Page last updated at 14:31 GMT, Wednesday, 17 February 2010

Tax exiles may have to pay back taxes after ruling

Lewis Hamilton
Lewis Hamilton moved to Switzerland, partly to avoid UK taxes.

Thousand of rich UK citizens living abroad as tax exiles may find they have to pay UK taxes after all.

The Court of Appeal has upheld the right of HM Revenue & Customs to tax a businessman, Robert Gaines-Cooper, who has lived in the Seychelles since 1976.

The judges said that he had never been exempt from UK taxes as a non-resident citizen.

Although he had abided by the rules to spend fewer than 91 days here, he had still not cut his ties with the UK.

Mr Gaines-Cooper may now have to pay a tax bill of £30m, for the years from 1993 to 2004.

A key feature of the Revenue's old guidance on whether someone was resident in the UK for tax purposes - known as IR20 - was whether they spent, on average, fewer than 91 days here each year.

"If you read the old guidance at face value, as most of us did, and you spent less than 91 days here, you would have been treated as a tax exile," said Mike Warburton of accountants Grant Thornton, who was an expert witness in the case.

A lot of people think they are out of the UK tax system - they may now be caught
Ronnie Ludwig
Tax adviser, Saffery Champness

However, the three Appeal Court judges ruled that it had always been the case that any would-be tax exile, such as Mr Gaines-Cooper, first had to show they had really left the country.

Any continuing connections would mean that he had not actually cut his ties with the UK and would thus not be able to avoid UK taxes.

The 91-day rule, they said, did not in fact establish non-residency, and was "important only to establish whether non-resident status, once acquired, has been lost".

'Distinct break'

Mr Gaines-Cooer, now in his 70s, was born in Reading and made his fortune from international businesses, selling, among other things, juke-boxes.

Despite moving to the Seychelles in 1976, where he lives on a colonial plantation, the judges said that England had remained the "centre of gravity of his life and interests".

They decided that he had never cut his ties with Berkshire where he had grown up, or with Oxfordshire, where he still owns a mansion on a 27-acre estate near Henley and which the judges said was still his chief residence.

As such, he had failed to prove a "distinct break" with his family and friends in the UK.

The judges ruled there were "ample" grounds to rule that Mr Gaines-Cooper had in fact been "resident and ordinarily resident in the UK" throughout his apparent exile.

The barrister for Mr Gaines-Cooper - who says he will appeal to the Supreme Court - accused the Revenue of "playing games" with his client, and accused the tax authorities of mischievously reinterpreting their own guidance.

The barrister, David Milne, said this "involves a wholly wrong reading of the policy and turns it from a sensible, practical, guide into something meaningless and, which is worse, a devious trap".

Back taxes

There are six million UK citizens living abroad.

If upheld, the effect of the ruling will be to expose thousands of the richest, who wish to be tax exiles, to unexpected retrospective tax bills, not just ones for future years.

"The Revenue can go back up to six years and say they have discovered you haven't paid enough tax," Mr Warburton said.

Ronnie Ludwig, a tax adviser at accountants Saffery Champness, said lots of tax exiles would now have to rearrange their lifestyles and business affairs.

"A lot of people think they are out of the UK tax system - they may now be caught," he argued.

The HMRC's new approach, which replaced IR20, was codified in new guidance on residency and non-residency - called HMRC 6 - which was published in April 2009.

Mr Ludwig said the Appeal Court ruling gave extra force to this new guidance.

And he said this meant that the Revenue could look at various aspects of someone's life-style to determine if they had really left the UK or not.

"They will look at the time spent here, the regularity of your visits, if the UK is the main centre of your economic activity and business ties, if you have family connections such as children going to boarding school, if you are a member of a sporting club, and if you use UK credit cards, banks and even mobile phones," Mr Ludwig said.

An HMRC spokesman said it would study the 31-page judgement, but added: "It is also useful that the Court of Appeal has acknowledged that HMRC can increase compliance activity in an area so that it can ensure it catches those who may have previously not paid tax that is due."

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