UK: Gaines-Cooper: Residence

Last Updated: 17 November 2011
Article by Ashurst London

In a 4-1 majority judgment, the Supreme Court held that HMRC's published guidance on residence should be interpreted as incorporating a test requiring a "distinct break" from the taxpayer's life in the UK. Although this phrase was not used specifically, the guidance could be summarised as setting out factors which required an evaluative enquiry into the quality, as well as the extent, of "leaving" the UK for tax purposes, and the requirement for a distinct break was implicit within this. The taxpayers therefore could claim no legitimate expectation that HMRC would assess their residence status on the concessionary basis claimed, i.e. without considering whether there had been a "distinct break".

HMRC guidance may give rise to legitimate expectation of tax treatment different from the strict legal position

In 1999, HMRC published a booklet, IR20, setting out general guidance on the meaning of the word "residence" and phrase "ordinary residence". Because there has never been a statutory definition of these terms, it was particularly important that HMRC set out the main principles applicable in determining these concepts otherwise taxpayers would have been obliged to trawl through a large body of case law to identify those principles to apply to their own circumstances.

This judicial review hearing concerned two sets of appellants with different fact patterns. The better known is Mr Gaines-Cooper who has been through the full appeals process on the subject of his residence and domicile, all of which resulted in him being UK resident and domiciled for the years in question (Mr Davies and Mr James's appeals had been stayed pending determination of these judicial review proceedings). The appellants argued here, however, that the ordinary law does not govern determination of their residence status as the published guidance (or, on their alternative contention, HMRC's settled practice) gave rise to a legitimate expectation that their tax status would be determined accordingly.

"Distinct break" test could be read into the guidance

IR20 set out a number of "main factors" which were to be considered by taxpayers and gave two main ways for those leaving the UK to become non-resident:

  1. leaving for full-time work abroad; and
  2. leaving the UK for a settled purpose (including going abroad for three years or more).

Nowhere was the criterion of a "distinct break" mentioned specifically but, in the course of detailed discussion of the paragraphs of IR20 relating to the second category on which the taxpayers relied, Wilson LJ considered matters such as the grouping of the paragraph referring to a "settled purpose" with those under the heading of "Leaving the UK permanently or indefinitely" and the common references in these paragraphs to "visits" by the individual to the UK. In his view, the common feature of requiring "visits" "underlined the need for a change in the individual's usual residence and, therefore, by ready inference, for a distinct break in the pattern of his life in the UK".

Reading IR20 as a whole, Wilson LJ summarised the matters which he viewed as being apparent to the ordinary sophisticated taxpayer from the guidance as follows:

  • that he was required to "leave" the UK in a more profound sense than that of travel, namely permanently or indefinitely or for full-time employment;
  • he was required to do more than to take up residence abroad;
  • he was required to relinquish his "usual residence" in the UK;
  • any subsequent return on his part to the UK was required to be no more than "visits"; and
  • any "property" retained by him in the UK for his use was required to be used for the purpose only of visits.

The judge considered that, given these principles which could be distilled from the guidance as a whole, a taxpayer should expect that HMRC might enter into a "multifactorial evaluation of his circumstances", looking at both the quality of the links the taxpayer had with another country and the extent of the remaining links with the UK: in short, the taxpayer should be aware that he must make a "distinct break" with the UK.

IR20 was general guidance only

Wilson LJ stated that, were he wrong to have determined that IR20 successfully indicated to taxpayers that, to found a claim of non-residence, a distinct break from their pattern of life in the UK was required, he would conclude in any case that the guidance was "so unclear as to communicate to its readers nothing to which legal effect might be given".

The judgment also quoted from IR20's preface which drew taxpayers' attention to the fact that the guidance was only general and whether it was appropriate in any given case would depend upon all the facts of that case. The guidance further suggested that, in case of difficulty in applying the rules, a taxpayer should consult with his tax office. It was notable that the appellants had not done so.

Mance LJ dissented

While expressing his "residual unease about a concession so apparently general and independent of any consideration of particular circumstances", Mance LJ nonetheless dissented from Wilson LJ's leading judgment. He construed IR20 as focusing on the taxpayer's intentions regarding the duration of his absence and could find no direct support for any requirement for a distinct break in its wording. He considered that IR20 was designed to be comprehensive in describing to a taxpayer how his residence status will be determined and that the need for a "distinct break" could only be discerned following a review of the case law on residence. In his view, if a distinct break is always required as HMRC now contends then it should have been explicitly set out as one of the "main factors" for taxpayers to be aware of.

Insufficient evidence that HMRC had a settled practice of ignoring the "distinct break" test

The appellants' alternative contention, if IR20 could not be read as they believed, was that HMRC nonetheless had a settled practice of determining residence on the basis that a distinct break from the UK was not required. The Court noted that it is difficult to say that a practice (as compared to published guidance) has created an unambiguous, widelyrecognised and unqualified assurance to taxpayers on their tax treatment from which it would be abusive to depart. Clear evidence to this effect is therefore required. In this case, the appellants could show only "generalised, anecdotal" evidence that HMRC had changed its practice from not previously having required a distinct break – as opposed to having merely increased its level of scrutiny of residence cases – and this evidence was too "thin and equivocal" to found a claim for legitimate expectation.

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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