21 October 2011
Gaines-Cooper loses in the Supreme Court
Private Client solicitor Freddie Bjørn considers the impact of the Supreme Court judgment in the Gaines-Cooper case which was handed down on 19 October 2011.
Summary of the Facts
The facts of the case are relatively straightforward and have been discussed at length over the years that Mr Gaines-Cooper has been pursuing his case. However, a swift summary may be useful as background before considering the Supreme Court's judgment.
Mr Gaines-Cooper's original contention was that he was not resident in the UK between 1993 and 2004. However, having been found by the Courts to have been resident during those years on the 'ordinary law' (based on years of case law) he argued that the day-counting rules set out in the Inland Revenue (now HMRC) guidance IR20 (which was replaced by HMRC6 at the beginning of 2009) had given him a 'legitimate expectation' that his residence status would be interpreted in line with that guidance as opposed to the stricter ordinary law.
So, the question for the Court of Appeal, and subsequently the Supreme Court, was whether IR20, which provided 'a more benevolent interpretation of the circumstances in which an individual becomes non-resident...in the UK than is reflected in the ordinary law', had indeed given Mr Gaines-Cooper (and the other appellants in the case) a legitimate expectation or, whether Mr Gaines-Cooper had placed too much reliance on what was clearly stated to be general guidance.
The Supreme Court's findings
The lead judgment in the case (which HMRC won by a majority of four to one) was given by Lord Wilson who made the following points of particular note:
- the need for a 'severance of social and family ties', required by the Court of Appeal to create a 'distinct break', was too high a threshold to impose on a person ceasing to be UK resident - a 'severance of such ties is too strong a word in [the] context'. Whilst it is beneficial for tax payers to know that the Court of Appeal's extreme severance test is no longer likely to be required for non-residence, the lack of guidance as to what actually is required for a distinct break fails to clear up the ambiguous 'distinct break' concept.
- A person's full time work abroad is sufficient to yield a 'distinct break in the pattern of [an individual's] life in the UK and the terms of paragraph 2.2 [of IR20] adequately convey its status as a pre-requisite to non-residence'. This was also clarified in the Court of Appeal and will be welcome news for those who believe they have shed their UK resident status through full time work abroad.
- Not only was IR20 clearly expressed to be offering general guidance but the contentious paragraphs in question were 'very poorly drafted', such that they 'lacked the clarity required by the doctrine of legitimate expectation'. The inference being that to have relied so heavily on guidance which was quite clearly ambiguous without so much as seeking clarification from the Inland Revenue was not sufficient to enable Mr Gaines-Cooper to claim he had a legitimate expectation.
So where does the Gaines-Cooper case leave us? It is early days but the reality is that the Supreme Court's judgment is unlikely to have changed anything significantly for the majority of non-residents. IR20's successor, HMRC6, contains 'materially different guidance' such that any action by HMRC in reliance upon that would presumably fall outside the scope of the Gaines-Cooper judgment. Further, the long-awaited statutory residence test (now due in April 2013) should clarify the position for non-residents going forward.
Consequently, the main concern is that HMRC have been holding back on their pursuit of those claiming to have been non-resident for the years pre-2009 pending the conclusion of this case. Presumably HMRC will use the judgment to argue that reliance on the 'benevolent interpretation' set out in IR20 is not sufficient to establish non-residence and that the general guidance IR20 offered should have been read in conjunction with the 'ordinary law' in this area, which is still principally taken from the 1928 case of Levene v IRC. If this is HMRC's approach there is a silver lining in Lord Wilson's confirmation that a 'distinct break' need not be the 'severance of social and family ties', although query whether this will prevent HMRC requiring such a high threshold in the absence of a definition of what a distinct break actually is.
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