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Press Releases:
19th Oct 2011 | STATEMENT FROM ROBERT GAINES-COOPER (Download / View PDF)
06th July 2011 | STATEMENT FROM ROBERT GAINES-COOPER (Download / View PDF)
16th Aug 2010 | GAINES-COOPER GRANTED SUPREME COURT APPEAL (Download / View PDF)
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Taxation, 15 September 2011, 6
15 September 2011
Issue 4321
Then the wheels fell off…
© Reed Elsevier (UK) Ltd 2011
Some thoughts from Peter Vaines on IR20 and Gaines-Cooper, in which he advised the taxpayer.
Now that Mr Gaines-Cooper's appeal has been heard by the Supreme Court it is perhaps a good moment to reflect on why and how we ended up there and on the demise of IR20.
I have no idea why HMRC chose to challenge Mr Gaines-Cooper's residence status, but it must be said that their approach has been damaging to themselves and to the country. Whether by accident or design, the result has been that advisers up and down the land (and their clients) have been in a state of acute uncertainty for years because nobody, not even the most experienced adviser, has been able to advise their clients with any degree of assurance as to whether or not they are UK resident, except in the most obvious circumstances.
Uncertainty inhibits any kind of financial activity and if somebody planning to come to the UK cannot be clear when, or whether, he would be UK resident (and, if he were to become UK resident, whether he would later be able to shed that residence), he will simply not bring his business or his money here to the obvious detriment of our economy. Professional advisers are all too well aware of clients and potential clients who have chosen not to establish (or expand) their business in the UK because of these uncertainties. Furthermore, those leaving the UK who would have retained some financial connections here (which would obviously have been of continued benefit to the country) are very reluctant to take the risk — they go away and stay away.
Key Points
● The unsettling effect of HMRC ignoring the rules in IR20.
● The importance of certainty in determining residence status.
● Should HMRC have simply updated the IR20 rules for the future, rather than acting retrospectively?
● Certainty restored with the new legislative proposals.
● The need to restore trust between HMRC and professional advisers.
Professional advisers will have heard their high net worth clients saying that they simply do not feel welcome here. The entrepreneur who comes to this country and creates jobs is vilified by the press and the politicians. We welcome people from other countries to live and work in the UK because they add to our cultural diversity and bring with them many other benefits — but only it seems, if they are poor. If they are rich we don't want them. It has come to the point where to admit one is a non-domicile is to invite abuse.
A matter of certainty
The relevance of this to IR20 and Mr Gaines-Cooper's residence status is the issue of certainty. We have had IR20 since 1973 and it represented the established Inland Revenue practice on the subject. It did not matter whether it was the law or not (and it clearly was not, because it contained extra-statutory practices and concessions) but it was a sensible practice; it was well understood and it operated entirely satisfactorily for decades.
It got a bit out of date, needing the occasional modification, and HMRC might have recognised that technology, travel and working practices had moved on since 1999 when the last version was published and could have issued a revised version.
Surely these niggles were not serious problems; such things are being revised all the time. It was a good code — it had survived many governments and had been accepted, almost, as the last word on residence. HMRC even had the advantage that any grey area could be interpreted in their favour. That would have been fair enough. It was only when they started to say black was white that the wheels came off.
We are not dealing with the law here but with the published practice of HMRC. The law was in an uncertain state because there had been no decided cases for decades. There was no need; we had IR20 which was a practical guide to how residence would be determined by HMRC, and everybody could rely on it.
Everybody knew that to establish non-residence you had to leave the UK and not come back for more than 90 days each year for the following three years. This was the clear understanding of tax advisers, of taxpayers and even inspectors of taxes.
So when HMRC said that this was all wrong — IR20 did not say that, and even if it did, it meant something else — it was hardly a surprise that this was widely interpreted as a change of HMRC practice.
A simple misunderstanding
HMRC claimed that they did not change their practice retrospectively; it was just that everybody had misunderstood what their practice was; now they were making it clear. However, it is barely credible to suggest that professional tax experts, taxpayers and inspectors of taxes were all mistaken for so many years.
It is one of Mr Gaines-Cooper's complaints that he consulted some of the most prestigious firms in the country, all of whom gave him exactly the same advice, but according to HMRC they were all wrong. In these circumstances, it might have been reasonable for HMRC to have paused, and not just pressed on, saying that everybody was out of step except them. The honourable course would have been to acknowledge the almost universal understanding of the position and to adopt their preferred interpretation for the future. Nobody could have objected to that and no damage or reputational issues would have arisen.
Indeed, the point was raised by the Court of Appeal who said it was important for HMRC to explain why, when their interpretation was announced, there was a spontaneous eruption of articles from professional tax advisers saying that the department was moving the goal posts.
HMRC said there was no change in practice and sought to dismiss this criticism as a 'flurry in the hen coop' by people who were cross that HMRC were policing the rules more vigorously. In other words, lots of very experienced (and highly reputable) tax advisers spontaneously wrote articles complaining about the department changing its position purely out of pique. Quite apart from this being self-evidently wrong, it is an insult to the integrity of those advisers to suggest that they all took unreasonable umbrage at the same time.
No right to rely?
What is worse is that HMRC argued vigorously before the High Court and the Court of Appeal that they were perfectly free to ignore IR20 if they wished. The taxpayer had no right to rely on the terms of IR20 and, if they had done so, they only had themselves to blame. The very idea that HMRC could publish a statement of practice on which taxpayers and professional advisers had relied for 30 years, then claim that they could ignore it if they wished, was generally regarded as outrageous. Indeed, HMRC argued in the Court of Appeal that the taxpayer should not even be allowed to raise the issue at all. This argument was not received well by their Lordships and the point was soon conceded by HMRC.
Whatever happens in the Supreme Court, Mr Gaines-Cooper can be rightly applauded for his tenacity (and his willingness to incur the costs) of challenging HMRC on this issue. Without his determination to say this is wrong, HMRC would have succeeded in maintaining their stance that they are not bound by their public statements; IR20 and everything else would have been just so much waste paper which they could ignore as they wished. The implications are so grotesque as to be almost unimaginable because the principle would be equally applicable to every other organ of government. Mr Gaines-Cooper's success in facing down HMRC so they admitted they are bound by their public statements was a major achievement, for which there has been little understanding. Mr Gaines-Cooper does not seek recognition, but the tax profession will understand how important this is.
What should have happened?
In my view, what HMRC should have done was to protect the integrity of IR20. They simply did not know, or did not stop to think, how valuable it was. By choosing to undermine IR20 in an attempt to win one case (and no doubt to encourage others) instead of preserving and maintaining an excellent code of their choosing, they damaged their own reputation and that of the country. In their quest, they lost sight of the jewel they had in their hand and the need to keep it safe.
The approach they chose to take has been justly criticised everywhere — including the by Court of Appeal — and has caused real damage to HMRC. There really was no need for any of this. It was always open to HMRC to revise IR20 and make it mean what they want it to mean, but what was found so repugnant by taxpayers and the nation is the way that they sought to reinterpret it retrospectively. Instead, they chose to trash the whole thing and invest a considerable amount of resources in drafting HMRC6 — which itself is now to be binned in favour of a statutory test.
Views differ about the proposed statutory test, but I would suggest that if it provides certainty, it will be welcomed. Inevitably, as with any new statutory rules, there will be rough edges to be smoothed out, but whether people like it or not is not the point. You may not like (or agree with) the congestion charge, but at least you know what the consequences are if you infringe it. What is unacceptable is to say that although the charge applies today, we will tell you where the congestion charge boundaries are tomorrow.
This approach by HMRC is by no means confined to Mr Gaines-Cooper — one only has to look at the case of Tuczka [2011] UKUT 113. While HMRC were saying in Gaines-Cooper [2010] STC 860 and other cases that IR20 reflects the law, they were arguing exactly the opposite before the court in the case of Tuczka. This is not right and they should not have done so, but there is no-one to hold them to account. HMRC have been acting like private litigants taking every point they can, good or bad, in order to win their case. This was perhaps best illustrated by counsel for the Revenue in the Supreme Court who at one point said 'I do not care how I win, my Lord'. This surely cannot be right.
HMRC's responsibility
I suggest that HMRC have a wider responsibility to the community which was perhaps well expressed in the recent case of Hok Limited TC1286, where it was said:
'It has long been part of the common law of this country that organs of the state must act fairly and in good conscience with its citizens. In our judgment there is nothing fair or reasonable [in their conduct in that case]'.
In my view, the Gaines-Cooper litigation should never have started. If, however, HMRC felt that once they had started, they had to finish, they should have approached the issues in a manner calculated to enhance their reputation for dealing fairly and in good conscience with its citizens. Unfortunately, this has not been the case and even if the Supreme Court eventually find in favour of HMRC, this will not overcome the widespread belief that HMRC have not approached this issue fairly.
It is not because of blind loyalty to my client that I say these things. It is because as a citizen and a professional tax adviser I want HMRC to be held in high esteem by reason of their fair and honourable dealings with taxpayers. I used to be proud that our Inland Revenue was widely respected and admired by taxpayers — how many countries can say that? However, in recent years a measure of such respect and admiration has been lost — and the sorry episode with IR20 has made it significantly worse.
Dave Hartnett has spoken at length about the need for trust between taxpayers and HMRC and I would respectfully agree. However, trust has to be earned, and HMRC must act, and manifestly be seen to act, in a manner which inspires (and which is deserving of) trust.
It may be too late to recover IR20 — that has been destroyed — but this kind of approach to taxpayers does need to change if there is any hope of recovering the vital trust between HMRC and taxpayers.
I think there is some way to go, but the process will never even start unless and until there is an acknowledgement of the issues raised here.
Peter Vaines is a partner at Squire, Sanders & Dempsey and acted as lead adviser to Mr Gaines-Cooper throughout his journey from the Special Commissioners to the Supreme Court.