Weekly Tax Update - Monday 24 October 2011

1. Private Clients

   1.1. HM Treasury confirms ISA limits for 2012-13

   Following the publication of inflation figures for September, HM Treasury has announced that subscription limits for Individual Savings Accounts (ISAs) from April 2012 will increase to £11,280 (up to half of which can be saved in cash).

   The Junior ISA annual subscription limit of £3,600 (available from 1 November) and the Child Trust Fund annual savings limit (with an increased of limit of £3,600 from 1 November) will be index linked from April 2013.

   www.hm-treasury.gov.uk/press_115_11.htm

   1.2. Davies and another and Gaines-Cooper

   The Supreme Court has decided for HMRC in dismissing the appeals from three taxpayers including Robert Gaines–Cooper that reliance could be placed on specific parts of the guidance on residence in the booklet IR20 alone for determining their residence status for tax.

   The leading judgment for HMRC was given by Lord Wilson who was of the opinion that the guidance in IR20 set out only the main factors to be taken into account when considering the residence status of an individual, and that a decision could only be made on an evaluation of the facts of the case. He said:

   "The preface to the booklet stated:

   "The notes in this booklet reflect the law and practice at October 1999. They are not binding in law and do not affect rights of appeal about your own tax.

   You should bear in mind that the booklet offers general guidance on how the rules apply, but whether the guidance is appropriate in a particular case will depend on all the facts of that case. If you have any difficulty in applying the rules in your own case, you should consult an Inland Revenue Tax Office..."

   The first paragraph quoted does not advance the Revenue's case: no doubt it intended the booklet to reflect the law but it accepts that, were the booklet to have failed to do so, it would be bound by its terms irrespective of the discrepancy. The second paragraph is however of greater significance: it stressed that the guidance was general; that its application to a particular case depended upon its facts; and that, in the event of any difficulties in its application to his case, the individual should consult a Revenue tax office. Neither in 1976 nor at any time thereafter did the second appellant seek advice from a tax office, still less a ruling on residence such as was available until the introduction of self-assessment on 6 April 1996. Nor did the first appellants ... seek such advice in advance of their going to Brussels in March 2001."

   Lord Wilson commented that crucial paragraphs in the guidance for the taxpayers (paragraphs 2.7 to 2.9) were poorly drafted and therefore lacked the clarity required for establishing a doctrine of legitimate expectation for reliance on an interpretation of that guidance to determine residence status without further consideration of legislation or case law:

   "On any view the three paragraphs were very poorly drafted. But does it follow that, when read in conjunction with the other parts of the booklet to which I have drawn attention, they amounted to a clear representation of the types for which the appellants respectively contend? Regrettable though it would be, a confusing presentation would be likely to have lacked the clarity required by the doctrine of legitimate expectation."

   Standing back from detailed sections of the guidance Lord Wilson concluded that the guidance indicated that the general requirement for demonstrating non-UK residence meant that a distinct break from the UK was required, although he did moderate the judgement of. Judge Moses at the Court of Appeal:

   "It is therefore clear that, whether in order to become non-resident in the UK or whether at any rate to avoid being deemed by the statutory provision still to be resident in the UK, the ordinary law requires the UK resident to effect a distinct break in the pattern of his life in the UK. The requirement of a distinct break mandates a multifactorial inquiry. In my view however the controversial references in the judgment of Moses LJ in the decision under appeal to the need in law for "severance of social and family ties" pitch the requirement, at any rate by implication, at too high a level. The distinct break relates to the pattern of the taxpayer's life in the UK and no doubt it encompasses a substantial loosening of social and family ties; but the allowance, to which I will refer, of limited visits to the UK on the part of the taxpayer who has become nonresident, clearly foreshadows their continued existence in a loosened form. "Severance" of such ties is too strong a word in this context."

   Lord Wilson also concluded that the evidence provided by the taxpayers that HMRC had a practice of applying specific sectors of the guidance to determine residency such as the day count measures and certain features of overseas connection in isolation, were not strong enough to demonstrate a departure from settled practice:

   "It is an arresting proposition that, having published and regularly revised a booklet in which it purported to explain how it would determine claims by individuals to have become non-resident and of which it encouraged widespread use, the Revenue departed from it as a matter of settled practice. Clear evidence would be necessary in order to make the proposition good. But there is another reason for the need for clear evidence in this connection. For, whereas, in the booklet the Revenue gave unqualified assurances about its treatment of claims to non-residence which, if dishonoured, would readily have fallen for enforcement under the doctrine of legitimate expectation, it is more difficult for the appellants to elevate a practice into an assurance to taxpayers from which it would be abusive for the Revenue to resile and to which under the doctrine it should therefore be held. "[T]he promise or practice...must constitute a specific undertaking, directed at a particular individual or group, by which the relevant policy's continuance is assured": R (Bhatt Murphy) v The Independent Assessor [2008] EWCA Civ 755, per Laws LJ at [43]. The result is that the appellants need evidence that the practice was so unambiguous, so widespread, so well-established and so well-recognised as to carry within it a commitment to a group of taxpayers including themselves of treatment in accordance with it."

   Lords Walker, Hope and Clarke agreed with Lord Wilson's summary. The dissenting judge, Lord Mance, disagreed and his view of IR20 was that it did not support any requirement for a distinct break. He felt that when reading paragraphs 2.5 to 2.9 of IR20, having to assume that a "distinct break" was required seemed remarkable if it was indeed such an important factor. However he declined to express an opinion on whether the taxpayers could show HMRC had demonstrated a clear and unequivocal practice in their assessment of an individual's residence status prior to 2005.

   Legislation on a statutory residence test is expected in Finance Bill 2012, and it is to be hoped that this will bring greater certainty to the issue of an individual's UK residence status for tax.

   www.bailii.org/uk/cases/UKSC/2011/47.html

   1.3. CGT private residence relief

   In the case of Mr A J Clarke v Revenue & Customs (TC01461), the First Tier Tribunal considered whether two properties disposed of qualified for relief for Principal Private Residence Relief.

   Mr Clarke was married with two daughters and lived at the matrimonial home Oaks Farm. Evidence was given that Mrs Clarke was having an affair. Mr Clarke purchased 60 Nayland Road in July 2002 and moved in immediately. The purchase was funded by a 12 month business loan as this was the fastest and cheapest route. Mrs Clarke refused to sell the former matrimonial home. Mr Clarke obtained planning permission to build a detached property in the garden. He subsequently sold 60 Nayland Road in March 2003 and moved into his mother's home whilst he built the new property 58a Nayland Road. He moved into 58a in July 2003. In July 2005 Mrs Clarke attempted to commit suicide and Mr Clarke moved back to the matrimonial home to protect his children. 58a Nayland Road was sold in November 2005.

   HMRC contended that at no time in the period of ownership was either of the properties the taxpayer's only or main residence and there was no intention to live permanently in either of them. HMRC noted that the property purchase had been funded by a 12 month business loan and there was no evidence of correspondence being sent to either of the addresses nor had HMRC been informed of a change of address.

   Evidence was submitted on behalf of Mr Clarke to support the fact that he had left the matrimonial home permanently. HMRC had accepted that he had resided at the properties so the point...