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.