Posted: 07 July 2011
Issue: Vol 168, Issue 4312
Categories: Update, News, Residence & Domicile, Overseas
Keywords: Gaines-Cooper, IR20

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Gaines-Cooper case begins in Supreme Court

The eagerly awaited hearing of the Gaines-Cooper appeal began yesterday in courtroom one of the Supreme Court, write Keith M Gordon and Ximena Montes Manzano.

As well as the five judges, Lords Hope, Walker, Mance, Clarke and Wilson, the court was graced with the presence of a number of notable members of the tax profession, including there QCs – and that is before one considers the barristers actually arguing the case.

Robert Gaines-Cooper is not the only appellant in the IR20 judicial review. Since the Court of Appeal hearings in 2009, his appeal has been joined with the claims of Robert Davies and Michael James, both of whom are being represented by David Goldberg QC and Nicola Shaw, and who opened proceedings.

It appears Mr Goldberg had been allotted a two-hour slot to make submissions on behalf of his clients.

Unlike Mr Gaines-Cooper, Messrs Davies and James had two strands to their case: first, that the proper construction of paragraph 2.2 of IR20 (1999 edition) entitled them to be treated as non-resident by virtue of their working full-time abroad; the second was that they could also take advantage of paragraphs 2.7 to 2.9, which dealt with individuals who had left the UK either permanently, for three years or more or for a settled purpose.

Mr Gaines-Cooper’s claim is based solely on these latter paragraphs.

Although it was clear that Mr Goldberg, on behalf of Messrs Davies and James, was maintaining arguments on both parts of IR20, his oral arguments were confined to paragraphs 2.7 to 2.9.

Mr Goldberg spent the first of his two hours taking their lordships through the history of IR20, including its various incarnations since its first publication in 1973 and how extraneous events – case law developments as well as statutory changes – were reflected in subsequent editions of the guidance.

He highlighted documents that showed how the Revenue had tried to draft the first edition of IR20 so that it could be easily understood by the ordinary taxpayer. The point he was making was that IR20 represented a standalone code, the terms of which should be given their normal meaning.

For example, if the guidance asks whether a taxpayer has left the UK (or gone abroad) and purports to tell the taxpayer whether or not he or she will be treated as non-resident afterwards, it would be contrary to the purpose of IR20 if ‘left the UK’ were to be interpreted as ‘ceased to reside in the UK as that phrase is understood by the courts’.

Mr Goldberg was particularly critical of the Court of Appeal’s conclusion that the requirement to have ‘left the UK’ in paragraphs 2.7 to 2.9 required a severance of ties to the UK, whereas the similarly worded requirement in paragraph 2.2 did not.

He told the court that, given that IR20 was supposed to reflect the case law, imposing such a requirement was unjustified because – as demonstrated in Reed v Clark – a severing of ties was not necessary to amount to a cessation of residence.

The barrister also referred to correspondence that the Institute of Chartered Accountants in England and Wales had in 1993 with the then Inland Revenue, which showed that the department did not at that stage worry about many ongoing connections with the UK when interpreting IR20, but was interested only in the number of days spent in the UK on return visits and the purpose for leaving the UK in the first place.

There was some discussion about the apparent change of wording in the tax return helpsheets, which seemed to reflect the taxman’s concern in about 2001 about mobile workers that appeared to support the taxpayers’ arguments.

Mr Goldberg’s case was that every contemporaneous document was consistent with the interpretation for which he was contending: that paragraphs 2.7 to 2.9 did not require a taxpayer to sever ties with the UK. The imposition of that hurdle was merely an excuse for not applying IR20.

Lord Mance wondered whether these arguments were being advanced to support the taxpayers’ interpretation of the paragraphs or to demonstrate a change in approach by the Revenue.

Mr Goldberg confirmed he was hoping to base his argument upon both limbs: first, he hoped to persuade the court that his construction of IR20 (as supported by the documentation) was correct, but as a reserve argument he would demonstrate that – contrary to the finding of the Court of Appeal – there had been an impermissible retrospective change in practice.

Shortly before lunch, Anthony Grabiner, Baron Grabiner QC, assisted by Conall Patton, began to present the case on behalf of Mr Gaines-Cooper.

Lord Grabiner reminded the court of the history of Mr Gaines-Cooper’s case, including not only his unsuccessful appeal to the Special Commissioners in respect of both his domicile and residence statuses, but also his travels abroad.

Adopting a slight different approach from that of Mr Goldberg, Lord Grabiner argued that the documentation evidenced only a change in the Revenue’s practice in respect of IR20: a change that was unfair and amounted to an abuse of power.

The barrister noted Mr Gaines-Cooper had made it perfectly clear to the Revenue in the late 1970s (as well as to the Bank of England because of the exchange control regulations then in place) that he had ceased to reside in the UK and had complied with the tax authorities’ requests for additional information.

Having done so, he could reasonably assume they were content to accept his position, because he heard nothing further from them for 20 years.

The court was shown how the taxman’s initial challenges to Mr Gaines-Cooper’s claim to be non-resident were predicated on the basis that the only real hurdle to overcome in IR20 was the day-counting test.

Indeed, at first, the Revenue misapplied that test; the department had wrongly included days of arrival in and departure from the UK, contrary to the practice clearly spelt out in IR20. Only when the error was pointed out did the taxman begin to suggest a different approach to IR20: requiring a severing of UK ties.

Returning to this issue later, Lord Grabiner highlighted a number of articles in the professional press that seemed to show that the private sector considered the Revenue to have changed its practice when applying IR20.

After lunch, Lord Grabiner made his second submission: that the Revenue’s construction – as accepted by the Court of Appeal – was wrong. He noted the near universal view that the current state of the law of residence is unsatisfactory, and he told their lordships that a belated attempt to clarify it was currently subject to public consultation.

The barrister noted there was agreement between the parties that a document such as IR20 ought to be interpreted by a court by considering the intended reader: in this case, a reasonably sophisticated taxpayer.

In the circumstances, however, he argued it would be wrong to impute to such a reasonable reader knowledge of the residence cases, most of which were heard in the first half of the 20th century. In particular, IR20 makes no reference at all to the apparent need to sever family ties. To the extent that it is necessary at all, that requirement arises only from the case law. Each of the various promises made in IR20 can, on a normal reading of the words, be satisfied without severing of ties with the UK. Indeed, paragraph 2.8 makes no sense unless some ties with the UK are retained.

Lord Hope asked whether the issue was that all ties had to be severed.

In response, Lord Grabiner argued IR20 contained powerful indications that family ties could be maintained. Furthermore, a requirement that ties be severed was in itself a cause of further uncertainty. Indeed, such a meaningless test would be contrary to the very purpose of IR20 unless the taxman was (unattractively, he suggested) to argue that IR20 was meant to be uncertain.

Lord Grabiner then made responses to aspects of the Revenue’s written case. He noted the department had argued that paragraph 1.4 of IR20 gave residence an adhesive quality. But the barrister suggested this was a misreading of the paragraph and, in any event, a non-sequitur.

Pre-empting the Revenue’s arguments, Lord Grabiner argued the IR20 guidance was within the department’s managerial discretion, as permitted under the Wilkinson principle, because it was based on the case law. However, the correct approach to take was to interpret IR20 on its own merits, and not by reference to the case law underpinning it.
In particular, he said IR20 was not meant to be taken as a summary of the law but a guide as to what the Revenue would do in particular cases. He emphasised, that it provided that the taxman would treat individuals as non-resident if they fell within the terms of the relevant guidance.

So far as the interpretation of paragraph 2.9 was concerned, Lord Grabiner said common sense dictated that the word ‘left’ should be given the same meaning as in paragraph 2.2.

Lord Wilson wondered whether the difference could be justified given that paragraph 2.2 was concerning cases involving full-time work abroad where section 830 of the Income Tax Act 2007 expressly disapplies the presence of available accommodation.

In response, Lord Grabiner suggested it was not a legitimate exercise for someone to be interpreting IR20 by applying such expert knowledge of the law of residence for tax purposes. The barrister asked rhetorically, ‘Why make something meant to be simple complicated?’

Mr Goldberg interjected by pointing out that paragraphs 2.7 to 2.9 could be said to overlap with the provisions in sections 831(1) and 832(1), which also disapply the relevance of available accommodation.

The Revenue’s interpretation, Lord Grabiner continued, meant IR20 was an empty tautology because it meant one could be treated as non-resident only if one had ceased to reside in the UK.

Furthermore, given the 91-day time limit in IR20 had no legal backing, it was arguable such an approach meant IR20 made it more difficult for someone to maintain non-residence status. That approach would be perverse.

The arguments then considered one major difference between the different cases: that Mr Gaines-Cooper had been already to the Special Commissioners before the judicial review was heard, whereas Messrs Davies and James had their judicial reviews heard first.

Lord Mance wondered whether a legitimate expectations argument could have been validly raised before the tribunal, but Lord Grabiner explained the consensus at the time (this being before the judgment of Sales J in Oxfam) was that the tribunal did not have jurisdiction to hear such points.

In any event, Lords Wilson and Clarke considered that a more sensible approach would be for the judicial review to be heard first, so that the detailed findings of facts would not prejudice any judicial review. That this had not happened was, as Lord Grabiner put it, water under the bridge.

The Revenue had been allocated four hours to make its arguments, the first half-hour falling at the end of day one.

They were submitted by James Eadie QC, who was assisted by Akash Nawbatt and Christopher Stone. He confirmed Ingrid Simler QC would be making additional submissions on the second day.

The barrister first accepted that guidance issued by the Revenue was plainly capable of creating a substantive legitimate expectation. Therefore, if the department makes a promise, it can be bound by it.

However, Mr Eadie’s argument was developed to suggest that IR20 did not create such legitimate expectations.

First, he noted that the Revenue is not given any tax-lawmaking powers, only powers of collection. Therefore, abdication of its powers could be ultra vires.

Lord Hope enquired whether the department could legitimately simplify the tax-collecting process (through simplified guidance); Mr Eadie concurred.

Indeed, in response to a question from Lord Mance, the barrister went as far as to suggest that the split-year treatment, which is clearly concessionary, was a legitimate simplification.

Furthermore, Mr Eadie continued, for a legitimate expectation to arise, the court had to be sure the Revenue could forgo the tax properly due. For this reason, any promise allegedly made had to be clear and unambiguous.

The barrister accepted that the intended reader of IR20 was the ordinary sophisticated taxpayer, who would not be expected to understand all case law. The thrust of the argument, however, was that such a reader – who would be expected to have read the entirety of IR20 – should not have obtained comfort from IR20 on which to found a claim for legitimate expectations.

In particular, Mr Eadie focused on the opening of IR20: its preface and first few introductory paragraphs.

He suggested that, properly construed, those words merely alerted the taxpayer to the fact that residence status is determined by case law, and that the taxpayer ought, having been so alerted, to seek further guidance from the taxman.

Lord Hope wondered whether the taxpayer would be entitled to go instead to a tax adviser.

Mr Eadie considered that a tax adviser ought to have been aware of the law and would have advised accordingly. To reinforce his case, he noted that IR20 claimed to reflect the law and practice in a particular month.

He argued that, given the fluctuations in both, this should further warn the reader that the guidance could easily be out of date and, therefore, was a further indication that the taxpayer could not safely rely on its guidance.

In short, Mr Eadie argued that the reasonable taxpayer would not overlook the underlying law. IR20 was not designed to provide answers.

Despite some questions from their lordships, the case did not advance much further before 4pm, when the court rose for the afternoon.

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