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place.”  A person can reside in two places simultaneously – in fact that is what Double Tax Agreements are for – and if one of those places is the UK he is chargeable here.  There is a difference they said, between the case where a British Subject has established residence in the UK and then has absences from it, and the case where a person has never been resident in the UK at all.  The presence of Mr Gaines-Cooper was not for a temporary purpose and they found him to be resident from 1993/94 onwards – he had never ‘left’ the UK.

Turning to ordinary residence, Gaines-Cooper claimed that he could not be ordinarily resident in a year when he was not resident in the UK, but as they found that he was resident, and in accordance with precedent, ordinary residence means residence in a place with a degree of continuity as part of normal and everyday life,  the commissioners said “…his residence here was continuous in the sense that it continued from year to year… it was ordinary and a part of his everyday life bearing in mind that his everyday life was far from ordinary. He would still be ordinarily resident in the UK even if there was an occasional year when he was not resident here”.

It’s a pity that the case failed to examine the notes to SA109, the supplementary pages to the self-assessment return to be completed by a person who claims not to be resident, or not to be ordinarily resident, or not to be domiciled in the UK, where not being domiciled makes a difference to one’s income tax or CGT liability. In a series of questions designed to help a taxpayer self-determine their status,  Q7 asks if the taxpayer is resident in a particular year, if the answer is “no” it states that the person is NOT ordinarily resident!  It is contradicted by later tables in the same document that indicate that it is possible not to be resident but to remain ordinarily resident.  No-one has yet sought to establish whether the revenue might be bound by the conclusion drawn from the answer to this question.  [When the tax return was redesigned in 2009 this controversial question was quietly dropped in favour of an approach which simply describes what is thought to be meant by residence and ordinary residence]

Now does this case undermine the 91-day rule as set out in IR20?  Immediately after the case a number of commentators thought that it did – and the comments of commissioners indicating that they preferred the revenue approach of counting nights spent in the UK seems to point in that direction.

However revenue and customs have subsequently issued a statement in the wake of this case which indicates that in their opinion the commissioners found that Gaines-Cooper had never left the UK in the first place.  They say that the 91 day rule is relevant to two sorts of taxpayer described in the booklet in Chapter 2 – leaving the UK and Chapter 3 – temporary visits to the UK.  They will continue to apply the 91 day rule as set out in IR20, including ignoring days of arrival and departure, but it will be necessary before that to determine, given the facts of a case, whether a taxpayer has left the UK.  [Since the podacst was written the law has now changed and ‘day-counting’ IS now based on nights spent in the UK unless the taxpayer is simply in transit from one part of the world to another]

Before 1993 it was considered essential, for all purposes other than employment income, that if a taxpayer wanted to secure non-resident status they should spend at least one complete tax year outside the UK, relocating their residence as well, and not setting foot in the UK at all.

When the residence rule concerning a place of abode came to an end in 1993 it seems that many people , presumably including Gaines-Cooper, assumed that it would be sufficient to merely limit the time spent in the UK – this case clearly indicates that that is not sufficient – the complete year abroad may still be essential to establish non-residence after which the visits to the UK can recommence on a limited basis – it would certainly be very desirable.

[Gaines-Cooper subsequently tried to take a judicial review of the residence issue to the High Court.  This is because it was question of fact not one of law and so a normal appeal could not be made.  The High Court declined to hear the application but he then made an application to the Court of Appeal who agreed to hear the application together with a request for a judicial review by two taxpayers who had not previously gone through the appeal system.  As we shall see the Court of Appeal decided in favour of the revenue and the Supreme Court have confirmed this in a decision handed down on October 18th 2011.]

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  Some accompanying illustrations are taken from Revenue publications and are crown copyright.  I’m sorry I couldn’t treat you to one of the Dave Clark 5’s hits but you can access these on – but I warn you it is very loud!