R (on the application of Davies and another) v The Commissioners for Her Majesty’s Revenue and Customs

Published Revenue guidance can found a legitimate expectation only where, read as a whole, it makes a clear, unambiguous and unqualified representation to the ordinarily sophisticated taxpayer. The tax-residence guidance in IR20 did not replace the ordinary requirement that a former UK resident make a distinct break in the pattern of life in the UK.

The inquiry is multifactorial. It requires substantial loosening, but not severance, of social and family ties. Residence abroad and compliance with day-count limits do not alone decide the issue. An inconsistent administrative practice can create an expectation only if clear evidence shows that it was unambiguous, widespread, well-established and recognised as committing the Revenue to the asserted treatment. Increased scrutiny, without proof that different criteria were previously applied, is insufficient.

The conjoined appeals arose from Revenue determinations that the appellants remained resident and ordinarily resident in the United Kingdom for relevant tax years. The first appellants had established business activities and accommodation in Belgium while retaining homes, families and other connections in Swansea. The special commissioners had conclusively found that the second appellant remained resident and ordinarily resident under the ordinary law despite his international activities and residence in the Seychelles.

The appellants sought judicial review on the ground that IR20 promised more favourable treatment than the ordinary law. Alternatively, they alleged that the Revenue had an established practice of applying IR20 in that manner. The Administrative Court refused permission, after which the Court of Appeal heard and dismissed the substantive applications: [2010] EWCA Civ 83.

The central issues were whether IR20 clearly dispensed with the need for a distinct break in the pattern of the taxpayer’s UK life and whether the alleged former practice created an enforceable legitimate expectation.

1. By a majority, the appeals were dismissed. Lord Wilson delivered the leading judgment. Lord Hope, Lord Walker and Lord Clarke agreed with his reasons. Lord Mance dissented on the construction of IR20.
2. Per Lord Wilson, the ordinary law requires a person formerly resident in the United Kingdom to cease having a settled or usual abode here. The person must effect a distinct break in the pattern of UK life. This requires a multifactorial evaluation. Social and family ties must ordinarily be substantially loosened, but need not be severed. Intention is relevant but does not determine whether the necessary change has occurred.
3. A formally published Revenue representation may create a legitimate expectation even if it is more favourable than the ordinary law. The asserted representation must nevertheless be clear, unambiguous and devoid of relevant qualification. Its meaning is assessed from the whole publication as understood by the ordinarily sophisticated taxpayer. The approach in R v Inland Revenue Comrs, Ex p MFK Underwriting Agents Ltd [1990] 1 WLR 1545 therefore applied to IR20.
4. Read as a whole, IR20 did not promise non-resident status merely because a taxpayer lived abroad for a settled purpose or intended an absence of three years and complied with the day-count limits. It required the taxpayer to leave the United Kingdom in a substantial sense, relinquish usual residence here and return only as a visitor. Property retained in the United Kingdom had to be used consistently with that status. Paragraphs 2.7 to 2.9 were to be read together and contemplated the same evaluative inquiry as the distinct-break requirement.
5. IR20 paragraph 2.2 provided a distinct route for full-time employment abroad, subject to its stated conditions. The full-time employment was itself the basis for dispensing with the wider inquiry. Employment beginning after the start of a tax year could not confer non-resident treatment for the preceding year.
6. A practice differing from the published guidance could generate an expectation only if it was so unambiguous, widespread, well-established and well-recognised that it communicated a commitment to the relevant group. The evidence showed, at most, that scrutiny of residence claims became more frequent around 2001. It did not establish an earlier settled practice of applying different criteria.
7. Lord Mance would have allowed the appeals on the primary issue. He considered that a fair reading of IR20 substituted specifically delineated routes to non-residence for the difficult common-law inquiry and did not implicitly require a distinct break.

1. United Kingdom Supreme Court: By a majority, dismissed the appeals and affirmed the dismissal of the judicial review applications.
2. Court of Appeal: Ward, Dyson and Moses LJJ dismissed the substantive applications for judicial review: [2010] EWCA Civ 83. The court had earlier allowed appeals from the refusals of permission and directed that it would determine the applications itself.
3. Administrative Court: Wilkie J refused the first appellants permission to apply for judicial review. Lloyd Jones J separately refused the second appellant permission.
4. Earlier Court of Appeal stage: In the first appellants’ proceedings, the court directed that judicial review should be determined before their statutory tax appeal and remitted the permission question to the Administrative Court: [2008] EWCA Civ 933.