UK: British Taxman May Come for a Big Slice of Your Cake

For many UK expats the solids have just hit the air-conditioning with some force. A recent tax case has made it clear that if you are an UK national living in Hong Kong but have maintained connections with the UK you are at risk from the UK taxman who will be happy to charge you 50% tax on your world income. So Kung Hei Fat Choi from me but not from him.

The UK Court of Appeal has just rejected a British national's claim that he did not owe UK taxes because he lived in the Seychelles and handed him a £30 million tax bill for the years 1993 to 2004.

This decision could affect thousands of British expats who have lived in Hong Kong for many years but who spend time in the UK. All may be at risk from an increasingly aggressive UK Revenue service (HMRC) whipped into a frenzy by a government desperate for more tax to cut an increasing national deficit. Ignore this at your peril.

This case in question involved British businessman Robert Gaines-Cooper who had argued he did not owe taxes in the UK because he has been a resident of the Seychelles since 1976. He pointed to the rule in HMRC's own leaflet IR20 that defines a non-resident as one who spends less than 91 days per year in the UK.

The UK court said a taxpayer must show a "distinct break" from social and family ties to the UK and that spending all but 91 days outside the country is not sufficient to establish non-resident status. This is not a change in stance just a reinforcement of the existing rules. Those rules have been widely misinterpreted. There never has been a rule which says that the number of days spent in the UK is the absolute test of residency. Most countries operate similar systems. If you spend a certain number of days there you must necessarily be resident-even if already tax resident elsewhere as well. If you don't spend the requisite number of days you may still be resident because that country is the center of your economic or social life or place of closest connection. It's this latter point which has often been missed.

The Court confirmed that HMRC were indeed bound by the terms of IR20 but there was an implied condition that to be treated as non-resident there must be a distinct break with the UK and a severing of all social and family ties. Gaines-Cooper had a house in Henley where his wife and son lived and where he kept a valuable collection of art and guns. His son was at school in the UK. He had an UK mobile phone, his will was drawn up under English law and he regularly attended Ascot racecourse. Therefore he could correctly be treated as resident in the UK even after his ostensible departure in 1976. Apart from the Ascot bit many UK nationals living in Hong Kong are in the same boat which may now reveal itself to be sailing in a cess pit and holed below the waterline.

The court deemed that the correct interpretation of tax residency status turned on whether England had remained the taxpayer's " centre of gravity of his life and interests" and that the 91 day rule could not establish non-residency status on its own, rather it was "important only to establish whether non-resident status, once acquired, has been lost". In other words if you spend more than 91 days in the UK then you are definitely resident. If you spend less than 91 days in the UK you may not be resident but must look at other factors too. The court agreed.

Gaines-Cooper plans to appeal the case to the Supreme Court. His counsel told the BBC that HMRC was "playing games" with his client and mischievously reinterpreting its own guidance, turning it "from a sensible, practical, guide into something meaningless and, which is worse, a devious trap".

HMRC may (for that read "will") now look to crack down on more UK expats. In their own words it has has launched a sustained attack on people who had used residence and domicile rules to reduce their tax bills. Last year a new HMRC team was established, known as the high-net-worth unit, to investigate the lifestyles of some of the UK's richest individuals, including expats. It follows the enactment of the £30,000 non-domicile levy, the introduction of the 50% top income tax rate and the super-tax on the City of London bonus pool. HMRC said: "We are looking at residency and domicile more carefully..... HMRC is committed to ensuring that all those who are resident in the UK pay the tax that is due and this judgment will aid that effort."

The IR20 guidance on residency was replaced last year with a new booklet called HMRC6. This emphasises the importance of pattern of lifestyle in determining UK residency and states that just because you leave the UK to live or work abroad, you are not necessarily non UK resident for tax purposes.

So what to do? If you may be affected then you can change your lifestyle to remove the tax danger but for many that will neither be desirable or feasible. Selling the UK home and taking your children out of UK school may be a very unattractive option. The alternative is to plan so that if you are caught out your exposure to UK tax will be limited. Without proper planning you may have to pay UK tax at up to 50% on each and every source of world-wide income. That would be an economic disaster for many living in Hong Kong. Ignore this at your peril. Review tour arrangements. They have probably been made on the assumption that you are not UK tax resident. That assumption may be incorrect. Or at least HMRC may not agree.

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.

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