The increasing number of challenges has been evident and there have been four cases on the subject of residence and domicile in the same number of months. This article looks first at three cases involving persons leaving the UK and second at a person coming to the UK.
Leaving the UK
1. Gaines-Cooper, Davies and James
Many readers will be familiar with the case of Robert Gaines-Cooper. Since Mr Gaines-Cooper failed in the original tax case heard in 2006 there have been a number of appeals. The most recent judgment – in the Court of Appeal – was an appeal of an application for judicial review. The Gaines-Cooper case was heard at the same time as the cases of Robert Davies and Michael James.
The Court of Appeal offered a detailed interpretation of the relevant paragraphs in IR20 (the old HMRC guidance) dealing with an individual leaving the UK. They noted that there are two ways in which a person can leave the UK. First, he can work under a full time contract of employment overseas for at least one whole tax year. Second, he can leave the UK permanently or indefinitely.
Davies and James both fell potentially into the first limb but they failed to meet the test as they had begun their respective employment after 6 April of the relevant tax year. The Court of Appeal did confirm that a person will cease to be resident under this limb even if he maintains social, domestic and family ties to the UK. This is important and should bolster the arguments of an expat who has moved offshore under such an employment contract to be treated as non-UK resident (full time self employment should also count).
On the second limb, the Court held that “permanently or indefinitely” meant that there was a need to demonstrate a clean break from the UK and to cut social and family ties with the UK. On the facts of the three cases none of them had done this. Gaines-Cooper in particular had maintained extensive social and domestic ties to the UK including a house and business interests and his wife and son lived in the UK for long periods.
Despite expert evidence to the contrary, the Court of Appeal found that the treatment of the taxpayers was not an unannounced change of policy by HMRC. It was instead a result of the increased scrutiny of taxpayers. HMRC had a consistent policy but in recent years this had applied to a greater number of taxpayers and had been applied more rigorously.
In order to prevent a £30 million capital gains tax liability, Mr Hankinson moved from the UK to the Netherlands with the intention of working full time for a Netherlands-based subsidiary of a UK company of which Mr Hankinson was MD. Mr Hankinson claimed to be non-UK resident on the basis of the full time working overseas limb (noted above).
The First Tier Tax Tribunal found that Mr Hankinson had spent 130 days in the Netherlands in the relevant year and 82 in the UK. He had gone on holiday to Barbados but had taken ill and ended up spending 113 days there. There was some doubt about the extent of the work carried out by Mr Hankinson. The Tribunal held that his move to the Netherlands was therefore no more than “occasional residence” overseas and as such he remained UK resident.
The decision is not surprising given the weak facts. If Mr Hankinson had spent a greater number of days in the Netherlands he may have been able to present a better case. What is clear from this case is that it is vital to keep accurate records.
Miss Nazim Karim claimed to be non-UK resident in order to prevent a capital gains tax liability following the disposal of two investment properties. Miss Karim did not appear to give evidence but was represented by a Mr Evans. The Tribunal, while accepting that Mr Evans gave an honest account, considered this second hand evidence to be of a poorer quality, because they were unable to assess the honesty, accuracy or completeness of Miss Karim’s account. There was also documentary evidence that cast doubt on that account.
Miss Karim, on that evidence, had spent an average of just over 92 days each year in the UK over a four tax year period although in one of those years Miss Karim’s mother had been ill which meant that she stayed longer in the UK than anticipated.
The Tribunal noted that the number of days spent in the UK was only one factor to consider and found that in the relevant tax year Miss Karim had a settled abode in the UK, she spent a significant amount of time in the UK and, in that year and contiguous years, her visits were frequent. She had business in the UK to attend to and had family ties. The fact that she may also have been resident in the Algarve was irrelevant.
Coming to the UK – Tuczka
Dr Tuczka was an investment banker who moved to the UK in 1997 to work in the City. He originally planned to stay for between two and a half years and so did not regard himself as ordinarily resident. He ended up staying longer and so from 2001/02 tax year submitted a return on the basis that he was both resident and ordinarily resident. This mattered as by not being ordinarily resident in the earlier years he could claim the remittance basis of taxation on his overseas work days for the company.
HM Revenue disagreed and treated Dr Tuczka as UK ordinarily resident from 1998/99 tax year.
The First Tier Tax Tribunal had to decide if Dr Tuczka was in the UK for a settled purpose – not by reference to his state of mind but whether there was a sufficient degree of continuity for the purpose to be described as settled. If there was a settled purpose then the Tribunal had to determine at what time the purpose became settled.
Dr Tuzcka had bought a house in London in 1998. The Tribunal noted that this was not a determinative point but was an added factor demonstrating a settled purpose. His girlfriend – who later became his wife – commenced an accountancy training contract which lasted until 2002 and Dr Tuczka had a bonus payment under his contract which required him to remain in London for a longer period than that originally stated.
The Tribunal therefore found that the facts of the case did not support his original intention to stay for up to three years.
In both Hankinson and Karim, HMRC had raised a “discovery assessment”. HMRC are entitled to raise such an assessment if it is discovered that there is income or chargeable gains which ought to have been assessed but have not been. If an incomplete disclosure has been made, then HMRC have five years following the 31 January after the end of the relevant tax year to raise a discover assessment. Where there is fraudulent or negligent conduct the time limit is extended to 20 years. The Tribunal in both Hankinson and Karim considered that the taxpayers were negligent in not reporting the correct information.
What does this all mean in practice? Great care is needed in deciding whether there are any potential UK tax liabilities and whether a tax return must be filed where there is some doubt about the taxpayer’s residence and domicile status. Given the current uncertainty and increasing threat of a challenge by HMRC, considerable doubt exists in many cases.
If the taxpayer gets it wrong, there is a long period of uncertainty when a challenge can be made. In addition, if tax is found to be due then penalties and interest will be added. Mr Hankinson’s original tax liability of £30 million in the 1998/99 tax year has now more than doubled! Early tax advice is therefore sensible and may lead to considerable peace of mind.