The Finance

Expatriate tax and finances

Look out - TAX!

The recent Gaines-Cooper case has been grabbing everyone’s attention down in Nigeria for those of us living and working in country but still with residences and families back in the UK and rightly so as it highlights not only the pitfalls within the existing rules but is also an indication of the continued drive by HMRC to exploit the politically soft target group of British expatriates.

However, in spite of the massively punitive fine imposed on Mr Gaines-Cooper there are quite a lot of differences between him and the average expat in PH or Lagos. His habitual return to the UK where he still held a large property and his children attended private school can often be a red flag for HMRC but returning every year to go to Ascot is an more like a red rag to a bull. He held no work contract overseas and as there is no double taxation agreement between the Seychelles and the UK so he didn’t even have a lower tax environment to fall back on regardless of how closely he stuck to the letter of the law regarding days in country.

How does this affect professional expatriates in Nigeria? Not overly significantly as long as they adhere to the basic rules of being an expatriate which are outlined below. Nigeria, unlike the Seychelles, does have a double taxation agreement with the UK meaning that if you have paid local tax here in Nigeria, something that we’re all well aware of, then the UK govt will have no further claim on your income as long as you do not go over the days in country allowance. Another sensible practice is to follow the concept of A,B,C; if you are from country A and work in country B then you bank in country C. This adds a degree of redundancy into your personal wealth management and means that you are far less likely to attract the attention of the HMRC, even if you are still within their rules it does not mean that an investigation would not cause you significant distress and inconvenience. I also recommend that you bank in non high street banks as these are only to keen to share your details with the authorities for some three years now.

Bear in mind that if a case is launched against you nothing is sacred, your mobile phone records will be checked, Visa statements cross referenced, plane tickets demanded, the burden of proof is on you, not vice versa. So maintain clear records at all times and if in doubt, come and ask the advice of financial professionals and don’t just rely on slipping under the radar.

For those who have decided that the UK holds no future appeal and are well and truly removed from their tax system or simply planning to retire somewhere sunnier there are wider matters to consider such as pensions. A pension is a massive asset and to leave it locked within the UK taxation system is a fundamental waste. There are ways to remove this from the UK that are perfectly legal and far more tax efficient but again, please seek full professional advice on this as getting it wrong at the start can have consequences later on. If you are an expat and wanting to start a pension, again you need to seek further clarification as being non resident in the UK also means that you are not entitled to the tax break associated with such contributions, yet there are very good alternatives available offshore.

HMRC is not looking to catch all of us out at Heathrow airport or prosecute as aggressively as they did with Mr Gaines-Cooper. As long as you stick to sensible practices and limit your exposure in the UK you should not attract any further attention or being overly concerned. Below are the case notes that highlight the exact technical interpretation of the current situation but as ever, if you have any questions, please feel free to fire them across to me here on james.bennett@aesfinance.com.

Alternatively, I will be back in country by the end of March and happy to sit down with anyone who wants one to one advice.

HMRC INTERPRETATION OF NON-RESIDENCE:
THE LATEST GAINES-COOPER COURT OF APPEAL JUDGMENT

This Court of Appeal judgment is the latest instalment in the long running legal saga between Robert Gaines-Cooper and HM Revenue & Customs (HMRC). It is important because it confirms the status of HMRC guidance generally and interprets HMRC's guidance on the circumstances in which an individual ceases to be resident in the UK for tax purposes. It is therefore relevant to anyone who is claiming to have left the UK in recent years or who is considering exiting the UK in the near future.

Background
The judgment, in fact, relates to two linked cases: the case of the businessman Robert Gaines-Cooper, who claimed to have left the UK and become resident in the Seychelles, and the case of Robert Davies and Michael James, who took up full-time employment in Belgium.

An individual's liability to UK tax depends, to a great extent, on that individual's residence status. The UK does not have a comprehensive statutory definition of residence. The law is largely set out in cases, many of them dating back to the 19th Century.

Residence is a question of fact and if you want to determine whether you have become or ceased to be UK resident, you have to consider the various factors set out in the different cases. To assist with this, in 1973 HMRC issued IR20, a booklet designed to provide general guidance in relation to residence and ordinary residence. IR20 has been amended over the years and, in fact, it was withdrawn and replaced by new guidance known as HMRC6 with effect from 6 April 2009.

In the Gaines-Cooper and Davies and James cases, the Court of Appeal had to decide whether HMRC was bound by the terms of its own guidance in IR20, whether HMRC's interpretation of IR20 was correct and whether that interpretation had altered over time without notice to taxpayers in a way that breached their legitimate expectations.

Reliance on HMRC guidance

The Court confirmed that, where HMRC has published a statement of normal practice, a taxpayer has a legitimate expectation that HMRC will apply the guidance to the facts of his case and that, if he falls within the situation described in the guidance, HMRC will treat him accordingly. In effect, the Court said that HMRC is bound to follow its published guidance. This is reassuring because recent statements (including statements made by HMRC in the course of earlier hearings in the Gaines-Cooper case) had caused tax professionals to question the status of HMRC guidance.

Meaning of IR20: ceasing to be UK resident

What value can be ascribed to being able to rely on HMRC's guidance? The Court noted that, although HMRC is effectively bound to apply IR20, the guidance in the booklet is itself open to interpretation. Specifically, it does not provide a "bright line" test for when an individual ceases to be UK resident.

The Court then offered a detailed interpretation of the relevant paragraphs of IR20 (quoted in the Appendix to this note). IR20 sets out two main situations in which an individual may cease to be UK resident. The Court upheld HMRC's interpretation of both situations.

Working abroad

The Court found that when you leave the UK to work full-time abroad under a contract of employment, IR20 provides that you will only cease to be resident in a particular tax year if the employment subsists from the start of the relevant tax year. On the facts, Mr Davies and Mr James had not begun their employment in Belgium until after 6 April in the relevant tax year, so they were found to be UK resident for capital gains tax purposes in that year.

The Court also confirmed that, under this limb of the IR20 test, you can cease to be UK resident even if you maintain social, domestic and family ties with the UK (e.g. you keep your house in the UK or your family continues to live in the UK). In effect, full-time employment abroad is sufficient evidence of a break having been made from the UK to cause residence to cease. This will be very good news for the thousands of individuals who, in recent years, have taken up full-time work abroad but continue to have links with the UK.

Leaving the UK permanently or indefinitely

If you do not meet the conditions for working abroad, then you could rely on having left the UK permanently or indefinitely as set out in IR20. The Court agreed with HMRC's interpretation of these provisions. Specifically, it held that the words "permanently or indefinitely" require you to demonstrate that you have made a distinct break and cut your social and family ties with the UK. One of judges noted that this requirement in IR20 reflected the case law on this point. However, it was held that on the facts of these cases, Messrs Gaines-Cooper, Davies and Jones had not sufficiently broken their links to the UK and so had never ceased to be UK resident. Mr Gaines-Cooper, in particular, had maintained extensive social and domestic ties to the UK, including a house and business interests, and his wife and son had lived here for long periods.

This part of the judgment may cause concern to many professional advisers and their clients. Over the years, many individuals (including those who have "commuted" to the UK at weekends) will have left without taking up full-time employment abroad and thought that they could escape the UK tax net as long as they kept an eye principally on the number of days they spent here. They may need to revisit their position for years in which they sought to rely on what was, by and large, the industry interpretation of IR20.

Change in HMRC's policy on IR20?

According to the Court, HMRC's treatment of Messrs Gaines-Cooper, Davies and James was not the result of an unannounced change of policy. This will surprise practitioners in this area, as there had been a consensus (acknowledged by the Court) that HMRC appeared to have moved the goalposts. The Court interpreted the situation rather as HMRC having increased its scrutiny of taxpayers, so that its policy has been consistent but in recent years has been applied to a greater number of taxpayers and applied more rigorously.

Practical points

What if I am claiming to have left the UK under the old rules in IR20?

• If you are confident that you fall within the situations described in IR20, you can take considerable comfort from the decision. This will be particularly relevant if you left to work full-time abroad but retained ties to the UK.
• If you fall outside the Court's interpretation of IR20, you will need to discuss your position with your tax adviser – for example, if you did not take up full-time employment abroad yet maintained social and family ties with the UK.

What if I am thinking about leaving the UK under the new rules in HMRC6?

• The good news is that ostensibly HMRC has to abide by its published guidance and give notice of any changes in policy, so HMRC should apply HMRC6 in considering your position.
• The bad news is that the guidance in HMRC6 is deliberately vague and HMRC has expressly stated that it is a work in progress. Indeed, it has only recently been amended (on 12 February 2010) and it is anticipated that more changes will follow the publication of this judgment.
• Having said that, the analysis of IR20 in the judgment will inform the interpretation of when you cease to be UK resident under HMRC6 as the relevant provisions are similar.
• Arguably, the judgment gives comfort to those who are intending to work abroad under a full-time employment contract. However, the judgment confirms that they are unlikely to cease to be UK resident in a tax year unless they take up employment before the start of that tax year, it is regrettable though that the judgment does not address whether the split-year concession would potentially be applicable in these circumstances.
• In other circumstances, a distinct break should be made with the UK, including cutting social, domestic and family ties. This raises some fundamental questions, e.g. should all immediate family members also leave the UK, should UK residential property be disposed of, should involvement with social and sporting clubs cease and attendance at social events end? These are factors that you will need to consider carefully with your advisers.

What if I am still resident in the UK but subject to tax in another country as well?

• In these circumstances, you will need to consider whether there is a treaty between the UK and the other country which could limit the scope of double taxation.

Statutory residence test

• Above all, this case highlights the lack of clarity when it comes to determining an individual's residence. Where you do not fall squarely into the situations set out in HMRC's guidance, your tax status will be uncertain.
• The time is ripe for a comprehensive statutory residence test in line with other developed nations such as the USA. This would enable anyone living in, visiting and leaving the UK to know where they stand.

Appendix - Extracts from IR20 (1999 Edition)

Leaving the UK permanently or indefinitely

2.7 If you go abroad permanently, you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more a year - see paragraph 2.10. Any days spent in the UK because of exceptional circumstances beyond your control, for example the illness of yourself or your immediate family, are not normally counted for the purposes of averaging your visits.

2.8 If you claim that you are no longer resident and ordinarily resident, we may ask you to give some evidence that you have left the UK either permanently or to live outside the UK for three years or more. This evidence might be, for example, that you have taken steps to acquire accommodation abroad to live in as a permanent home, and if you continue to have property in the UK for your use, the reason is consistent with your stated aim of living abroad permanently or for three years or more. If you have left the UK permanently or for at least three years, you will be treated as not resident and not ordinarily resident from the day after the date of your departure providing.

• your absence from the UK has covered at least a whole tax year, and
• your visits to the UK since leaving

– have totalled less than 183 days in any tax year, and
– have averaged less than 91 days a tax year. (The average is taken over the period of absence up to a maximum of four years - see paragraph 2.10. Any days spent in the UK because of exceptional circumstances beyond your control, for example the illness of yourself or a member of your immediate family, are not normally counted for this purpose.)

2.9 If you do not have this evidence, but you have gone abroad for a settled purpose (this would include a fixed object or intention in which you are going to be engaged for an extended period of time), you will be treated as not resident and not ordinarily resident from the day after the date of your departure providing.

• your absence from the UK has covered at least a whole tax year, and
• your visits to the UK since leaving
– have totalled less than 183 days in any tax year, and
– have averaged less than 91 days a tax year.

If you have not gone abroad for a settled purpose, you will be treated as remaining resident and ordinarily resident in the UK, but your status can be reviewed if.

• your absence actually covers three years from your departure, or
• evidence becomes available to show that you have left the UK permanently providing in either case your visits to the UK since leaving have totalled less than 183 days in any tax year and have averaged less than 91 days a tax year.

All future correspondance with be handled directly by the author. We will have no involvement in your financial matters or queries.