4 November 2011

The Gaines-Cooper Case in the Supreme Court

Judgment was handed down on 19 October 2011 in what should be a landmark case for the law of residency in taxation. The principal judgment was handed down by Lord Wilson.

The case was framed as a judicial review based on the parties contending that they had a legitimate expectation that Her Majesty's Revenue would rely on the booklet known as IR20 and entitled "Residents and Non-Residents - Liability to Tax in the United Kingdom". Mr Gaines-Cooper was the second appellant in the case, and so the case will be known as Davies v The Commissioners for HMRC.

The appellants' contention was that Her Majesty's Revenue ought to have applied the principles set out in this booklet. The booklet in essence contained a more favourable interpretation of the circumstances which would apply to the individual becoming a nonresident than actually is reflected in the ordinary law. The difficulty facing the Supreme Court was that at the time of the hearing in the Supreme Court, Mr Gaines-Cooper knew that on the application of the ordinary law of the United Kingdom, he was a resident and ordinarily resident in the United Kingdom. In respect of Mr Davies, it was still an open question whether upon the application of the ordinary law he was or was not resident and ordinarily resident. Lord Wilson said that it was the unchallengeable findings of fact which had been made by the Commissioners in the earlier tax case against Mr Gaines-Cooper which made him push for a more ambitious interpretation of what would constitute the legitimate expectation. It was accordingly a matter of some substance in administrative law because every citizen has the right to the due application to him of the ordinary law.

The facts in Mr Davies case was that he was a property developer and held 50% of the preference shares in Liberty Property Holdings Limited. He was prominent in the administration of Swansea Rugby Football Club (the Ospreys) and was a respected member of the local community. He had incorporated a company in Belgium and had thereafter begun to rent furnished apartments in Brussels. Mr Davies did acknowledge though that he had not sold his house in Swansea and that his wife and daughters remained resident or partly resident in Swansea. Liberty then acquired his shares in itself for £4,5 million. The question then became the liability for Capital Gains Tax and whether Mr Davies was resident or ordinarily resident in the United Kingdom at the time of the acquisition of the shares in 2001.

The facts in Mr Gaines-Cooper's case have been traversed on a number of occasions. He acquired a domicile of choice in the Seychelles, having married a wife who was a native of the Seychelles. However, he had maintained a substantial home in Berkshire and in Oxfordshire and had maintained those houses. The Commissioners had concluded that he had dwelt permanently in the home in England and notwithstanding his residence in the Seychelles during those years, he was resident and ordinarily resident in the United Kingdom. Lord Wilson traverses the famous cases in the law applying to residents - for example Levene, Reed v Clark, and the issue of the "distinct break".

Lord Wilson then quoted from the judgment of Moses L J in his judgment in the Gaines-Cooper matter - that the importance of the fact that thousands of taxpayers relied upon the guidance given by HMRC cannot be doubted. It goes to the heart of the relationship between the Revenue and the taxpayer. It should not be forgotten that the Revenue itself has long acknowledged that the best way is by encouraging cooperation between the Revenue and the public to collect the taxes due. But since the issue of the booklet, in a field fraught with borderline cases relating to an enormous variety of circumstances, the Revenue has chosen to confer what presumably is regarded as a benefit on taxpayers who wished to know whether they were likely to be treated as resident or not.

To quote from Lord Wilson's judgment in paragraph 26:

"The primary duty of the Revenue is to collect taxes which are properly payable in accordance with current legislation but it also responsible for managing the tax system... Inherent in the duty of management is a wide discretion. Although the discretion is bounded by the primary duty (R (Wilkinson) v IRC [2005] 1 WLR 1718 at paragraph 21 per Lord Hoffmann), it is lawful for the Revenue to make concessions in relation to individual cases or types of case which will, or may, result in the noncollection of tax lawfully due provided that they are made with a view to obtaining overall for the national exchequer the highest net practicable return... In particular the Revenue is entitled to apply a cost benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute".

The Revenue then sought to rely on the decision of Bingham L J (as he then was) in the matter of R v IRC Ex Parte MFK Underwriting Agents. This was a matter where some agents had inquired of the Revenue about the uplift of certain bonds would be taxable on sale or redemption as capital gain rather than as income. They then argued unsuccessfully that the Revenue's response should be treated as correct. Bingham L J regarded that the statements of the Revenue needed to be weighed and assessed. He said that the taxpayer's only legitimate expectation is prima facie, that he will be taxed according to statute, not concession or a wrong view of the law. And this is where the case is famous in administrative law, he went on to state that where the approach of the Revenue is of a less formal nature then a detailed inquiry of what was said is necessary. It is necessary that the taxpayer should have put all his cards face upwards on the table. Secondly, it was necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification. He accordingly held that the Revenue's statements had not been clear enough to give rise to any legitimate expectation.

In this case of course the importance was that the booklet was formally published. Lord Wilson thus was looking for the issue of whether the statements in the booklet were clear and unambiguous. He then goes on an analysis of the proper construction of the booklet. His conclusion was that the appellants had failed to establish that the Revenue was departing from a settled practice such as to create a legitimate expectation. The evidence led was "far too thin and equivocal".

Alastair Morphet

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