Archives for posts with tag: Gaines-Cooper

Residence – Gaines Cooper and a Statutory Test

October 25, 2011 //
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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 Paulsoper@mac.com

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Podcast Two – Residence Updated

October 21, 2011 //
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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 http://www.Daveclarkfive.com – but I warn you it is very loud!

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