The Gaines-Cooper Case and Uncertain Times

David Whiscombe of BKL Tax laments uncertainty in tax, and provides two unfortunate examples faced by taxpayers and advisers.

More uncertainty...

The single most desirable characteristic of a tax is certainty. OK, in an ideal world taxes would also be fair, consensual, subject to proper Parliamentary scrutiny and designed to influence behaviours in a desirable way: but the most single important thing is that taxpayers know where they stand. In my experience, for businesses in particular, uncertainty is an unequivocally Bad Thing.

Which brings us to two recent developments.

Dividends as employment income

The first is the publication of the updated HMRC guidance on the revised ITEPA s447. This legislation deals with the taxation of "post-acquisition benefits from employment-related securities" and with the circumstances in which such benefits (and in particular dividends) are chargeable as employment income.

(The remainder of this section of the article is excluded as not pertinent to this blog post. If you wish to view it, visit http://www.taxationweb.co.uk/expert-eye/income-tax/uncertain-times.html)

Uncertainty on residency

For our second recent example of uncertainty look at the Gaines-Cooper case. It has been widely recognised for many years that the statute and case law surrounding questions of residency is in a state that is technically known as a pig's breakfast. Even before the ease of transglobal travel and communications and the rise of the global village made boundaries increasingly pervious to ideas, money and people it was already practically impossible to make any rational sense of the law; and the rise of international commuting has been the final nail in the coffin of any hope of getting much practical help from the (mostly nineteenth and early twentieth century) case law. Thus the codification of HMRC practice set out in IR20 has assumed great practical importance and has become generally accepted as the rule book for such matters. IR20 might be imperfect but at least one thought one knew where one stood. IR20 says that the normal rule is that days of arrival and departure are ignored in counting the number of days of presence in the UK. Mr Gaines-Cooper did not, on that basis, average more than 90 days a year in the UK: he therefore believed he was home (or rather, not home) and dry.

IR20 does create anomalies: many will agree that it is odd that someone who spends in aggregate many days physically present in the UK should be non-resident simply because his presence includes a large number of short trips. And perhaps there is an argument that IR20 should be revised. But, note – "revised": not "ignored when it seems like a good idea". Look, HMRC – you wrote the rules– you encouraged us to play by them – it's frankly unacceptable for you to change them halfway through the game or – as in the case of Mr Gaines-Cooper, to decide towards the end of extra time that the rules have been changed with effect from the start of the game.

In Revenue & Customs Brief 01/07 HMRC make a valiant but misguided attempt to defend the indefensible and invite us to believe that the approach in Gaines-Cooper is wholly consistent with IR20. If you have been resident at any time in the UK, say HMRC, you have first to decide whether you have left the UK before you move on to the stage of counting days of presence in the UK. What was fatal to Mr Gaines-Cooper, they say, is not that his days of arrival and departure have to be counted: it's that he never left the UK in the first place. There are a number of objections to this. First, it's not the case that seems to have been put before the Special Commissioner – rather it's an ex post facto attempt to square the circle. Second, if this approach be true, it follows that two individuals whose actions and behaviours in a given tax year are absolutely identical may be treated differently for residency purposes depending upon whether they have at some time in the past lived in the UK – a surprising result to say the least. Third, there is nary a word of this fine distinction in IR20. On the contrary the very strong impression given by IR20 is that an individual who makes his home elsewhere and who habitually and regularly spends less than 91 days in the UK will be treated as ceasing to be resident and ordinarily resident. Full stop.

There is already more than enough uncertainty in taxes. We need more of it about as much as (to paraphrase John Donne) Argus needs more eyes, or women or the sea more tears. So how about HMRC start seeing their job as promoting certainty rather than removing it?

Reproduced with the kind permission of the author David Whiscombe BKL Tax Consultancy Services

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