The long arm of the UK taxman
A recent case has made it clear that if you have maintained connections with Britain while living abroad, you’re at risk of a bill from the Inland Revenue. What should expats do?
Robert Gaines-Cooper has lived in the Seychelles, pictured, since 1976 - but that doesn't mean he is exempt from UK taxes. Photo: Jon Arnold Images Ltd / Alamy For many British expats who have been banking abroad and assuming that their savings are safe from the long arm of Her Majesty’s Revenue, things have just become very much more complicated.
A recent tax case has made it clear that if you are a UK national abroad, but have maintained connections with the UK, you are at risk from the UK taxman, who will be happy to charge you 50 per cent tax on your world income.
This case involved British businessman Robert Gaines-Cooper. He argued that he did not owe taxes in the UK because he has been a resident of the Seychelles since 1976.
He pointed to the rule in HMRC’s own leaflet IR20 that defines a non-resident as one who spends less than 91 days per year in the UK.
The Court of Appeal rejected this claim, on the basis that taxpayers must show a “distinct break” from social and family ties to the home country, and that spending all but 91 days outside the country is necessary, but not sufficient to establish non-resident status. It then handed him a £30million tax bill for the years 1993 to 2004 for his trouble.
Frighteningly, this was not down to a change in the rules. All that has happened is that the rules have been widely misinterpreted for some time, a flight of wishful thinking that the court has forced back down to earth.
There never has been a rule which says that the number of days spent in the UK is the absolute test of residency, although many expats remain under the impression that this is the single criterion by which they have to abide.
The decision could affect thousands of British expats who have lived abroad for many years, but who still spend time in the UK.
All may be at risk from an increasingly aggressive HMRC, whipped into a frenzy by a government desperate for more tax to cut an increasing national deficit.
Most countries operate similar systems. If you spend a certain number of days in the country, you must necessarily be resident, even if already tax resident elsewhere as well.
But even if you don’t spend the requisite number of days, you may still be resident if the country in question is at the centre of your economic or social life, or is the place of closest connection. It’s this latter point which has often been missed.
The court confirmed that HMRC was bound by the terms of IR20, but there was an implied condition - that to be treated as non-resident, there must be a distinct break with the UK, and a severing of all social and family ties.
Mr Gaines-Cooper had a house in Henley where his wife and son lived, and where he kept a valuable collection of art and guns. His son was at school in the UK. He had a UK mobile phone, his will was drawn up under English law, and he regularly attended Ascot racecourse.
In the court’s view, therefore, he could correctly be treated as resident in the UK, even after his ostensible departure in 1976. And with the exception, perhaps, of the regular attendances at Ascot, many UK nationals are in the same situation as Mr Gaines-Cooper.
The court deemed 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”, and that the 91-day rule could not establish non-residency status on its own, rather it was “important only to establish whether non-resident status, once acquired, has been lost”.
In other words, if you spend more than 91 days in the UK, then you are definitely resident. If you spend less than 91 days in the UK, you may not be resident, but you must look at other factors too.
Mr Gaines-Cooper has been granted leave to appeal to the Supreme Court.
His counsel told the BBC that HMRC was “playing games” with his client, and mischievously reinterpreting its own guidance, turning it “from a sensible, practical, guide into something meaningless and, which is worse, a devious trap”.
HMRC may (for that read “will”) now look to crack down on more UK expats. It has launched a sustained attack on people who have used residence and domicile rules to reduce their tax bills.
Last year, a new HMRC team was established, known as the high-net-worth unit, to investigate the lifestyles of some of the UK’s richest individuals, including expats. It follows the enactment of the £30,000 non-domicile levy, the introduction of the 50 per cent top income tax rate, and the super-tax on the City of London bonus pool.
HMRC said: “We are looking at residency and domicile more carefully...HMRC is committed to ensuring that all those who are resident in the UK pay the tax that is due, and this judgment will aid that effort.”
The IR20 guidance on residency was replaced last year with a new booklet called HMRC6.
This emphasises the importance of pattern of lifestyle in determining UK residency, and states that just because you leave the UK to live or work abroad, you are not necessarily a non-UK resident for tax purposes.
So what to do? If you think that you may be affected, then you can change your lifestyle to remove the tax danger. But for many that will neither be either feasible or desirable: selling your UK home and taking your children out of their school may well be a very unattractive option.
The alternative is to plan, so that if you are caught out, your exposure to UK tax will be limited.
Without proper planning you may have to pay UK tax at up to 50 per cent on each and every source of world-wide income - an economic disaster for many living abroad.
At the very least, you should thoroughly review your arrangements. They have probably been made on the assumption that you are not UK tax resident. That assumption may be incorrect. Or at least, HMRC may not agree.
Howard Bilton is a barrister called in both England and Gibraltar and currently practicing in Hong Kong. He lectures and writes extensively on tax matters and is appointed Professor to the Thomas Jefferson school of law in San Diego. He founded the Sovereign Group in 1987; it specialises in international tax planning and setting up and managing offshore companies and trusts and now has over 8,000 clients serviced from a network of offices in twenty-six jurisdictions around the world.
This is the first in a series of four articles that Howard will be writing for over the coming month. Why not visit our online discussion group, and post an offshore-finance related question for Howard and other members of the Sovereign Group team to answer?
TELEGRAPH.CO.UK 8-09-2010
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