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Judgment was reserved on the final day of the Gaines-Cooper judicial review hearing, which was heard with Davies and anor in the Court of Appeal.
It began with HMRC's counsel, Ingrid Simler QC, attempting to provide further clarification on the department's approach to its guidance in IR20.
She said that for an individual to successfully claim he was not resident in the UK, he needed to achieve two things: first, establish links with a new country and, second, sever links with the UK, writes Rachael Arning.
Ms Simler explained that the guidance in IR20 merely sets out the Revenue’s opinion as to which of these links (for instance, accommodation or employment) were most relevant in specific sets of circumstances.
However, the guidance was not exhaustive and did not prohibit the taxman from looking at other facts and circumstances if they would shed light on the taxpayer’s residence status.
Lord Justice Moses said Ms Simler’s comments suggested that when looking at IR20 it should be borne in mind that the factors listed were an ‘e.g.’ rather than ‘i.e.’, and Ms Simler agreed.
It was as important, she said, for an individual to demonstrate he had severed his links with the UK as it was for him to demonstrate that he had created them with the new country. Paragraph 1.4, which warned taxpayers that being resident in abroad would not necessarily mean they were not resident in the UK, illustrated the importance of this.
Ms Simler conceded that to establish non-residence, an individual would not necessarily have to demonstrate a ‘clean break’ and break all ties with the UK. Making a ‘distinct break’ would do, and this would involve establishing a break in the pattern of the individual’s life.
Lord Justice Ward referred to Ms Simler’s submission of the previous day - that there had been no change in HMRC practice in relation to non-resident claims - and said there nevertheless appeared to be much closer scrutiny of non-resident individuals in later years. If HMRC took a taxpayer at his word in the past, and were content to rely on day count, was that not a change of practice?
Ms Simler said that in her submission it was not. The Revenue had always had the right to enquire into ‘higher risk’ cases and had done so. If there had been an increased level of scrutiny in assessing applications in recent years, it was merely a reaction to the change in fiscal landscape after the introduction of self assessment, where the onus fell to the taxpayer to declare his residence status. This had necessitated a tougher stance by the taxman.
Moses LJ said there was a suggestion that HMRC had somehow deprived themselves of the right to police claims on the basis of past practice – but it would be a ludicrous situation if a successful claim could be brought against a public body for failing to announce that it was planning to conduct its investigations in a more thorough way.
The QC went on to take the judges through evidence relating to Messrs Davies and James, and stated that contrary to the 4 November submissions by their counsel, David Goldberg – that a ‘crack team’ at HMRC had decided to ‘make an example’ of the appellants – the evidence suggested that their case was no different to any other in the way it had been investigated.
The reason why their application for non-residence status had failed was because it had been clear on the facts that they did not satisfy the conditions set out in chapter 2 of IR20, and that in coming to that conclusion, IR20 had been applied entirely correctly by the Revenue.
In relation to her statement in the pervious day’s proceedings – that there was no concessionary split-year treatment for capital gains tax – Ms Simler explained that this wasn't strictly correct: a concession (ESCD2) was in fact available for CGT.
However, a taxpayer needed to be non-resident for at least five tax years to be able to claim the benefit from it. Since Messrs Davies and James would not have been able to rely on it, this was not critical to HMRC’s case.
Turning her attention to Mr Gaines-Cooper, Ms Simler said that even if he had successfully lost his UK resident status in 1976 by falling within chapter 2 of IR20 – which she doubted on the facts - he would nevertheless have been treated as reacquiring residence again in 1980 under the ‘accommodation rule’ in chapter 3.
The QC explained that the ‘accommodation rule’ provided that if a taxpayer had UK accommodation available to him in a tax year and he set foot in the UK for any one day in that year, he would immediately be deemed UK resident for that entire tax year. Although the rule was abolished in 1993, once Mr Gaines-Cooper had become UK resident by virtue of the rule, to divest himself of residence he would have to have subsequently changed the pattern of his personal circumstances. The fact that he retained accommodation, social connections and business interests in the UK, was proof that he did not.
Moses LJ asked, why, if it was so clear that Mr Gaines-Cooper did not satisfy the rules in IR20, had the present case caused such consternation amongst practitioners?
Ms Simler replied that it was because of HMRC’s application of the day counting rule in chapter 2: in assessing whether Mr Gaines-Cooper was non-resident, days of arrival and departure had been included.
However it was important to bear in mind that this was not a case in which the ‘normal’ day counting rules (as referred to in paragraph 1.2 of IR20) should be applied. Ms Simler pointed out that in the tax years in question Mr Gaines-Cooper was taking up to 150 flights a year.
Therefore, not counting travel days would have created a ‘distorted picture’, and HMRC were entirely justified in taking the days into account.
In his closing submissions, Mr Gaines-Cooper’s counsel, David Milne QC, focussed on four main points: first, that he had not dealt with chapter 3 in his main argument because it was HMRC’s contention that his client had never ‘left’ the UK (since chapter 3 was only relevant to non-residents).
However, it was, of course his contention that Mr Gaines-Cooper had become non-resident after 1976 and therefore fell squarely within paragraph 3.3, which applies where short term visitors make short visits to the UK.
Second, he claimed Ms Simler was plainly wrong to assert that the consequence of his client falling foul of the ‘accommodation rule’ in a particular tax year (1992/93) meant that he lost non–resident status for all subsequent years. Mr Milne’s reading of the rule was that it would only ‘bite’ in the tax year in question, and subsequent years would be unaffected.
Third, even if his client had not ‘left’ in 1976 so that chapter 3 would apply, since his client had been abroad for three years from 1976 onwards, he would have fallen squarely within paragraph 2.8. Since the test in 2.8 was a factual one that Mr Gaines-Cooper had satisfied, it was not necessary for him to adduce further evidence to bolster his claim that he was non-resident.
Finally, Mr Gaines-Cooper was entitled to disregard days of arrival and departure in calculating days spent in the UK for the purposes of ensuring he did not fall foul of the ’90 day rule’ in chapters 2 and 3.
Mr Goldberg drew matters to a close for Messrs Davies and James by accusing HMRC of applying an irrational interpretation to paragraph 2.2 – which requires the taxpayer to have been absent for ‘a’ full tax year for full-time employment – by insisting that the year of employment be the same as the tax year under appeal.
He also objected strongly to Ms Simler’s claim that paragraph 2.9 was merely an adjunct to paragraph 2.8: a point that Ms Simler pointed out was rather unhelpfully also made by Mr Milne yesterday.
Mr Goldberg said this was clearly wrong because paragraph 2.9 was clearly intended to deal with persons such as his clients who went abroad for fewer than three years for a settled purpose – which in their case was to work for their company in Belgium.
