Rules for non-dom status blurred by UK court decision

News - Tax

Written by Ray Clancy

Thursday, 18 February 2010 09:23

A court decision that a wealthy entrepreneur must pay tax in the UK despite spending less than 91 days a year in the country has blurred the tax exile rules, it is claimed.

The Court of Appeal in London has ruled that businessman Robert Gaines-Cooper, who has set up companies in Canada, the US, Italy, Singapore, Jersey, Cyprus and the Seychelles, was liable to pay UK tax despite establishing a base in the Seychelles as he still had strong links with England where his mansion was in fact his main residence.

The international businessman moved to the Seychelles in 1976 and has claimed that he fulfils the IR20 rules as a non resident as he spends less than 91 days a year in the UK. He said that the UK tax authorities refused to accept that he had left the country.

His case highlights the growing determination by HM Revenue & Customs, the UK tax authority, to clamp down on alleged tax evaders and also demonstrates the risks run by tax exiles who nevertheless keep some links with their home nation. HMRC set up a High Net Worth Unit in April last year examine the activities of HNW people more closely.

HMRC has collected £373 million from investigations into wealthy taxpayers in the last financial year, a 21% rise on the previous year and a 360% increase over five years, according to new data acquired by the law firm, McGrigors. The firm used powers under the Freedom of Information Act to secure the data.

Phil Berwick, director of tax investigations at McGrigors, said many of the foreign nationals and wealthy UK individuals are investment bankers and hedge fund managers who may have sought to shelter earnings by using tax avoidance schemes.

The UK judges decided against British born Gaines-Cooper, because England had remained ‘the centre of gravity of his life and interests’ and his mansion in Henley was his main residence. The judges also said that the 91 day rule could not establish non-dom status but was ‘important only to establish whether non-resident status, once acquired, has been lost’.

The judgement is likely to have wide ramifications for those who have left the UK or are thinking of leaving for lower-tax jurisdictions, say lawyers. The judgement made clear that HMRC was fully entitled to look for a clear and clean break with the UK before approving non residential status.

Critics warn increasing regulatory pressure could drive wealth creators away from the UK, with the ruling following the enforcement of the £30,000 non-dom levy, the introduction of the 50% top income tax rate and the super-tax on the City of London bonus pool.

‘The Court of Appeal Judgement confirms how difficult it can be to shake off UK residency. Retention of ties to the UK can seriously jeopardise residency status,’ said Ronnie Ludwig, partner in the private wealth group at accountancy firm Saffery Champness.

He added that residency rules remain blurred as there is still no statutory definition of UK residency and domicile, in spite of a desperate need for one.