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The Gaines-Cooper residence case, which is being heard with Davies and anor, yesterday entered its second day in the Court of Appeal.
Following the previous day’s submissions on behalf of Messrs Davies and James, David Goldberg QC concentrated his efforts on demonstrating that there had been an unannounced change in HMRC practice, writes Rachael Arning.
Mr Goldberg said that although HMRC were claiming that their practice in applying IR20 to non-residents after 2005 was entirely consistent with their practice before that date, the evidence they had produced in support of their assertions was not convincing.
He added said that he was reminded of ‘the dog that didn’t bark in the night-time’ because the most powerful piece of evidence ‘was not what was there, but what was not there’.
David Milne QC, leading counsel for Mr Gaines-Cooper, began his submissions by briefly summarising the points he made last June. He first addressed the point as to whether IR20 could create a legitimate expectation for the taxpayer.
Lord Justice Moses remarked that this point would be particularly relevant if it was found that IR20 was not consistent with case law.
Mr Milne did not think that it was significant in this case that IR20 was qualified with a ‘health warning’. In his view, the warning was merely inserted to inform taxpayers of their rights and did not affect the fact that taxpayers would be treated as unequivocally non-resident if they fell within chapters 2 and 3 of the guidance.
The QC moved on to his main argument, which was that Mr Gaines-Cooper had established non-resident status between 1976 and 1980, when it was generally accepted that he had ‘left’ the UK to pursue various activities in various different countries. Since Mr Gaines-Cooper had carefully complied with the 90 day rule from the date he left the UK until 1991 – the date of the first Revenue enquiry into his tax position – he had a legitimate expectation to be treated as non-resident for that earlier period.
Mr Milne pointed out that the special commissioners had not ruled on his client’s residency status for the period between 1976 and 1991 because that period had not been under investigation for income tax purpose.
Moses LJ pointed out that the fact that Mr Gaines-Cooper had severed ties with the UK in earlier years had not ensured he maintained non-resident status in 1992/93. Since this was so, why had Mr Gaines-Cooper lost his case on the residence?
Mr Milne explained that rather than simply deem Mr Gaines-Cooper as non-resident from 1976 on the basis that his visits to the UK did not exceed the day count, the special commissioners assessed his residence position in later years by reference to general case law.
Addressing the assertion that Mr Gaines-Cooper had already lost the right to a remedy under judicial review because the special commissioners found against him on the residency point, Mr Milne said that his view was that his client’s legitimate expectation was unaffected.
This was because the commissioners’ ruling affected the tax years 1993/94 onwards, whereas Mr Gaines-Cooper’s legitimate expectation related to earlier years. In any event, if the court found in favour of the taxpayer, HMRC may have the power to forgo collecting tax as part of their discretionary management powers, or alternatively the court could restrict the amount of tax to be collected for the years in question.
Mr Milne ended his submissions by stating that, although not central to his case, he agreed there had been a change in Revenue practice in 2005, as alleged by Mr Goldberg.
Ingrid Simler QC then stood to put forward her submissions on behalf of HMRC, which were that first, the taxman’s interpretation of IR20 was rational and reasonable and did not confound the legitimate expectations of the taxpayer. Second, the alleged change of Revenue practice amounted to a more thorough approach to investigations. Third, there was no unfairness in the way in which IR20 had been applied.
In relation to her first point, Ms Simler asserted that there was no divergence between IR20 and the general law. She submitted that contrary to the appellants’ arguments, IR20 did not contain ‘bright line’ rules that determined the acquisition of non-resident status. Instead, the guidance provided general rules that a taxpayer could follow – but, ultimately, whether or not he could rely solely on the guidelines to determine residency would depend on the facts of his particular case.
Moses LJ said he did not understand the dichotomy of saying that the guidance depended on the facts, and Lord Justice Ward remarked that it had no meaning if the taxpayer had to establish for himself which facts were relevant, to satisfy a particular paragraph in the guidelines.
In relation to paragraph 2.2, Ward LJ thought it was important to look at the taxpayer’s intention first and then decide whether he did in fact pursue full-time work abroad.
Ms Simler agreed and said that the reason why Messrs Davies and James lost their case was that HMRC were not satisfied that they started to work full-time from the beginning of the relevant tax year (2001/02).
She explained that a taxpayer would only be treated as non-resident under paragraph 2.2 from the day after they left the UK for full-time employment. Therefore, if they worked part-time overseas they would still be UK resident unless they could rely on another paragraph in IR20.
Although they would be able to claim non-resident status from the day after they started full-time work, if that day was part way through the tax year, their residency position in respect of capital gains tax (the relevant tax in this case) would not be affected in that year, since concessionary split-year treatment was only available for income tax*. Therefore, once a taxpayer was deemed UK resident for capital gains tax purposes in a particular tax year he remained so.
Ms Simler referred to the appellants’ submission that the inconsistent interpretation of the word ‘leave’ in the context of paragraphs 2.2 and 2.8 was illogical and without sound basis. She explained that the meaning differed in these paragraphs for historic reasons.
Parliament had identified employed persons as a special group in the Income Tax Act 1970, which predated the first draft of IR20 by three years. The Act provided that an employed person’s residence status was to be determined ‘without reference to any place of abode’.
Therefore, when ‘leaving’ the UK for paragraph 2.2 purposes a taxpayer did not need to demonstrate he had severed all ties, merely that he had started full-time employment abroad at the start of the relevant tax year. However, HMRC were entitled to request other evidence to establish that the taxpayer left to work full-time.
In relation to paragraph 2.8, Ms Simler said that the taxman habitually asked for evidence that the taxpayer had first established his home abroad and second cut ties with the UK and behaved consistently with his intention to live abroad permanently or indefinitely.
With regards to Mr Gaines-Cooper, the QC claimed that HMCR were not satisfied that he had met any of the tests in chapter 2 of IR20 on the basis of the evidence provided. Furthermore, even if he had lost residence temporarily, Ms Simler thought it was likely that he had reacquired it a short time afterwards by virtue of falling within the rules of chapter 3, which sets out the circumstances in which non-resident visitors to the UK will acquire residence.
In relation to the allegation that there was a change in HMRC practice, the QC produced evidence to demonstrate that HMRC inspectors looked at more than just the number of days spent in the UK when establishing whether a taxpayer was non-resident.
The judges noted that the only letter that was produced in relation to Revenue practice in the application of para 2.9 showed that the inspector had given the wrong advice.
Ms Simler is due to deliver her final submissions on behalf of the taxman today, the final day of the judicial review hearing. Taxation will be there to report on the main points of interest.
*Ms Simler later retracted this claim. For more details see the report from day three of the case, which will appear on this site on 9 Nov
