Offshore Advantages

Two decisions have recently been issued by the UK courts regarding UK tax residence which will have implications for certain international assignees inbound to and outbound from the UK. The first — the Gaines-Cooper case — concerns the circumstances in which an individual ceases to be UK tax resident, while the second — the Tuczka case — involved a non-UK national and considered when someone becomes ordinarily resident in the UK.

In Gaines-Cooper, the UK Court of Appeal rejected, on 16 February 2010, a British taxpayer’s claim that he did not owe taxes because he was a non-resident, landing him with a £30 million tax bill for the years 1993 to 2004.

The case involved judicial review of an earlier decision that the position of HM Revenue & Customs (HMRC) was contrary to its own guidance given in booklet 1R20. British businessman Robert Gaines-Cooper had argued that he did not owe taxes in the UK because he has been a resident of the Seychelles since 1976. He justified his position by a rule that defines a non-resident as one who spends less than 91 days per year in the UK.

The Court of Appeal confirmed that HMRC was indeed bound by the terms of 1R20. But it accepted that an implied condition in 1R20 was that, in order for the individual in question to be treated as non-resident, they had to have made a distinct break with the UK by severing all social and family ties with the UK. As Gaines-Cooper was deemed not to have done so, he was to be treated as resident in the UK even after his ostensible departure in 1976.

Justice Alan Moses said that the correct interpretation of tax residency status turned on whether England had remained the taxpayer’s “centre of gravity of his life and interests,” according to the report. The 91-day rule could not establish non-residency status, rather it was “important only to establish whether non-resident status, once acquired, has been lost”.

The Court found that Gaines-Cooper, who was born in the UK, never meaningfully cut ties with the UK. He maintained a large house in the UK, which the Court called his “chief residence” and was home to his second wife and son, as well his collections of art and guns. Furthermore, his son attended an English school, his will was drawn up under English law and he attended regularly at Ascot racecourse.

On the basis of these connections, the Court found that Gaines-Cooper had failed to show the required distinct break and that his complaints of unfair treatment by HMRC were based on an “impossible construction” of the law. The fact that Gaines-Cooper had not been in the country for more than 91 days in any one year since 1976 made no difference to his status, the Court said.

The Court said HMRC’s interpretation of tax residency was correct, adding that there were “ample grounds on which to conclude that he had been resident and ordinarily resident in the UK throughout (the period)”. HMRC is ‘fully entitled to look for a clear break — or a clean break — with this country before affording non-resident status,” the Court concluded.

Gaines-Cooper plans to appeal the case to the Supreme Court. His counsel said that HMRC was reinterpreting its own guidance, turning it “from a sensible, practical, guide into something meaningless and, which is worse, a devious trap”.

Last year HMRC replaced the 1R20 guidance on residency with a new booklet called HMRC6. This emphasizes the importance of “pattern of lifestyle” in determining UK residency, stating that “just because you leave the UK to live or work abroad, does not necessarily prove that you are no longer resident here”.

The second case, Tuczka v. HMRC, was a decision of the First-Tier Tribunal that seems to have overturned the common understanding that individuals who come to the UK with the intention of remaining for less than three years are treated as “not ordinarily resident” in the UK such that their income from non-UK sources is only taxed in the UK if remitted to the UK. Uncertainty arises when individuals who originally intended to remain in the UK for less than three years remain for longer. The question then arises when do — or did - they become ordinarily resident?

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Andreas Tuczka, an Austrian Corporate Financier, claimed to have no intention of remaining in the UK for three years. He arrived in the UK in July 1997, but was held to be ordinary resident for the years 1998/1999, 1999/2000, and 2000/2001. In reaching this decision, one factor that was considered was the Tuczka purchased a flat and lived there with his future wife who was in the UK on a training contract that would last for more than three years.

In the words of the judge: “one factor in considering this question is Dr. Tuczka’s decision to purchase the Notting Hill flat. In our view this is not determinative of the question; it is an added factor demonstrating that his purpose in living in London for the time being was settled. Even without the purchase of the flat, we consider that the evidence shows Dr Tuczka to have become ordinarily resident during 1998-99. He chose to remain in London for a settled purpose, namely his employment, and adopted a pattern of living which in fact continued until 2002 (and, with certain ‘changes, subsequently).”

In other words, individuals should not assume that they will automatically be regarded as not ordinarily resident for three years if they do not leave the UK before their third anniversary of arrival. If they become “settled”, they may become ordinarily resident at an earlier date.

Taken together, the two rulings suggest that HMRC is targeting people who use residence and domicile rules to reduce their tax bills. Last year, it established a new team — the High Net Worth Unit — specifically to investigate the lifestyles of wealthy individuals in the UK. The government is also consulting on whether there should be a statutory definition of residence and, in broad terms, whether the test should be an objective one or not.