You may think you’ve divorced yourself from the UK, but the taxman sees it differently. Glen Atchison and Dhana Sabanathan explain
TO BE OR not to be (resident), that is the question. Changes to the taxation of non-UK domiciled individuals, increases in the top rate of tax and alterations to pension rules are all encouraging even the most patriotic, flag waiver to review where they want to live.
Times are hard, and this is focusing attention on what the government sees as the responsibilities of the rich. Perhaps the most revealing statistic of all is that Her Majesty’s Revenue and Customs is using roughly the same number of staff to investigate the tax affairs of the country’s 5,000 wealthiest taxpayers as used to manage 45,000 cases.
HMRC also now have wider inspection powers than in the past, and have been using them effectively to shed light on the affairs of UK resident individuals with offshore bank accounts.
A further sign of these taxing times is the absence of any indication that the 50 per cent income tax introduced by the last Labour government will be reduced. Neither does it seem is the coalition rushing to abolish the £30,000 annual charge for non-UK domiciled individuals who want to claim the remittance basis of tax. Indeed, many tax advisors are expecting to see less favourable rules for such individuals being introduced, following the announcement in this year’s Budget that the non-dom rules are being reviewed to see whether changes are needed to “ensure that non-dom individuals make a fair contribution to reducing the deficit.”
A temptation is to assume that simply rushing out of the exit door and then staying out of the country for all but 183 days a year is enough to satisfy the UK tax authorities that you’re outside of its reach. However, for most people this is not the case now, as British businessman Robert Gaines-Cooper discovered to his cost. (Read Robert Gaines-Cooper’s At the Sharp End questionnaire here.)
The entrepreneur left the UK to live in the Seychelles in 1976. He relied, as many did, on HMRC’s past published guidance, known as IR20, to shield his worldwide income and gains from UK tax. The guidance had been in existence for approximately 20 years up to 2009 and was widely relied upon by taxpayers and their advisors alike for laying out the ground rules that HMRC would play by.
However, Mr Gaines-Cooper, whose fortune was founded on a jukebox business, found himself slapped with a £30 million tax bill dating back to 1993. The Court of Appeal upheld recently that the businessman, whose parents were both tax inspectors, had not made a “distinct break” from his social and family ties in Britain.
The key lesson to be learned from this sorry tale is that you cannot simply rely upon keeping down the number of days you are physically in the country for protection. While anyone spending 183 days or more in the UK in a given tax year (or more than 90 days on average over a four year period) is automatically deemed resident, keeping below those days is no longer a guarantee of escaping the UK tax net. HMRC now looks much more closely at an individual’s overall lifestyle which includes business interests, property and social connections. As Mr Gaines-Cooper discovered, even owning a UK mobile phone stacked against him, and along with keeping a house in the UK, educating a child in the country and having a Will governed by English law, all led to the courts agreeing with HMRC’s conclusion that he remained UK resident.
CLARIFICATION IS HARD to come by. The latest guidance from HMRC is known as HMRC6 and comes with a significant warning that “it has no legal force”. In other words, it might change at any time, and it is uncertain that a taxpayer could use it as a defence when faced with a claim by HMRC.
This means a greater reliance is being placed on the often shifting sands of case law, something any individual considering non-UK resident status can hardly be expected to follow.
Mr Gaines-Cooper has appealed to the Supreme Court, but what hope for him in the highest court in the land? Certainly a betting person would put long odds on him winning given that HMRC has won at every stage so far. Many predict that tax inspectors will use what is likely to be an inevitable defeat for Mr Gaines-Cooper, as the reason to continue to cast a spotlight on wealthy individuals living abroad who maintain links with the UK.
The key to surviving HMRC scrutiny is to ensure a “distinct break” with the UK and be prepared with documentation to back that up. Apart from those in full-time long-term foreign employment, it is likely to involve disposal of UK property, removal from the electoral roll and minimal contact with family and friends that remain in the UK. There must also be evidence to show the strength of ties in the new home abroad.
While the situation might be somewhat easier for those leaving the UK for full-time work abroad lasting more than one tax year, even they need to be careful these days. A recent First Tier Tribunal decision made clear that employment must be demonstrably full-time and genuine. A contract of employment is not enough; there needs to be further evidence of the work carried out.
There are plenty of good reasons to stay in the UK, but for anyone thinking of going abroad the days of just filling in a P85 and sending it to your local tax office have long gone. Get advice before you book your one-way ticket.
Glen Atchison is head of tax and Dhana Sabanathan is a solicitor at Harbottle & Lewis LLP