Robert Gaines-Cooper’s brave battle against HM Revenue & Customs ended on Tuesday this week (subject to a possible appeal to the European Court of Justice) when the Supreme Court delivered judgments in favour of HMRC (one judge dissenting), holding that their determination that Gaines-Cooper was UK tax-resident between 1993 and 2004 was reasonable.  

As long ago as 1936, a government-appointed committee held that the lack of clarity surrounding the concept of residence for tax purposes was “intolerable” and recommended that a statutory definition be introduced.  Seventy-five years later, HM Treasury appears finally to be implementing that recommendation and issued a consultation paper on the subject in June 2011.

In the meantime, taxpayers such as Gaines-Cooper wanting to know whether they are, have become, or have ceased to be UK resident have relied on the guidance given in an HMRC booklet.

This booklet is loosely based on the decided case law, much of which dates back to the early twentieth century, and from which it can hardly be said that a clear picture emerges.  The HMRC guidance represented, or so taxpayers and their advisors thought, a pragmatic attempt on HMRC’s part to provide some degree of clarity, and indeed to relax the strict legal position as found in some of the more extreme decided cases.

While confirming that taxpayers were entitled to rely on the guidance, the Supreme Court held that in a number of areas, and particular on the question as to when a taxpayer ceases to be UK resident, the booklet was so poorly drafted that it could not be relied upon at its face value. In particular, they held that ceasing to be UK resident was not simply a matter of spending fewer than 90 days on average a year in the UK, but required a “distinct break” with the UK as well.  Though his business interests were outside the UK and he spent most of the year outside the UK, Gaines-Cooper retained properties in the UK and his wife and son lived in the UK during term time.  The court held that HMRC were entitled to regard him as UK resident and that to do so was not inconsistent with their guidance booklet.

The ambiguous and potentially contradictory nature of parts of the guidance note had long been recognised, and tax practitioners had long proceeded on the basis of what they believed was a rough and ready consensus with HMRC as to where the lines were to be drawn. In particular, it was believed that HMRC agreed that establishing a pattern over a number of years of being in the UK for no more than 90 days was of itself a sufficiently “distinct break” for a taxpayer to cease to be UK resident.  

It was felt that this was supported by the following statement in HMRC’s guidance:

You are resident and ordinarily resident in the UK if you usually live in the UK and only go abroad for short periods – for example, on holiday or on business trips.

Although the Supreme Court has upheld HMRC’s decision to apply a harsher test for taxpayers wishing to leave the UK, it is disappointing that HMRC has chosen to do so in relation to previous tax years.  Taxpayers want clarity and to feel that they can rely on HMRC guidance.  The UK is rapidly acquiring a reputation for being hostile to the internationally wealthy, with changing fiscal goalposts upon which it is unsafe to rely.  This cannot be in the best interests of the UK economy.

If the proposed statutory residence test is introduced with effect from 6 April 2012, the decision is of relevance largely in relation to past years, and some individuals may well find their past tax affairs scrutinised with HMRC seeking to argue that they are tax resident in the UK.

What is interesting is that, if the proposed statutory definition had applied during the tax years which were under appeal, it seems that Mr Gaines-Cooper could well have found it relatively easy to avoid being UK resident.

He would have needed to:

- Reduce his days spent in the UK somewhat, to make sure he spent less than 90 days in the UK under the proposed new test which does not ignore days of arrival and departure.

- Make sure that he spent more time at his house in Jersey (we are told he spends three or four months there each year) than in the UK.  

- Avoid being directly involved in any UK businesses (it seems likely that this would have been possible after 1995)

The fact that his wife and son were UK resident and that he had available accommodation in the UK would not prevent him from ceasing to be UK resident under the proposed new rules, provided he adhered to the above.

In light of this, it has to be asked what was the point of HMRC taking such a firm stance in relation to the past?  Gaines-Cooper believed that he was complying with the guidance so as to be non-UK resident. If he had appreciated that he had failed to take account of the “at best, very opaque clues”, as Lord Mance describes them in his dissenting judgment, in the guidance that he was not doing enough to be non-resident, he would have had the chance to address these.  For example, his son has, since 2005, gone to school in Switzerland, where his wife now lives.  Judging by the proposed new rules, it appears that the Treasury is content for Gaines-Cooper to arrange his affairs so as to be non-resident with only relatively minor modifications to his pattern of living. 

Perhaps rather than pursue Gaines-Cooper for the last four years, HMRC’s energy might have been better spent implementing the 1935 recommendation for the introduction of a statutory residence test, thereby introducing greater certainty for all concerned, and consigning the guidance booklets to history.