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UK Tax Residency – Details of HMRC Ruling

Ainsley Wainwright

Ernst & Young

19 February 2007

November 2006 saw the publication of the outcome of the Gaines-Cooper v HMRC (Special Commissioners) case. The result was widespread media interest as it appeared to represent a change to the long-held interpretation of the UK’s HM Revenue & Customs guidance notes on UK tax residency for individuals. Revenue & Customs Brief 01/07 as issued on the HMRC website in January 2007 provides guidance on the outcome of the case and confirms that in the determination of UK tax residency, interpretation can be on an individual basis. The ruling in its current form has a far-reaching impact on individuals who visit the UK on a frequent basis yet limit their time in the UK to less than 91 complete days of presence. The Special Commissioners of HMRC applied their decision in the case on a retrospective basis and therefore other ongoing cases could be subject to a similar interpretation with significant amounts of income being deemed subject to UK tax. It is important to note that although the case does indeed represent a significant change of approach by HMRC with regard to the application of current UK law on residence, it does not in fact represent a change in law. The concepts of UK tax residency are not defined by UK tax legislation, rather through UK case law. IR20 – Resident and non-residents: Liability to tax in the United Kingdom is HMRC’s published guidance as issued in 1999. The guidance states that an individual will become tax resident in the UK if they are present in the UK for more than: • 183 days or more in any single UK tax year; or • 91 days or more averaged over a rolling period of four UK tax years. IR20 notes that “normal” practice is that days of arrival and departure from the UK can be ignored in determining the total number of days in the UK under the two tests noted above. Days where presence in the UK is due to illness or family bereavement are also usually excluded. Taking this interpretation, it is clear that an individual could arrive in the UK on a Monday morning and depart the UK on a Wednesday evening with only one full day of presence in the UK for UK tax residency purposes. If this pattern was repeated for the full tax year and indeed on a rolling basis, under the 91 day average test, UK tax residency would not be triggered. Mr Gaines-Cooper argued that for the UK tax years ending 5 April 1993 to 2004, he was tax resident outside of the UK in the Seychelles and that although he did continue to return to the UK, his presence was less than 91 days per year according to his/ his advisers’ interpretation of the available guidance. HMRC argued that Mr Gaines-Cooper should be treated as tax resident in the UK for the entire period in question and therefore taxable on his worldwide income in the UK. In reaching this decision the Special Commissioners focused on the particular personal circumstances of Mr Gaines-Cooper and why he was looking to be treated as “not resident” in the UK: • The family of Mr Gaines-Cooper remained in the UK during his period of claimed non residency • He was viewed to be in control of two UK businesses. Therefore, even though it is clear that he was present in the UK for less than 91 days in any tax year when excluding days of arrival and departure, this was not held to be the deciding factor in reaching the ruling. Nonetheless, it was noted that the “normal” interpretation of the 91 day rule to exclude days of arrival and departure gave an inaccurate picture of his presence in the UK when considering the particular facts of the case. The UK tax authorities have not sought to challenge anyone in this way before and therefore the case will be very important for individuals who are claiming to be not resident in the UK under the 91 day rule. Our experience is that when the facts of this case are viewed together with the intention of the individual, it provides HMRC with significant reason to focus on UK nationals who are tax resident before departing the UK with the intention of breaking UK residency. One could reasonably expect the focus to widen to investigate foreign nationals who visit the UK for business purposes on a regular basis with sufficient days of presence that may under a different interpretation of the rules make them tax resident in the UK. HMRC guidance issued in response to this case emphasises that any dispute that arises over the application of “general guidance” will be resolved by the Commissioners. In coming to a decision they are obliged to make use of the available case and statute law rather than guidance issued by HMRC. While it is unclear how widely HMRC will seek to apply this ruling it is clear that it is an area that they will be focusing on more closely going forward. Individuals in a similar situation to that outlined above should certainly be aware of the risk attached to such arrangements.