Law and Tax

Continuity and the tax system ...

Recent posts have discussed the Deutsche Morgan Grenfell and Gaines-Cooper cases. HM Revenue and Customs lost one and won the other. Perhaps it is revealing that they reacted to both cases in the same way: by reinstating the status quo?

Residence and the wealthy businessman

The case of Gaines-Cooper v Revenue & Customs Commissioners has recently attracted publicity. It illustrates the important fact that, where residence for tax purposes is concerned, the practice of HM Revenue & Customs (“HMRC”) does not precisely follow the law. On an appeal, however, tribunals and courts will apply the law. This will often be less helpful to taxpayers than HMRC practice.

The case was heard by the Special Commissioners—a tax tribunal, not to be confused with the Commissioners of Revenue & Customs, who are the tax collectors.

The Special Commissioners’ decision shows that Mr Gaines-Cooper has had a varied and interesting life. Ironically, he was the son of two tax inspectors. Over the course of his life he has been involved in a wide range of business ventures. He was born in 1937 and started his first business in 1958. This involved placing juke-boxes in pubs and other sites in England and supplying background music. He later sold this business to a record company, which he joined as finance director. Since then he has been busy with a wide range of businesses worldwide—notably in Canada, the Seychelles and the United States.

By chance he visited the Seychelles for the first time in 1973. The Seychelles are a group of 115 islands located in the Indian Ocean, with a population of 80,000. He fell in love with the Seychelles, bought a house there and set up a plastics company there, partly in order to obtain a residence permit.

He has always kept his house in the Seychelles, which is now extremely large. His second wife is from the Seychelles. She, however, prefers to live in England and their son (born in 1998) is expected to go to Eton. He has never applied for Seychelles citizenship; his wife, on the other hand, applied for British citizenship.

Besides his property in the Seychelles and elsewhere, it seems Mr Gaines-Cooper has at all times had property (or access to property) in the UK.

The Special Commissioners had to decide his residence and ordinary residence status for UK tax purposes. In doing so they had to apply the strict law—not published HMRC practice. They noted that—in contrast to HMRC practice—no duration of visits is prescribed by statute. Under the strict law one must take into account all the facts of the case, including:

•  the duration of an individual’s presence in the UK;
•  the regularity and frequency of visits;
•  birth, family and business ties;
•  the nature of visits; and
•  connections with the UK.

They also had to decide his domicile status. This is a distinctive feature of common law jurisdictions, which I will not discuss in this note.

The Special Commissioners accepted that he considered himself resident in the Seychelles, but held that he resided in both the UK and the Seychelles. Under the strict law, therefore, he was resident in the UK.

The Special Commissioners noted that, under the general law, “ordinary residence” requires more than mere residence; it connotes residence in a place with some degree of continuity. “Ordinary” means normal and part of everyday life. Applying these principles, they concluded that Mr Gaines-Cooper was at all times ordinarily resident, as well as resident, in the UK.

This was bad news for Mr Gaines-Cooper. On 5^th January 2007, however, HMRC announced that their “91-day” test remains unchanged. Under this test, individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more per tax year, taken over a maximum of up to four tax years. HMRC normally disregard days of arrival in, and departure from, the UK when calculating days under the 91-day test.

Under HMRC’s 91-day test, Mr Gaines-Cooper might not have been regarded as resident in the UK in most tax years. HMRC explain the apparent inconsistency of approach by stating that Mr Gaines-Cooper had never left the UK in the first place, so the test did not apply.

This newly stated refinement on the 91-day test will no doubt intrigue taxpayers and their advisers in times to come. But the case also emphasises that it is better, in marginal cases, to rely on the law, not just on HMRC practice.

Tax paid under mistake of law

In 2001 the European Court of Justice the (“ECJ”) held that the UK’s advance corporation tax (“ACT”) regime, which applied to dividends, was contrary to European law. (Joined Cases C-397/98 and C-410/98, Metallgesellschaft and Hoechst.) Although the ACT regime was abolished in 1999, it continues to send ripples through the UK tax system.

Under the ACT regime, companies generally had to pay ACT to the UK authorities when they paid dividends. They could offset this against their “mainstream” corporation tax liabilities, and UK-based shareholders could claim credit for ACT in respect of the dividends they received.

Where a company paid a dividend to its parent company, the two companies could elect that ACT would not be payable. This was only possible, however, if both companies were resident in the UK for tax purposes. It was not possible where the parent company was resident in another EC Member State (or anywhere else).

The ECJ held, in effect, that this denial of relief from ACT had been an unjustified barrier to the freedom of companies based in other European Member States to set up subsidiaries in the UK.

UK companies with EC parents had, in effect, paid tax earlier than they should have because they could not opt out of the ACT system. The ECJ held that this gave rise to a right of compensation or restitution.

One UK company in this situation was Deutsche Morgan Grenfell Group plc (“DMG”). (Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners and the Attorney General [2007] STC 1.) It started legal proceedings, claiming restitution, in October 2000 and later added further claims. The Inland Revenue argued that the time limit for the claims was six years from the date of payment, and that the claims had been made too late. DMG, however, argued that it had made the payments under mistake of law. On that basis the six-year limitation period began to run from the date it discovered its mistake, or could with reasonable diligence have discovered it. The Inland Revenue, on the other hand, argued that claims for restitution based on a mistake of law could only be brought in cases involving private transactions, and not where tax was concerned.

This case reached the House of Lords (the highest English court) in summer 2006, and the Lords gave their decision at the end of October. The Lords held that, contrary to the Inland Revenue’s contention, it was possible to claim for restitution of money paid under mistake of law.

It has long been possible, at common law, to go to court to recover money paid under mistake of fact. The right to recover sums paid under mistake of law has only developed more recently. The Deutsche Morgan Grenfell case has extended this right to situations where tax is involved. This does not absolve the taxpayer from checking the position before making payments to the tax authorities! It might sometimes, however, make it easier to recover sums that have been paid.

Time limits for claims: Where an action for restitution of tax based on mistake of law is brought after 7th September 2003, the action must generally be brought within six years of the tax having been paid. This rule did not affect Deutsche Morgan Grenfell, which had started proceedings before the time limit was introduced.

On 6th December 2006 the UK Government announced that it would extend the time limit of six years from the date of payment to other cases, similar to Deutsche Morgan Grenfell, where final judgment had not yet been given. This moving of the goalposts is designed to protect the Government from large liabilities to refund tax, but seems very unfair to taxpayers who have already begun proceedings. It may well be in breach of European law. It seems likely, therefore, that this story has further to go.