UK residency test and tax bills loom for expats

Hundreds of British 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… 

Test case

Robert Gaines-Cooper was a successful businessman who went to live in the Seychelles in the 1970s and carefully arranged his affairs so that he did not exceed the limit of 90 days a year.

That did not stop HM Revenue & Customs (HMRC) choosing him as a test case, along with two other gentlemen, Davies and James, to move the goalposts by arguing that he could not claim to be non-resident if he hadn’t ‘left the UK’ in the first place.

HMRC claimed that, because he had a house here, his wife spent much of her time in the UK and he had a son at Eton, he had not formed a clean break with the UK and could not therefore claim to be non-resident.

Gaines-Cooper fought his case through the Courts, arriving at the Court of Appeal with Davies and James. Evidence was provided to the Court of Appeal by the three tax inspectors involved and four experts from the profession, of which I was one.

The three tax inspectors produced witness statements which, in unison, declared that they had always adopted the approach that a taxpayer needed to show that they had left the UK by forming a clean break before the day count provisions were considered.

The four professional experts, without any collaboration, all agreed that this was a relatively new approach adopted by HMRC and not the long-term practice.

The Court of Appeal sided with HMRC and Gaines-Cooper took his case to the Supreme Court.


Last month, the court announced, by 4:1, its agreement with HMRC. In a sense, his loss was not surprising. What was surprising was the dissenting judgment of Lord Mance, who said:

“I do not find in the express terms of paragraph 2 of IR20 or, in particular, in the words ‘permanently or indefinitely’ direct support for any requirement for a distinct break. Looking at the matter more broadly, it would seem to me remarkable that, if any such requirement was intended, it was not clearly expressed. Yet HMRC now suggests that the existence of the ‘so obvious a factor’ was left to inference from what appear at best very opaque clues.” 

 Well done, Lord Mance.

This is precisely the point that we all made at the Court of Appeal. The whole purpose of IR20 was to avoid disputes by stating in clear terms how the Inland Revenue understood the rules to operate. The suggestion that taxpayers and their advisers should be able to deduce a different meaning through “opaque clues” defeats the whole purpose of the IR20 guidance.

A new statutory residence test

One good thing has emerged from this case: a proposal by the Government to introduce a statutory test of residence.

The consultation document sets out a clear and workable set of tests to determine whether or not someone is or is not resident in the UK, with reference to both the day count of their presence in the UK and a number of other factors, such as available accommodation or employment in the UK.

With any luck, this will come into force from next April (2012), and not before time.

At least then we will be able to advise our clients how they can manage their tax affairs with reference to the world of executive jets and Eurotunnel rather than sailing ships.