UK Tax Residence: Supreme Court decision in Davies and Gaines-Cooper

Sullivan & Cromwell LLP - October 31, 2011

The UK Supreme Court has handed down its judgment in Davies and Gaines-Cooper, two judicial review cases on the tax residence of individuals. The taxpayers argued that HM Revenue and Customs had said in guidance, and consistently taken the view in practice, that it would treat individuals in their circumstances as not resident in the United Kingdom. HMRC was refusing to apply that treatment, so the court should intervene and hold HMRC to its word. HMRC succeeded in convincing the court that the taxpayers had misunderstood the guidance and that there was no settled practice of the sort the taxpayers claimed.

Why it matters

The guidance itself has now been extensively revised. However, the Supreme Court’s judgment and the litigation leading up to it do raise wider issues.

  • The decision underscores the risks in relying on HMRC guidance and – even more so – any supposed general HMRC practice. It will be an uphill struggle for taxpayers to convince the courts that HMRC has bound itself to take any particular approach.
  • The judgment also offers a reminder of the current law on what a taxpayer must do to shed UK-resident status: among other things, the taxpayer must show a distinct break from his or her life in the UK (going abroad to work full-time will often qualify).
  • The case points up the pressing need to move to a clearer statutory definition of residence, as the government proposes to do.
  • Finally, the litigation has raised points on:
    • whether a taxpayer should apply for judicial review of the way HMRC has exercised its discretion before it begins a dispute on the law through an appeal to the Tribunal (in the circumstances, yes); and
    • whether the public is entitled under the Civil Procedure Rules to see the skeleton arguments HMRC provides to judges (in general, yes).