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UK residency status all at sea as HMRC targets tax exiles

Thursday, March 04, 2010 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax, HMRC, tax havens, Sue Knight, HNWIs, domicile, residence, Gaines-Cooper, IR20, UK residents, residency, status, Finance Bill 2008

The debacle over residency status is finally brought to a conclusion following the publication of the long-awaited decision of the Judicial Review cases of Davies, James and Gaines-Cooper.
So what can the non-residents who want to keep a foothold in the UK expect from HM Revenue & Customs’ (HMRC’s) more rigorous scrutiny of non-UK residency claims?

Residency status in flux
For many years, the practice and guidance relating to residency status was found in HMRC’s booklet IR20, which has now been superseded by HMRC6 (with effect from 6 April 2009). For those of you who would like further details of residency, James Kessler QC provides a detailed review of the current position in Taxation of Foreign Domiciliaries 2009/2010.

Judicial Review raised new questions
The issue that gave rise to the Judicial Review was whether a taxpayer is entitled to rely on booklet IR20 (or any other Statement of Practice) issued by HMRC,  which is based on long-established HMRC practice.

HMRC’s contension, however, was that IR20 was not binding, insisting that taxpayers could not have any legitimate expectation to rely on the terms of IR20, despite having done so since 1973. IR20 merely set out how HMRC might approach the taxpayer’s position and the taxpayer’s residence status had to be determined by reference to the law; the terms of IR20 were completely irrelevant.

This point of view was challenged in the consolidated appeal case of Gaines-Cooper, and in the original Judicial Review hearing at the end of June 2009, HMRC was asked by the judge to justify why it had not followed IR20. In November 2009, HMRC abandoned this argument completely and acknowledged that it was indeed bound by the terms of IR20 – providing that the taxpayer’s circumstances fit exactly within the terms of IR20.

Did HMRC reinterpret IR20 rules?
As Squire, Sanders & Dempsey (who acted for Robert Gaines-Cooper) note in their November 2009 United Kingdom Tax Bulletin, this is not the end of the matter, though, as individuals who thought they fell within the terms of IR20 now find that they do not because HMRC says it doesn’t mean what we all thought it meant for the last 35 years.

So the argument then moved on to whether the interpretation placed on IR20 by HMRC was new, and whether there had been an unannounced and unfair change in its practice.

Lord Justice Moses concluded:

“The Revenue did not renege upon the assurances given by IR20 or misinterpret its terms or alter its interpretation or application of IR20 to defeat the taxpayers’ claim to non-resident status.”

Interestingly, Lord Justice Ward was not quite as bullish in his summing up and said:

“The surprise of a large body of professional opinion at the recent turn of events causes me concern that there has been a change in policy. I am, however, persuaded that the change which has been perceived by the profession…is the effect of a closer and more rigorous scrutiny and policing of the growing number of claims, which it is permissible for the Revenue to conduct and is not a root and branch change in policy.”

All three appeals were dismissed, with HMRC victorious on all fronts. The decision will be a great disappointment, not only for taxpayers but also for the profession.

Reform on residency status inevitable
The real difficulty, exposed by these appeals, is that unless the facts of a taxpayer’s case are beyond all reasonable doubt, the very terms of IR20 provide no certainty of the outcome of any claim to resident or non-resident status.

The House of Lords Select committee on the Finance Bill 2008 pressed for reform in 2009/2010, and while this deadline has been missed, reform must be inevitable. How long and what from it will take, is another question.

It is intolerable that the principles to be applied are mainly found in case law, principally from the late 19th and early 20th Century rather than in statutory code.

A comprehensive statutory definition of UK residence would replace both the current hopeless uncertainties of the law and HMRC’s practice, thus enabling individuals to plan their affairs accordingly (although drafting this would certainly have its challenges).

Non-UK residents targeted by HMRC
What is clear is that taxpayers who wish to lose their UK residency status, or who have been claiming to be non-UK resident but who have returned to the UK on a fairly regular basis (albeit complying with the old 91-day rule), and who do not work abroad on a full-time employment contract, need to carefully review their residency status.

HMRC has started to raise detailed enquiries into non-UK resident claims, particularly where there are continuing connections with the UK so it is advisable that individuals review their residency status to see whether any action can be taken now to strengthen their position.

Image: © Striatic/Flickr, 2006

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