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Grant Thornton’s Mike Warburton was an expert witness in the Gaines-Cooper ex-pat tax case…

Hundreds of expats and tax exiles may be at risk of an unexpected tax bill after Robert Gaines-Cooper, who moved to the Seychelles in the 1970s, recently lost his claim to be non-resident for UK tax .

Director Mike Warburton, who was an expert witness in the case, reviews the ruling, which has major UK residency and tax status implications for anyone who leaves the UK to live abroad.

Ever since income tax was introduced in 1799 to fund the Napoleonic Wars, whether someone was resident in the UK or not was critical to how they were taxed.

In the intervening two centuries, modes of transport have changed beyond recognition. It is not uncommon for those living in the UK to commute on a weekly or even daily basis to work outside the UK, and vice versa.

Despite this, it remains the case that we do not have a meaningful test in legislation as to whether someone is or is not resident in the UK for tax purposes.

IR20 guidance

Instead, UK tax residency was left to judges to work out for themselves as disputes arose and cases were brought before them. Continually taking cases to the courts was clearly unworkable and the Inland Revenue helpfully brought out a detailed guidance booklet known as IR20 (PDF).

This document was not itself legally binding, but it was the closest thing available to tax advisers because it set out in clear terms – as we thought at the time – the basis upon which the Inland Revenue understood the case law to apply. Tax advisers naturally came to rely on IR20 when it came to advising clients on their tax status. IR20 was replaced in April 2009 by HM Revenue & Customs (HMRC) with a new booklet called HMRC6 which, not surprisingly, makes it clear that HMRC views the 90-day test as one which can make someone UK tax resident rather than helping them shed it.

Physical presence

The essential test enshrined in IR20 was one of physical presence. Whether you were resident or not depended upon your presence in the UK based on a day count. The guidance even went on to explain what a day meant for this purpose by excluding days of arrival and departure.

Essentially you would NOT be regarded as resident in the UK if you spent less than 182 days a year in the UK and less than 90 days a year on average.

Strictly speaking, there were two ways in which you could cease to be UK resident. One, whereby you left the UK permanently or indefinitely (or for a period of more than three years). Two, where you went to work under a full-time contract overseas.

In my experience, nobody questioned the importance of the phrase ‘leaving the UK’. Until this case…

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