25/11/10

By Claire West

A year on from the landmark judgment against the Seychelles-based entrepreneur Robert Gaines-Cooper in the Court of Appeal, international investors and entrepreneurs are shunning the UK in order to avoid the uncertainty created by the case, according to leading tax advisers.

The Gaines-Cooper case was heard in November 2009 and HMRC’s conduct in the case undermined the long-established “90-day rule” for non-residents. Since the judgment was published, advisers report that many taxpayers with international interests are choosing not to move to the UK or are avoiding setting up new ventures in the country because they are concerned about the uncertainty of the tax rules in the UK.

In August this year, Mr Gaines-Cooper was granted leave to appeal the judgment in the Supreme Court and the case is expected to be heard early in 2011.

“Before the Gaines-Cooper case tax payers, advisers and, indeed, tax inspectors understood the 90 day rule — which had been set out for decades in IR20 published by HMRC. That is, if a taxpayer left the UK and did not return for more than 90 days in the following tax years, he would be treated as non resident. This rule was fair, clear and widely understood,” said Peter Vaines of law firm, Squire Sanders & Dempsey L.L.P.

“HMRC now say that IR20 means something else and we all misunderstood the position. This has created real uncertainty which has been hugely damaging to its reputation internationally. They say that there is an implied term that the taxpayer must sever his family and social ties with the UK, but it is not at all clear what that means. Obviously, it is not possible for an entrepreneur to sever family ties (his mother may continue to live in the UK, for example) before leaving to live and start up a business abroad,”
he said.

Advisers report more and more international clients choosing not to locate in the UK, with some reporting a halving in the percentage deciding to come to the UK having taken legal and financial advice on their options.

“While there are figures for UK taxpayers leaving the UK, there is very little visibility on those inbound businesspeople who chose not to come here. Apart from UK tax rates, it is the uncertainty over the rules and the integrity and consistency of HMRC which is proving fatal. The whole question of residence has been handled very badly. In particular, HMRC’s handling of the Gaines-Cooper case has done the country a lot of damage and is leading to reduced tax revenues as people stay away and fail to invest here,” commented Peter Vaines.

Advisers and academics have also noted a change in attitude of HMRC to a high-handed and over- aggressive approach. One adviser cites a “creeping presumption of guilt” by HMRC that is leading to international entrepreneurs cutting back on their UK investments or failing to go ahead with projects which would have created jobs and tax revenues in the UK.

“The current high UK rates of tax are undoubtedly damaging to the UK economy. Our top income tax and capital gains tax rates are now almost the highest in Europe, and UK corporation tax rates are amongst the highest in Europe. Rates aside, equally harmful is the general approach of HMRC, to the operation of our tax system which adds substantially to the overall cost of taxes for the taxpayer,” observed Richard Teather, senior lecturer in tax law at Bournemouth University and an adviser on tax matters to various governments.

“In recent years, HMRC has crossed the line and started trying to collect the amount of tax they would like to be due rather than the amount that is actually due under the law. In the case of Robert Gaines-Cooper, HMRC was effectively seeking to change long-established tax practices,” he said.

“Mr Gaines Cooper had relied on the Revenue’s own guidance — in the form of the IR 20 practice note - which they tried to have reinterpreted, and indeed argued that they could ignore it if they wished, even if the taxpayer had relied on it. The Revenue are entitled to change their practice whenever they want, but not to adopt a new practice and apply it retrospectively,” said Richard Teather.

Other commentators have highlighted the fundamental misunderstandings relating to the tax treatment of non-domiciled and non-resident tax payers.


“There is widespread misunderstanding of the position of non-doms and non-residents who are becoming scapegoats because a just, simple and flat tax system is incapable of generating the amount of money that the government is spending. This is an endemic problem in the EU. We need to curb the powers of the tax authorities and curb the appetite of government for raising more and more money in tax." Professor Philip Booth, editorial and programme director at the Institute of Economic Affairs Mr Gaines-Cooper himself has operated several businesses in the UK during his business career.

“The companies I have founded dealt with tax matters in 16 countries and paid tax in all of them — including the UK. But of those 16 countries, dealing with the UK tax authorities took more time and cost more money than the 15 others put together. The lack of consistency, fairness and overall certainty ends up costing too much in management time and professional fees to deal with UK tax matters,” said Robert Gaines-Cooper.

“As a businessman and creator of jobs and economic activity — as well as a taxpayer — I expected to be treated fairly. Instead, I am assumed to be less than forthright, which I deeply resent and for that reason would not locate any new business in the UK. In some ways, there are compelling business reasons for being in the UK, but the uncertainty that results from the arbitrary approach of HMRC is simply unacceptable to any businessman”
said Mr Gaines-Cooper.