A question of residence

  • Author : John Carrell
  • Date : May 2010
ABOUT THE AUTHOR: John Carrell is Head of Tax and Partner at Farrer & Co.

F ew tax cases have stirred up so much furore in the UK Press as the recent Court of Appeal decision in Gaines-Cooper, which ruled that Robert Gaines-Cooper did not qualify for exemption from British taxes as a non-resident.

Supposedly it has made it much harder for hedge fund traders and others to flee heavily taxed Britain. Reacting to the case, the CEO of a leading London brokerage firm was quoted in the Times as saying:

‘For us we would need whole trading desks or product classes to relocate (to Geneva or Zurich). Any of our staff who went would probably have to relocate entirely taking their wives and children with them.’

It has also been suggested that employees leaving Britain will have to sell their homes and not set foot here for at least a year.

The Gaines-Cooper decision says nothing of the kind. It simply reaffirmed established principles, which are well known to professional tax advisors. In one respect it made it easier to advise would be émigrés; it said that key passages in IR 20 were binding on the Revenue.

The case marked the latest attempt by Robert Gaines-Cooper to overturn the original court decision that he was UK resident despite his claim to have left the UK in 1976 to live in the Seychelles. This time he was seeking judicial review of the Revenue’s alleged failure to apply its stated practice in IR 20 to him. His application was joined with that of two other individuals – Mr Davies and Mr James – who had gone abroad to work in Belgium in 2001.

IR 20, or to give it its full name – ‘IR 20 – residence and non-residence: liability to tax in the United Kingdom’, has been well thumbed by professional advisors over the years. It has provided useful guidance in an area where there is limited statute law and which (in the words of the judge in Gaines-Cooper) ‘is fraught by borderline cases.’

The attitude of the Revenue towards IR 20 has been ambivalent. In some cases it has applied it as if it were a set practice, but in others it has emphasised that ‘it is for general guidance only’ and each case has to be decided on its facts. This has fed the suspicion that the Revenue will apply or not apply IR 20 at will.

During the course of presenting its case to the Court of Appeal in Gaines-Cooper the Revenue shifted its ground and accepted that it could be held to what IR 20 said. In the words of Moses LJ, IR 20:

‘…set out a limited number of specific situations in which the taxpayer will be treated as non-resident. If a taxpayer falls within the situation described by the Revenue, the Revenue has given an assurance that it will treat the taxpayer in accordance with the terms of the guidance. If a taxpayer comes, for example, within the terms of 2.2 the Revenue has given an assurance that it will treat that taxpayer as not resident and not ordinarily resident. It will not be permitted to resile from that assurance, unless and until it announces that it proposes, for the future, to alter the circumstances in which it will accept non-resident status.’

Paragraph 2.2 deals with employees going to work full time abroad. This was the route under which Davies and James had claimed they had gone non-resident. They had left for Belgium in March 2001, but apparently did not start their employment there until after April in the following tax year, 2001/2. At stake was a large capital gain on a disposal in that tax year. The court held that on the correct interpretation of 2.2 they were not resident in that year. Had they started their employment on or before 6 April 2001, so that they satisfied para 2.2, the Revenue would have been obliged to treat them as non-resident.

Moses LJ gave a short and succinct summary of the conditions that those going to work abroad have to meet:

‘In 2.2 it is not enough that the taxpayer has left the UK, he must have left to work full-time. Absence is not sufficient, it must be absence while engaged on a full-time employment for at least a whole tax year. No more however is required. The absence need be neither permanent nor indefinite. Accordingly, …. there is no requirement, under 2.2 for a taxpayer to demonstrate that he has severed family and social ties within the UK.’

So hedge fund traders and others do not have to sell their UK homes and take their spouse and children with them to Geneva or Zürich. (IR 20 has been replaced by HMRC 6 from 6 April 2009 but there are no changes of substance to the relevant paragraphs and the judge’s summary above still stands.) Robert Gaines-Cooper did not go abroad (in 1975) to take up full time employment. Therefore he had to rely on the second route to non-residence signposted in IR 20. Para 2.7 states:

Leaving the UK permanently or indefinitely

‘If you go abroad permanently, you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more a year.’

Gaines-Cooper said this meant that all he had to do was leave the UK and thereafter spend less than 91 days a year here. The Court of Appeal referred to the words in the heading. It was not enough to leave:

‘The adverbs ‘permanently or indefinitely’ make, as a matter of construction, all the difference. The extent to which a taxpayer retains social and family ties within the United Kingdom must have a significant and often dispositive impact on the question whether a taxpayer has left permanently or indefinitely.’

So under this route the taxpayer must cut ties with the UK sufficiently to demonstrate that he or she is leaving the UK ‘permanently or indefinitely.’ Gaines-Cooper had retained nearly all of his ties to the UK so that the Revenue had been correct in its application of IR 20 to him.

What ties should someone going non-resident sever? First of all the main home must be moved from the UK to somewhere abroad. It is not strictly necessary to give up having a home in the UK altogether. IR 20 suggests that an individual can retain a home here providing it is ‘consistent with’ that person going abroad permanently or indefinitely. But it would be prudent for that person’s home abroad to be larger than the UK one. He or she should certainly move furniture, personal effects, family photos and – last but not least – family pets to the new home abroad.

As for family ties, any spouse and minor children should accompany the indivdual abroad. In Robert Gaines-Cooper’s case it went against him that his wife – although a Seychelloise – stayed living year round in the UK and his young son went to Rupert House School in Henley. There is, however, no need for him to sever all family and social ties. It is nonsense to suggest, as the UK Press has done, that his grown up children should accompany him or that his aged parents should uproot themselves.

He can of course continue to visit relatives and friends in the UK – providing he keeps within the 90 days. But the country to which he has moved should become the centre of his life, at any rate for the next three years. He should, for example, register with a doctor and a dentist there and have his main bank accounts there.

This accords with recent tax cases on residence, which emphasise that an individual can only show that he or she has gone non-resident if there is a ‘distinct break’ in the pattern of that person’s life.

In summary, Gaines-Cooper holds few fears for the professional advisor, who should be able in 90 per cent of cases to give the client definite advice, one way or the other, about going non-resident.


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