Posted: 08 July 2011
Issue: Vol 168, Issue 4312
Categories: Update, News, Admin, Residence & Domicile, HMRC, Overseas
Keywords: Gaines-Cooper, IR20

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Final day of Gaines-Cooper appeal in Supreme Court

On the second (and last) day of the Gaines-Cooper residence appeal in the Supreme Court yesterday, James Eadie QC continued with his submissions for HMRC, write Keith M Gordon and Ximena Montes Manzano.

The elements that must be proved in order to show a legitimate expectation were:

• In a case where the alleged legitimate expectation is based on conduct rather than express words, the same degree of clarity and lack of qualification is required. There must be a clear and consistent pattern of invariable settled practice and this proposition is consistent with established cases of legitimate expectation in tax cases (for example, Unilever).
• Although the authorities say that a taxpayer may rely on an established practice, it has to be a) very clear and b) an exceptional case.
• Any person who relies on conduct must be assured by the public body that that practice will continue.
• The concept of reliance on the practice to the taxpayer’s detriment is not an essential precondition but it is highly relevant.
• The taxpayer must show that it is so unfair to resile from the practice that it would amount to an abuse of process. If the public authority reaches a sensible view, even if the view is not correct, it would not be proper to characterise that as abuse.
• If a promise is made to the public at large, it is all the more difficult to prove legitimate expectation, it helps if the promise is made to a small specific group of people.

At this point, Lord Mance, one of the five judges, interjected by asking if the points arose on the construction of the documents, if the Revenue was wrong on the construction of IR20, then would that be it?

Mr Eadie replied that if, and only if, the court decided against the department on the true construction of IR20 then there should be a declaration of non-entitlement to residence status.

The court seemed very interested in the concept of reliance on a promise or practice, and enquired as to whether a taxpayer was required to raise his or her particular case with the Revenue, and whether the department could point to an answer in any of the forms submitted by the taxpayers in this case that were disingenuous, incomplete or misleading.

Mr Eadie said there was no criticism of the taxpayers as far as that was concerned; it was up to taxpayers to do what the guidance told them, and a reasonable taxpayer would follow the advice in the guidance and consult with his or her tax office.

Mr Eadie introduced the new submission that even if a legitimate expectation existed in this case, judicial review being a discretionary remedy, there is an interrelation between the ‘unlawfulness’ and the relief to be granted. It could well be that the court decides that in the circumstances it is appropriate to refuse to give the remedy sought by the taxpayers.

Lord Wilson, another of the judges, expressed worry about the acceptance by the Revenue that not much about this point was argued at the Court of Appeal stage of the case and suggested it was uncomfortably late for the department to be raising it at this stage.

The concern was addressed by the Revenue by suggesting that if the court was against it on the practice and interpretation issues, the court would have to decide what to do next and will have to grapple with the issue of remedy and discretion.

Mr Eadie had one final point: reliance might be thoroughly important in the cases of Robert Davies and Michael James – the fellow appellants of Robert Gaines-Cooper – and the burden of proving reliance and detriment is on the taxpayers.

They had been asked to adduce the tax advice received to show that they had actually relied on the guidance, but they had failed to produce any evidence on this point.

Mr Eadie concluded his submissions by saying that if the court was to conclude that it needed further details or evidence of reliance and detriment, then it should declare a legitimate expectation was created and go no further than that. This would result in a narrow form of declaration of unlawfulness, and the decision would be remitted back to the Revenue for reconsideration.

Miss Ingrid Simler QC then in turn dealt with the following points on behalf of the taxman:

• The issues and the Revenue’s case.
• Signs of deficiencies in the taxpayers’ cases.
• The correct interpretation of IR20.
• Change of practice.
• Application of the facts: reliance and detriment.

Ms Simlar began by contending that if the taxpayers were correct either on the asserted meaning of IR20 or in the alleged change of practice, it would mean non-residence status would in effect be given to taxpayers who have not ceased to be resident in the UK but that at best have dual residence. This would have a significant impact on the collection of tax.

She said the taxpayers’ case relied on an alleged unequivocal practice by the Revenue by which it committed itself to disregard the obviously relevant question of whether the taxpayer has left the UK permanently.

The barrister argued that the taxpayers were relying only on a single letter by a case worker back in 1999 and on the consternation by members of the profession – and that consternation had to do with day counts, and not on the question of leaving the UK permanently.

Ms Simler contended that the question of whether a person permanently left the UK requires an evaluative judgment, and paragraph 2.8 of IR20 demonstrates a necessary analysis of whether the taxpayer severed all ties with the UK.

She submitted that three divergences of approach between Mr Gaines-Cooper’s barrister, David Goldberg QC, and Lord Grabiner QC, barrister for Messrs Davies and James, were tantamount to deficiencies in their cases, and this should be noted by the court.

According to Ms Simler, the IR20 ‘booklet’ sets out any concessionary treatment and where it does, it says so.

When asked by the court on the status of the 91-day test, Miss Simler contended is is a creature of practice; she did not accept it determines non-residence, because it does not affect appeal rights.

She added that, if nothing else, IR20 gives taxpayers an advantage and some comfort that they can still visit the UK after they have established non-residence.

Ms Simler contended residence has an ‘adhesive’ nature and ‘something more’ is required to establish non-residence.

Lord Wilson noted that this was in reference to paragraph 1.4 which warned readers that residence overseas does not preclude residence in the UK.

Ms Simler placed a lot of emphasis on the wording of paragraph 2.1 of the guidance as being the first part of the chapter and ‘the first thing a taxpayer should read’.

She explained that the phrase ‘usually live’ involves an examination of the nature of the links with the UK. A person claiming non-resident treatment under 2.7-2.9 can expect that the Revenue will be interested in whether the person continued to ‘usually live’ in this country.

She further asserted that home is the hallmark of residence. If you keep a home here and you live abroad then you might still be resident here. This argument is consistent with dual residence.

Ms Simler stated that you have to fall squarely within the terms of paragraph 2.2 in order to be treated as non-resident (that is, you must go abroad to work full time for the requisite period). However, paragraph 2.5 contemplates the possibility of another occupation in the UK and makes it clear that it is an evaluative concept.

In the Revenue’s view, the second part of the paragraph explains that if you have a main employment abroad, the department will consider whether any activities you carry out here are consistent with the statement that you have left the UK to work abroad. It then follows that if someone does not meet all requirements in paragraph 2.2 they remain resident unless 2.7 to 2.9 apply.

Paragraph 2.8 of IR20 was described by Miss Simler as ‘the meat’ of ‘leaving the UK permanently or indefinitely’. She said it is not good enough to establish residence abroad; you must claim you have ceased to be resident in the UK. There is an immediate contrast with 2.1, which talks about ‘usually’ living here or short business trips abroad.

Lord Hope, another of the judges, enquired whether the ownership of property in para 2.8 simply goes to intention – as in, ‘Do you really intend to go live abroad for three years or more?’

The barrister replied that it is not just about intention; it is about showing that the retention of property must be consistent with the claim that one is no longer resident or ordinarily resident. One must take oneself out of the UK by establishing a permanent home abroad, and the retention of a property must be consistent with this.

She suggested that if one leases a flat in Belgium and retains a house in the UK where a wife and child continue to live, then this is not consistent with having ‘left’ the UK. A taxpayer must break all ties with UK. This would certainly happen if a taxpayer did not set foot in the UK at all, as the pattern of his or her life would be definitely broken.

Ms Simler argued that para 2.8 is concerned with evidence that someone left the UK. It looks at evidence of what someone does abroad, as well as at evidence of what they do in the UK. The next part of 2.8 simply gives a taxpayer comfort that if it has been established that he or she left, then he or she can visit without losing non-residence status. These are all questions of fact and degree, and not a mechanical exercise.

In the Revenue’s view, paragraph 2.9 must be read in the context of 2.7 and 2.8, because they all appear under the same rule; 2.9 makes it clear that it is about evidence that a taxpayer has left the UK permanently for three years or more, and it assists a taxpayer who lacks that evidence but can prove a settled purpose. The para is not a less strict test than the test in 2.8; to think otherwise would make it redundant.

Lord Wilson enquired about the nexus between three years and the 2.9 scenario, and Lord Hope pointed out that the requisite period could well be less time: one year or even six months.

Ms Simler asserted that, under para 2.8, one has to go abroad for an extended period of time, and that could be three years or more. This reference contemplates that the evidence one has to provide must show that one has left the UK permanently for three years or more.

After listening to the arguments and looking at IR20 in some detail, Lord Mance referred to IR20 as ‘not a very logical document’.

Lord Wilson raised the query that if Mr Davies and Mr James did not rely from the outset on paragraphs 2.7 to 2.9, could the Revenue then argue it did not have a legitimate expectation on which to rely?

Ms Simler replied that was the Revenue’s exact point and the two taxpayers had started to rely on the paragraphs 18 months after dialogue started.

At this stage, Lord Hope noted that their tax returns were dependent on paragraph 2.2 and nothing else.

The barrister started the section by contending that the evidence adduced by the taxpayers came nowhere near to establishing a clear and unambiguous change of practice.

She argued the alleged change of practice is that, from 2005, the Revenue introduced a ‘distinct break’ requirement to fulfil the conditions in 2.7 to 2.9, but she said established practice as of 1955 – and every IR20 since 1973 – made it clear that available accommodation and short visits to the UK, even on a single day, would make one resident. The abolition of the available accommodation rule was only for visitors.

Responding to the alleged fundamental change in mindset in the Revenue, Ms Simler referred to correspondence from a major firm of accountants, dated October 1999, to demonstrate that severing ties was already known to be a requirement.

However, the taxpayers argued that correspondence was not about residence but about domicile, as there were references to Belgium income tax and the tax treaty. In any event, Ms Simler said, the evidence provided by the taxpayers’ advisers recognised at the beginning (in 2004) that ties with the UK had to be severed.

That view was subsequently changed in a later witness statement prepared for the Court of Appeal, when it was described as a ‘factor’ to be taken into account when considering whether a taxpayer left the UK. This is inconsistent with a case of reliance on established practice.

The barrister had to cut short her submissions because she had exceeded her allocated time; she concluded by saying that if the Revenue is correct in its interpretation of the guidance, ist decision could not be impugned as irrational.

Lord Grabiner made very succinct points in reply. (It should be noted that IR20 has been subjected to a detailed linguistic analysis, which would not have been done by the sophisticated taxpayer.)

• Mr Eadie and Miss Simler’s argument on established practice is based on the premise that a reader might assume that the guidance might fail to reflect accurately the law and practice. In reality, the reader would have been assured it accurately reflected the law.
• On the Revenue’s case, IR20 fails to deal with the most important question of all: how does a taxpayer fall squarely into paragraphs 2.7 to 2.9?
• Articles in the professional press talk about a two-stage test. The first stage would be to ask how a taxpayer leaves the UK. IR20 says nothing about the first-stage test; if it was indeed by severing family ties, IR20 would say so or mention it. The point was not thought about or even considered when it was first drafted. This is the simple and most obvious explanation for the deficiencies in IR20: it means what it means.
• Paragraph 2.9 suggests that if you have gone abroad, then residence can be reviewed if three years or more have elapsed from departure. Once non-residence is established, three years relate back to the date of departure; apart from state of mind, a taxpayer being absent for three years or more is conclusive of non-residence. The second part of 2.9 refers to the discretion of the Revenue to carry out a review of its own.
• After the publication of Mr Gaines-Cooper’s case by the Special Commissioners, there was consternation about the result because he was being denied the points made in IR20. If you are outside IR20 then you count days of arrival and departure; if you are within IR20 you can benefit from the exclusion of days of arrival/ departure.
• There is no evidence of the Revenue being entitled to resile from its promise because of a mistake or error. The tax lost may be a large sum of money, but this is not relevant. There is no justification for evading responsibilities the Revenue create by issuing the guidance in the first place.

Mr Goldberg clarified in reply that his clients were still relying on paragraph 2.2, as well as 2.7 to 2.9 and they did not rely on paragraph 2.9 as a matter of last resort as alleged by the Revenue because:

• In the tax return, his clients described themselves as non-resident. There has been no determination of residence. The question is whether they are entitled to be treated as non-resident.
• On the facts they went to work in Brussels full time, there is no dispute that at some point the employment became full-time; the issue is when.
• Once the Revenue raised the issue that Messrs Davies and James might not have been in full-time employment, the department raised 2.7 to 2.9. In any event, the argument is that they fall into every paragraph of IR20.
• IR20 is quite obviously an amalgam of law and practice; bnot just the 91-days test, but also days of arrival and departure.
• Nothing in the documents suggests you need to sever ties with the UK to be non-resident. Contrary to this, the Revenue was not treating paragraphs 2.2 and 2.7 to 2.9 differently; it was treating them together.
• The test reflects in a simplified form and, in a simple and pragmatic way, what the case law says. You can break your pattern of life by still keeping ties in the UK.
• The test to be reviewed here is not rationality, it is fairness.
• There is no rule that prevents the court from making a finding that Messrs Davies and James are to be treated as non-resident, and there is no policy reason why the Revenue should not honour its promise.

Judgment was reserved; a decision sooner than the autumn is unlikely.

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