UK: Non-Residence - Latest Developments

Last Updated: 25 February 2010
Article by Daniel Feingold

AN UPDATE

Since my last Article, there have been more twists and turns (in the form of two big cases) on the issue of how to achieve Non-Residence.

This is both troubling and unhelpful, since Non-Residence is perhaps the most effective way for High Net Worth Individuals to avoid the 50% Tax hike coming in April and is under consideration by many City Workers, Entrepreneurs and High Income earners.

Over Christmas, the First Tier Tax Tribunal Decision in the case of Hankinson –v- HMRC 2009 TC 00319 was published.

This concerned a successful Entrepreneur who held his shares in Bison Limited (his UK Company) via Non-Resident Trusts.

The method chosen to extract the gain tax free was for Mr Hankinson to spend 15 months working full-time in a Dutch Subsidiary of the Company.

The Capital Gains Tax at stake was just over £30m without adding a penalty and 11 years of interest!

The principal issue in the case was whether Mr Hankinson was Ordinarily Resident in the UK at the time the capital gains crystallised in March 1999.

Mr Hankinson would need to rely on Section 2.2 of IR20 that would treat him as Non-Resident and Ordinarily Resident if he was working abroad full-time for a period covering a whole tax year.

On the facts, the Tribunal found that he did not appear to work full-time for the Dutch Subsidiary and continued to do work in England for the main Bison Company and his other investment Companies. Further, on 2nd January 1999 he took ill on a flight to Barbados and returned to the UK on 30th April 1999 and never returned to the Netherlands to work.

His appeal on these issues were dismissed.

Yet again, this case (which came to light by means of a discovery assessment made in January 2005) demonstrates evidence of bad advice and poor execution.

This case is the product of an approach by some Advisors (I'm still seeing today) that Clients only had to pay "Lip Service" to being Non-Resident and that sticking to "day counting" would suffice.

The only glimmer of hope for Mr Hankinson is that the Tribunal Judge appears to have made a clear "faux pas" in relying not on the Opinion of the Dutch Tax Authorities or an Independent local Tax Lawyer as to their rules on Tax Residence, but on a letter from the Client's Dutch Tax Advisors written in March 1998. (That letter should in my view, never have been seen by the Tribunal, anyway).

Although the Tribunal Judge then gives Mr Hankinson the benefit of the doubt and proceeds to analyse whether the Tie-breaker Clause in the Treaty would protect him; his conclusion, (probably correct) is that it would not.

Mr Hankinson has already embarked on a Judicial Review and will no doubt appeal this decision.

There is a clear lesson here that taking good advice and sticking to it can pay dividends, especially where large amounts of tax are at stake.

The long running saga of Robert Gaines-Cooper (Davies & Anor, R (on the application of) –v- HM Revenue Customs [2010] EWCA Civ 83 (16 February 2010) culminated in the Court of Appeal dismissing his Judicial Review application on the ability to rely on HMRC's Guidance Booklet on Residence (IR20) as to the treatment of Taxpayers claiming Non-Residence.

Gaines-Cooper joined forces with two other appellants Davies and Wilkie (UK Property Developers) who were claiming to be Non-Resident for 2001-2002 on the same grounds as Mr Hankinson; full-time work abroad but this time in Belgium.

Gaines-Cooper's case revolved around whether he needed to make a "Distinct Break" with the UK or could rely on the Guidance in IR20 which appears to refer only to the number of days spent in the UK in a tax year.

Whilst Davies and Wilkie's issue, the ability to rely on IR20 appeared identical (from the greater sympathy for Davies and Wilkie particularly from Lord Justice Ward) it appears that joining their appeals with Gaines-Cooper may not have been the wisest strategy, except of course from a costs perspective.

Gaines-Cooper is someone who maintained a large house, collection of cars, guns, a wife and child in the UK and, in my view did not have any realistic chance of success as the finding of facts against him in the Special Commissioners were essentially fatal to his case.

There was a claim (backed up by several expert witnesses) that HMRC changed their approach to Residence Cases and in particular IR20 from the tax year 2004-2005.

In fact, the evidence points (and my personal experience concurs with this) that the change in policy occurred in 2001 and in particular, from the April 2001 publication of an Article (Personal Residence "Mobile Workers" Living in the UK in Tax Bulletin 52) on Mobile Workers. This supposedly impacted on those claiming Non-Residence under Section 2.2 but the reality is that this is when HMRC changed their approach on the "Distinct Break" issue as well!

Lord Justice Moses did not think this amounted to sufficient grounds to protect any of the Clients and the confusion of the expert witnesses in focussing on the wrong dateline was not (in my view) helpful.

The Appellants will appeal to the Supreme Court but hopefully separately!

HMRC will no doubt see this as an absolute victory and it will lead to more Enquiries and Challenges on Residence status where Capital Gains Tax and Income Tax from UK activities are at stake.

My view is that the Court of Appeal has actually made it clear that HMRC must stick to their position as stated in IR20 (or HMRC 6 its successor), if the Taxpayers fall within the relevant section. Falling within the terms of either full-time employment or achieving the "Distinct Break" are therefore critical.

The other problem I have with the Court of Appeal Decision is that HMRC's Counsel has persuaded the Courts that the old and contradictory cases on Residence have clear and consistent principles that are of wide application and that IR20 (and therefore HMRC 6) accord (more or less) with those principles. That is just simply not true and it seems only the Supreme Court will be able to clarify this key legal issue . Hopes of a statutory definition on Residence being introduced as an alternative solution, is also extremely unlikely.

Conclusion

The end result is that any Client contemplating Non-Residence for tax purposes needs clear Tax Law advice from an Expert on the "Distinct Break" (as I advocated in my earlier Article dated 1st December 2009 ). Another level of protection can be added by making sure that the Client is Resident under local Tax Law in a Country with a Double Tax Treaty with the UK: And would be treated as such under the Tie-breaker Clause on Residence, in that Treaty!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.