Gaines-Cooper Loses Supreme Court Residency Case

The Supreme Court recently upheld the Court of Appeal’s decision that Mr
Gaines-Cooper was a resident of the UK despite spending the majority of his
time in the Seychelles.

Mr Gaines-Cooper’s main argument centred on the application by HMRC of their guidance set out in the IR20 booklet on residence.  This has since been replaced by HMRC6.

Despite following HMRC’s guidance on residence, Mr Gaines-Cooper was found to be UK resident.  The case revolved around whether there was an ‘implied’ requirement for there to be a distinct break from the UK in order to become non-UK resident.

The case highlights the fact that HMRC guidance is not the law, and following it will not necessarily provide protection. Similar principles have applied in the taxpayers’ favour in recent cases on ‘reasonable excuse’ which have found HMRC’s guidance to be stricter than the actual wording of the legislation.

Going forward, the new statutory rules on residency should provide taxpayers with more clarity, however for prior years the case law principles will still apply.

Take Advice and then Action

The Tax Tribunal heard that Mr Shanthiratnam cashed in 1/3 of a bond as collateral for his business.

When he submitted his tax return HMRC enquired and corrected his tax return so that his tax bill was increased by about £20,000.  Had he gone about sourcing collateral from his bonds in a different way he could have avoided further tax.

The Judge said he sympathised with the taxpayers view that double tax had been suffered; but that he should have understood what the tax result of his actions would be, before proceeding.  The taxpayer’s appeal against the additional bill was dismissed.

UK-Swiss Tax Treaty – Update

UPDATE: Please see Eaves and Co’s Swiss Treaty Brochure for full details of the treaty

The UK-Swiss tax treaty (announced in August 2011) has been signed and will come into force in 2013.

Initial details of the treaty were issued in August 2011, however further information on the precise terms of the agreement is now available.

Under the terms of the tax treatment, UK taxpayers may either:

1) Retain anonymity and suffer an initial one off deduction of  between 19-34% and continue to pay a new withholding tax of 48% on interest, 40% on dividends and 27% on gains or;

2) Make a voluntary disclosure to HMRC regarding their Swiss assets and income.

If a disclosure is made, the accounts of UK taxpayer will not be subject to the one off deduction.

The treaty includes several anti-avoidance provisions including a clause aimed at preventing banks from promoting schemes to avoid the withholding tax by ensuring that such banks will become liable for the tax avoided.

If you would like to discuss the impact of the treaty further or would like help deciding which option to choose please feel free to contact us in our Leeds office.

Payments are Gratuities

A company created two employee benefit trusts for its employees.

After the sale of the parent company for £39 million, cash payments were made to certain employees by the trustees at the end of October 2002, October 2003 and February 2004. These payments were based on the company’s bonus structure and length of service.

HMRC decided that the company should pay primary and secondary class 1 National Insurance contributions on the payments made to the employees. The company appealed this ruling and claimed that the payments were gratuities and should be exempt from National Insurance under Social Security (Contributions) Regulations 2001 Sch 3 para 5.

The First-tier tribunal stated that a gratuity in this situation was a payment given voluntarily in recognition of services rendered and the amount given depended on the donor.

The payments made to the employees were considered individually in order to see if they satisfied the gratuity test.

The company’s appeal was allowed as a result of the payments being gratuities as the trustees were not obliged to make the payments and the amount was at their discretion.

Not a New Discovery

In 2005/06 and 2006/07 three taxpayers created  losses using a tax avoidance scheme.  The taxpayers then claimed the losses against capital gains on their self-assessment tax returns.

The taxpayers included sufficient information regarding the transactions in the additional information section of the tax returns.  As required, the tax returns also revealed the scheme’s Reference Number under the disclosure of tax avoidance scheme (DOTAS) rules.

The scheme in question was subsequently found to be ineffective.

HMRC did not open an enquiry into the taxpayers return in time and therefore instead made a discovery assessment in respect of the gains.

The taxpayers appealed.

The tribunal found that the discovery assessments were not valid.  The judge said that while HMRC had made a discovery within TMA 1970 s.29(1), the taxpayers were protected from the discovery assessment by virtue of TMA 1970 s29(5) as they had provided adequate information to allow the assessments to have been made in time.

The judge stated that ‘no officer could have missed the point that an artificial tax avoidance scheme had been implemented’ and it seemed ‘perfectly obvious’ that no one had ‘even looked at the returns’.

The case highlights the importance of disclosing sufficient additional information in the ‘white space’ of a tax return to protect against a future discovery assessment.