The Supreme Court has ruled in favour of HMRC and upheld the decision to subject a millionaire expat to UK tax laws despite him spending most of his time in the Seychelles.
While the Lord Justices acknowledged that HMRC's position on how to achieve non-residency "should have been much clearer", a majority of four to one agreed that the guidance informed that in order to qualify for non-residency status, individuals would be required to leave the UK permanently, indefinitely or for full-time employment, and relinquish "usual residence" in the UK.
The solicitor representing retired millionaire Robert Gaines-Cooper immediately issued a stark warning to other expats, saying they too were "at high risk" if they followed official HMRC guidelines as to what constitutes UK residency for tax purposes.
Robert Gaines-Cooper has spent more than 30 years living in the Seychelles but in 2006 HMRC decided that his close connections with the UK, including a large estate in Henley-on-Thames and his regular trips to Ascot, meant that he was both resident and domiciled in his home country, and liable for a backdated tax bill.
He has always maintained he followed the non-residency guidelines set out in HMRC's official IR20 booklet, but after today's decision will now be obliged to pay the backdated tax as well as his legal fees, expected to run into the millions.
Peter Vains, head of tax at the London office of solicitors Squire, Sanders & Dempsey, who represented Mr Gaines-Cooper, said: "He will pay what he is due. It was never about tax but about what was right and wrong. He satisfied all of the guideline terms but the revenue and courts have decided that some additional terms need to be implied in the reading.
"The Supreme Court is the ultimate authority, so one can't complain, but it is harsh."
While the Lord Justices acknowledged that HMRC's position on how to achieve non-residency "should have been much clearer", a majority of four to one agreed that the guidance informed that in order to qualify for non-residency status, individuals would be required to leave the UK permanently, indefinitely or for full-time employment, and relinquish "usual residence" in the UK.
Returns to the UK had to be no more than "visits", while UK property kept by the taxpayer for their use could not be used as a place of residence.
The IR20 will be abolished as of April next year and replaced by a statutory residence test.
Commenting on the case, Sean Drury, partner at PricewaterhouseCoopers said: "With a statutory residence test expected to come into effect in April 2012, the issues at stake in the Gaines-Cooper judgement will soon be of historic interest only.
"However, the Supreme Court's judgment has underlined that international businesses cannot rely on HMRC guidance, only on the interpretation of statute through the courts
"With significant tax costs associated with internationally mobile employees, companies sending employees into and out of the UK would welcome more clarity in managing these costs and for it not to be subject to interpretation on a case by case basis by HMRC.
"With a significant number of enquiries still open into the affairs of internationally mobile employees impacted by this judgment, we hope HMRC adopts a practical approach in closing these enquiries down before the new rules come into effect next April."
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