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For many British expats, the solids have just hit the air conditioning. A recent tax case has made it clear that if you are a British national living in Hong Kong but have maintained connections with Britain, you are at risk from the British taxman, who will be happy to charge you 50 per cent tax on your world income. So Kung Hei Fat Choi from me but not from him.

The Court of Appeal has just rejected a British national’s claim that he did not owe British taxes because he lived in the Seychelles and handed him a £30 million (HK$359 million) tax bill for the years 1993 to 2004.

This decision could affect thousands of British expats who have lived in Hong Kong for many years but who spend time in Britain. All may be at risk from an increasingly aggressive Revenue service (HMRC) whipped into a frenzy by a government desperate for more tax to cut an increasing national deficit.

Ignore this at your peril.

This case in question involved British businessman Robert Gaines- Cooper, who had argued he did not owe taxes in Britain because he has been a resident of the Seychelles since 1976. He pointed to the rule in HMRC’s own leaflet IR20 that defines a non-resident as one who spends less than 91days per year in Britain. The court said a taxpayer must show a “distinct break” from social and family ties to Britain and that spending all but 91days outside the country is not sufficient to establish non-resident status.

This is not a change in stance, just a reinforcement of the existing rules. Those rules have been widely misinterpreted. There never has been a rule which says that the number of days spent in Britain is the absolute test of residency.

Most countries operate similar systems. If you spend a certain number of days there, you must necessarily be resident – even if already tax resident elsewhere as well. If you don’t spend the requisite number of days, you may still be resident because that country is the centre of your economic or social life, or place of closest connection. It’s this latter point which has often been missed. The court confirmed that HMRC were bound by the terms of IR20 but there was an implied condition that to be treated as non-resident, there must be a distinct break with Britain and a severing of all social and family ties.

Gaines-Cooper had a house in Henley where his wife and son lived and where he kept a valuable collection of art and guns. His son was at school in Britain. He had an British mobile phone, his will was drawn up under English law and he regularly attended Ascot racecourse. Therefore he could be treated as a British resident even after his ostensible departure in 1976. Apart from the Ascot bit, many British nationals living in Hong Kong are in the same boat, which may now reveal itself to be sailing in a cesspit and holed below the waterline.

The court deemed that the correct interpretation of tax residency status turned on whether England had remained the taxpayer’s “centre of gravity of his life and interests” and that the 91- day rule could not establish nonresidency status on its own, rather it was “important only to establish whether non-resident status, once acquired, has been lost”.

In other words, if you spend more than 91days in Britain, you are definitely resident. If you spend less than 91days, you may not be resident but must look at other factors, too. The court agreed.

Gaines-Cooper plans to appeal the case to the Supreme Court. His counsel told the BBC that HMRC was “playing games” and mischievously reinterpreting its own guidance, turning it “from a sensible, practical, guide into something meaningless and, which is worse, a devious trap”.

HMRC may now look to crack down on more expats. It has launched a sustained attack on people who have used residence and domicile rules to reduce their tax bills. Last year a HMRC team was established to investigate some of Britain’s richest individuals, including expats. It follows the enactment of the £30,000 nondomicile levy, introduction of the 50 per cent top income tax rate and the super-tax on the City of London bonus pool. HMRC has said it is “looking at residency and domicile more carefully” and is “committed to ensuring all those resident in Britain pay the tax due and this judgment will aid that effort”.

The IR20 guidance on residency was replaced last year with a new booklet called HMRC6. This emphasises the importance of pattern of lifestyle in determining UK residency and states that just because you leave the UK to live or work abroad, you are not necessarily non-UK-resident for tax purposes.

So what to do? You can change your lifestyle to remove the tax danger but for many, that will neither be desirable or feasible. Selling the British home and taking your children out of school in Britain may be a very unattractive option. The alternative is to plan so that if you are caught out, your exposure to British tax will be limited. Without proper planning, you may have to pay British tax at up to 50 per cent on each and every source of worldwide income.

So review your arrangements. They have probably been made on the assumption that you are not a British tax resident. That assumption may be incorrect. Or at least HMRC may not agree.

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