Taxing times ahead for exiles

Thousands of tax exiles will be nervously re-assessing their finances following the Supreme Court ruling in favour of HMRC over a Seychelles-based billionaire’s residency status.

The court upheld 4-1 the Court of Appeal’s ruling that Robert Gaines-Cooper, who made a fortune by renting out jukeboxes, is resident in the UK for tax purposes.

The long-running dispute concerned the correct interpretation of the UK’s residence rules, which the court described as “very poorly drafted”.

Gaines-Cooper never spent more than 91 days a year in the UK, a time period widely accepted as the threshold for residence under HMRC’s tax guidance booklet, IR20 (now replaced by HMRC6).
However, the court held that IR20 required an overall evaluation of the taxpayer’s circumstances, and that the taxpayer “had to make a distinct break”. What amounted to a “distinct break” depended on the facts and “what the taxpayer actually does or does not do to alter his life’s pattern”.

Giving judgment in R (on the application of Gaines-Cooper) v Commissioners for HMRC [2011] UKSC 47, Lord Wilson said: “As Lord Mance points out, the requirement for a distinct break is not clearly expressed in the relevant paragraphs of the booklet…[but]…taken as a whole, the message that the booklet conveyed was that all the circumstances were open to evaluation in order to see whether the rules for non-residence were satisfied.”

Gaines-Cooper was heard alongside another tax exile case involving two men who worked in Belgium for a whole tax year.

Jason Collins, partner at McGrigors, says tax exiles “urgently” need to review
their financial affairs in light of the ruling.

“This ruling could open the floodgates for HMRC to pursue thousands of British tax exiles for backdated tax.

“It’s a significant blow for taxpayers. This ruling does not give taxpayers the certainty that they need and that is fundamental to the fairness of the tax system. This case proves that HMRC guidance is not reliable if it is badly drafted.

“The current regime is a lottery, which undermines confidence in the British tax system and makes the country less welcoming to internationally mobile wealth.”

Peter Vaines, barrister at Squire, Sanders & Dempsey, says: “Lord Wilson’s confirmation
that the severance of family and social ties is not required to establish non-residence will be widely welcomed.

“The test is that such ties merely need to be loosened—although the extent of such loosening is not made clear.

“Lord Wilson’s careful analysis of IR20 makes it clear that we must be particularly vigilant to examine HMRC Statements of Practice in fine detail to ensure that all possible nuances are teased from the wording. Otherwise we may deceive ourselves into thinking that their apparently straightforward terms can clearly be satisfied.”

HMRC’s permanent secretary for tax, Dave Hartnett, says: “There was an important principle of fairness at stake and that is why we have fought this complex case through the courts. We have always believed that our view of Mr Gaines-Coopers’s residence status was correct, so I am delighted that the Supreme Court endorsed that view.”