Residence – Gaines-Cooper and a Statutory Test

Some years ago I produced a couple of podcasts, the first on Residence and Non Residence and the second on Domicile.  They were prompted by the case of Robert Gaines Cooper, an international business man who claimed to have become non-resident in the 1970’s and to have taken domicile in the Seychelles.  This was on the advice of his parents who were both tax inspectors!

Gaines Cooper’s case has just reached the Supreme Court so it is time to look at it again.

The dispute which involves Gaines Cooper is a very protracted one and is a precursor to allegations by the revenue that he had established settlements in which he, or his wife, retained an interest and that he had transferred assets abroad whilst retaining the right to the benefit of the assets transferred.

Where are we now – four years on from the first case?  It was considered that his residence status was a simple fact on which a ruling of the Special Commissioners, who heard that appeal, would be binding unless it could be shown to be absurd following the ruling in Edwards v Bairstow so that no reasonable body of commissioners could have arrived at that decision.

His domicile status was a question of law and further appeal was made, first to the High Court, who found that there were more than 20 different connections which he still enjoyed with the UK so that they considered him to have UK domicile in 2004 and by extrapolation backwards in time to 1992/93, the first year under appeal.  Gaines-Cooper claimed he had taken Seychelles domicile in 1976 and had not subsequently altered it.  Domicile is concerned with allegiance and a taxpayer can only have one domicile in English Law at any point in time – had Gaines Cooper not been domiciled he would only have been liable, even if resident in the UK, on sums brought to the UK under the remittance basis.  Remember from 2008 onwards it is now quite costly to use the remittance basis as those who are not domiciled but have been resident for 7 out of the past 9 tax years must pay £30,000pa for the privilege, and from next April may have to pay £50,000pa if resident for more than 12 out of the previous 14 years.

Gaines Cooper did take an appeal on his domicile to the Court of Appeal but they felt that his counsel was simply rearguing the same issues that had been raised in front of the High Court and dismissed his appeal and refused him the right to appeal to the House of Lords.

In the meantime Gaines Cooper had sought a judicial review of the residence issue and if he could show that he was not resident he would not be caught by the anti-avoidance provisions.  To obtain a judicial review it is necessary to show that there is a matter of public interest, not merely private interest, concerning maladministration or the legitimate expectation that government departments must act fairly.

The High Court initially rejected this application, but he was successful in a later application to the Court of Appeal who then joined his application with another from two other taxpayers, a Mr Davies and a Mr James who were Swansea-based property developers who moved to Belgium (probably to seek to avoid CGT) and began to work full-time for a Belgian company which they established.  Unlike Gaines Cooper they had never appealed to the Commissioners and had no binding determination of fact against them, they had sought their judicial review directly from a determination by the revenue.  Their initial application to the High Court had also been unsuccessful.

Although the reviews were heard at the same time the factual reviews are, or rather were, different, Gaines Cooper claiming that he had left the UK to take up permanent residence abroad; Davies and James originally arguing that they left the UK to take up full time employment overseas – however both claim that the revenue had not properly applied the booklet IR20 which summarises the revenue’s approach to the issue of residence and that the revenue had in fact altered their attitude so that although all of the claimants say that they followed the guidance in the booklet they were denied the tax treatment they sought.

However Davies and James had a further problem, because although they claimed they left the UK to take up duties of a full time employment overseas they now accept as a question of fact that they left the UK to go on holiday in Italy and it was only after the beginning of the tax year that they took up the duties of the employment and so were not employed for a full tax year overseas in that tax year in which the gains arose. This means that their arguments now resemble Gaines Cooper’s rather more, that they had left the UK, like him, to permanently reside for a period overseas.

The Court of Appeal had ruled that taxpayers, and the revenue, could indeed rely on IR20 (subsequently replaced by a revenue document HMRC6 to which one hopes the same comments apply?) but accepted the revenue’s argument that they had not changed their approach to the issue but simply had stopped accepting claims for non-residence on the face of it and had looked at the claims more closely.

The Taxpayers now seek a ruling in their favour from the Supreme Court, however they were only able to convince one judge of the validity of their claim, the other four found for the revenue and in doing so emphasised some very important points for those who seek to leave the UK and become non-resident.

To cease being resident in the UK requires a taxpayer to leave, but the Court of Appeal decided that this meant something slightly different if you were leaving the UK to take up employment – there it simply implies that you get on a plane and go, but that a person seeking, like Gaines Cooper, to permanently cease residence must have a sufficiently distinct break in the pattern of his life to show that he has left the UK, the same word but a very different meaning.  Lord Manse who found for the claimants noted that IR20 did not emphasise this distinction, did not explicitly state that a taxpayer should have this distinct break, and was, in his opinion, therefore misleading – “the primary issue in each appeal is how on a fair reading IR20 would have been reasonably understood by those to whom it was directed.”  However the view of the other four judges was not in the taxpayer’s favour.

They found that the ordinary law, founded on past cases, requires such a break and IR20 should be interpreted in the light of this requirement even though it may not be expressly stated in the booklet.  They also felt that the taxpayers had failed to establish that there had been a change in the way in which the revenue approached the issue, despite taking evidence from leading accountancy firms which pointed towards a change having taken place.

The judgement now makes it clear that where a taxpayer relies on having left the UK there must be a distinct break – something which has been identified quite separately in other cases such as the airline pilots Sheppard and Grace but this is, of course, a binding ruling of the Supreme Court.

The old ‘belt and braces approach’ was to suggest that a taxpayer leaves the UK for at least one complete tax year, does not set foot in the UK at any time and, like Dave Clark the drummer, in his case in 1986 [Reed v Clark], relocates his home outside the UK.  It may be extreme but it should give a greater degree of certainty.

It is probably not a surprise that the revenue now want to introduce a statutory test of residence – remarkable as it may seem the word residence is nowhere defined in statute, hence the very many cases on the subject and, of course, the uncertainty that stems from this.  The revenue would like, it seems, to have an intelligent agent, in computer speak, on their website so that any taxpayer could input their circumstances and have, because it is founded in statute, an authoritative statement of residence status.  The current proposals which were put out to consultation in the summer of 2011 will probably become law from April 2012.  If they do they will sweep away all previous cases in this area and establish statutory certainty, or so it is hoped.

The legislation seeks to identify three classes into which a taxpayer may fall.  The First Class (Class A) are those taxpayers who are conclusively non-resident.  The Second Class (Class B) are those who are conclusively resident.  Where a person satisfies conditions in both classes non-residence takes priority over residence.  There will then be a Third Class (Class C) where they do not fit into either of the first two categories.  Here the revenue approach will be to identify ‘connection factors’ and to look at the number of days spent in the UK.

Let’s look at the First Class – Taxpayers who satisfy any one or more of these conditions will conclusively NOT be resident in the UK.

So Either:

* A person who is not resident in all three preceding years and is present for less than 45 days in the current year.

* Or a person who is resident in one or more of the previous 3 years but present for less than 10 days in the current year.

* Or a person who left the UK for full-time work abroad if they spend less than 90 days in the UK and do not spend more than 20 days working in the UK.

This suggests that visitors can only come for up to 45 days without fear of being classed as resident whereas they could come up to 182 days under the current approach.  Exceeding the 45 day limit will place them in the third class where the number of connection factors will become relevant.

However the 10 day rule for a person who had been resident is helpful as it suggests that it is no longer necessary to take the belt and braces don’t set foot at all approach.

Note also that each year can be taken in isolation rather than over a four year period as applied at present using the 90 day average rule.

The Second Class are those who are, like most of us, conclusively resident in the UK

So – Either

* Present in the UK for more than 182 days in a tax year – no change there…

* Or only has one home and that home is in the UK, or has a number of homes all of which are in the UK

* Or works full-time in the UK for more than 9 months with no more than 25% of the duties outside the UK.

The home condition takes in people like sea farers who leave the UK for several years at a time but who remain technically resident in the UK – at present they would be resident but this could now change…

Clearly you could have a situation where a person has a home in the UK but spends less than 10 days in the UK, satisfying a condition in each Class – this is when non-residence takes priority over residence.

The condition concerning full-time work refers to a period of 9 months which could straddle two different tax years, conceivably the taxpayer might spend 4 months in one year and 5 in the next, at present they would not be resident in either, now they might be resident in both – however…

Where a person arrives in or leaves the UK that year will be subject to statutory split year treatment to prevent it operating unfairly.

Where a taxpayer does not satisfy any of the conditions in the first class, Class A, or the second class, Class B, they fall into the third class – Class C and now it is necessary to identify connection factors.

These are applied in a slightly different way depending on whether you are arriving in the UK or leaving the UK.

For people arriving the connection factors are:

* Having a family resident in the UK

* Accessible accommodation where use is made of it

* Substantive, but not full-time work, employment or self-employment, in the UK

* Presence in the UK for more than 90 days in either of the two preceding years.

For people leaving the UK these factors are also identified together with a fifth:

* Spending more time in the UK than in other countries

Then having determined how many factors apply in a particular case we count the number of days spent in the UK – hence – if arriving in the UK

* Less than 45 days – not resident

* At least 45 days but Less than 90 days – resident if all four of the factors are satisfied

* At least 90 days but Less than 120 days – resident if 3 or more factors are satisfied

* At least 120 days but Less than 183 days – resident if two or more factors are satisfied.

* And of course 183 days or more you are resident anyway.

If you are leaving the UK all five factors come into play:

* Less than 10 days – non-resident of course

* Up to 44 days – resident if you satisfy four or all five factors

* Up to 89 days – resident if you satisfy three or more factors

* Up to 119 days – resident if you satisfy two or more factors and finally

* Up to 182 days – resident if you satisfy one or more factors.

Whilst this should provide greater certainty taxpayers who are not in the first two Classes may find it difficult to manage the permutations of connections and days.

At present if a person leaves the UK and returns within 5 years a liability to CGT arises on the disposal during that period of assets owned when leaving the UK.  It is proposed to extend this to certain sources of investment income, particularly dividends from close companies – companies small enough to be manipulated to obtain a tax advantage – however this will not apply to earnings from employment or self employment.  Surely there is a simple way round this – pay remuneration from the close company rather than a dividend?

The consultation suggested that as only a very small number of people use the remittance basis it may not be necessary to retain a concept of ordinary residence, and this clearly needs further exploration.

You should note that the Gaines Cooper case and the proposals for a statutory residence test do not affect the issue of domicile even though 23 years ago the Law Commission suggested that the UK concept of domicile was so out of date it needed urgent reform.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.

 For further details of podcast production, particularly if you would like me to create them for you, contact me at