The concept of “tax residence” is fundamental to the system of UK taxation, impacting on a person’s liability to income tax, capital gains tax and in some instances inheritance tax. So it is perhaps surprising that the test of UK tax residence is currently so uncertain.
This article reviews some of the main developments in this area over the past few years.
UK tax residence:
background
A person who spends more than 183 days in the UK in a tax year is classified as a UK tax resident. Historically there was always an alternative test, based on published guidance from HM Revenue & Customs (HMRC) - Booklet IR20. Under this second test a taxpayer would also be considered tax resident in the UK if he was present in the UK for an average of 91 days a year or more, on a rolling four year period. Days of arrival and departure were disregarded for both the 183-day and 91-day test.
Based on IR20, both taxpayers and professional advisers came to rely on the principle that as long as a person’s visits to the UK were 90 days or less (excluding days of travel) they would avoid becoming tax resident in the UK.
For example, this allowed a businessman to fly from his home in Monaco to the UK on a Monday morning and return home on Thursday evening, clocking up only two days of residence (i.e. Tuesday and Wednesday) in between. By careful planning and day counting, it was therefore possible to avoid becoming tax resident in the UK.
Shepherd v HMRC
Although it was the later Gaines-Cooper case that was to grab the headlines in the popular press (“Brown attacked over millionaires’ stealth tax”), a decision of the Special Commissioners in 2005 was an early indication that HMRC were taking a harder line on taxpayers seeking to rely solely on the 91-day test, and were instead looking at a wider range of factors.
The case of Shepherd involved a British Airways pilot due to retire in April 2000. He decided to retire abroad and in October 1998 acquired a house in Cyprus for this purpose. During the tax year 1999/2000 he spent only 80 days in the UK, but the Special Commissioners decided that he was tax resident in the UK. Looking at all the circumstances he had not made a distinct break with the UK, his presence in the UK was substantial and continuous and so he remained resident in the UK during that tax year, even though he would have “passed” the 183-day and the 91-day tests.
The Gaines-Cooper case
The much-publicised case of Gaines-Cooper v HMRC in late 2006 was a further indication that the 91-day test could no longer be seen as the decisive factor. In that case the taxpayer had been careful to restrict his visits to the UK to an average of less than 91 days a year, but HMRC argued that to ignore days of arrival and departure would give a distorted view of the amount of time Mr Gaines-Cooper actually spent in the UK. Instead they sought to calculate his residence based on the number of nights he had spent in the UK.
This decision led to a furore, with HMRC being accused of moving the goalposts and ignoring their own published guidance in IR20. HMRC swiftly issued a statement to the effect that the case did not change the basis on which the 91-day test was calculated, but that the test only applied to people either coming to or leaving the UK. Because Mr Gaines-Cooper had for many years been a UK resident, in order to come within the terms of the 91-day test he had to show first of all that he had given up his UK residence. To determine this preliminary question HMRC said they were entitled to consider all relevant factors, including the pattern of his continuing visits to the UK. In looking at these visits it would be misleading to disregard days of arrival and departure. On the facts, it was decided that Mr Gaines-Cooper had never given up UK residence. Taxpayers must first show that they have really left the UK to reside elsewhere before they could look to rely on the 91-day test for calculating the time they have spent here for residence purposes.
The
2007 Pre-Budget Report - eight days in a week?
The Chancellor’s 2007 Pre-Budget Report proposed a simple but fundamental change to the HMRC day-counting practice:
“When deciding if an individual is resident in the UK for tax purposes HMRC does not currently count the days they arrive in or depart from the UK. On and after 6 April 2008, days of arrival and departure will be counted as days of presence in the UK for residence test purposes.”
This proposed change would have increased the days of UK presence for our Monday-to-Thursday, Monaco-based businessman from two to four. This would, in the Government’s view, lead to him breaching the 91-day test and becoming UK tax resident (and, in the real world, might lead to him moving his business away from the UK.)
Bizarrely, a person visiting the UK for precisely one week, say from midday on Sunday to midday the following Sunday, would actually add eight days to his day count tally!
Finance Act 2008
Following consultation the 2007 proposal was relaxed. Instead, the new rule is to include as days spent in the UK any day when the taxpayer is present in the UK at midnight. This becomes in effect a test based on nights spent in the UK, similar to the treatment applied in the case of Gaines-Cooper. This rule is subject to special provisions governing transit passengers.
The new rule only applies for the statutory 183-day test, although HMRC have confirmed that, by concession, they will apply the same treatment for the purposes of the 91-day test.
A Monday morning to Thursday evening UK visit would therefore count as three days, because the visitor is here at midnight on Monday, Tuesday and Wednesday. This outcome can perhaps be viewed as a compromise between the historic position of counting the visit as two days and the 2007 HMRC proposal that it should count as four days.
Grace v HMRC
This was another case involving a British Airways pilot, but this time initially resulted in a win for the taxpayer.
Mr Grace, originally from South Africa, had been living in the UK since 1986 and working for BA since 1988. In 1997 he decided to return to South Africa, although he continued working for BA. He bought a property in Cape Town but also kept his UK home where he used to rest before and after flights.
Mr Grace calculated his day count on the IR20 basis (ignoring days of arrival and departure) but HMRC sought to recalculate including those days. On the basis of the HMRC calculations, Mr Grace’s average UK day count was more than 90 days and also more than his time spent in South Africa. Even so, the Special Commissioner found in favour of Mr Grace.
The approach of the Special Commissioner was to look at the situation holistically to determine the ‘quality’ of the UK residence as compared to the overseas residence, including the reasons why he spent time in the UK and the existence of a genuine home elsewhere.
Mr Grace was able to satisfy the Special Commissioner that he had actually ‘left’ the UK in 1997 and after that he had closer links with South Africa. Although he visited the UK frequently and on a strict day count actually spent more time in the UK than in South Africa, his visits to the UK were only work-related, before and after flights. He spent regular breaks of two weeks at a time in Cape Town, so he could show that his presence in the UK was for temporary purposes only.
A fall from Grace?
Mr Grace’s victory was short-lived; to the surprise of many, the decision of the Special Commissioner was overturned on appeal to the High Court.
The Court decided that Mr Grace could not demonstrate a distinct break in the pattern of his life in 1997 when he claimed to have left the UK. Also, his continuing presence in the UK for purposes of employment was not considered “a temporary purpose”. So he was to be treated as UK resident for all relevant years of assessment.
It is understood that Mr Grace is considering a further appeal.
Withdrawal of IR20
IR20 was withdrawn in April 2009 and replaced by a new HMRC guidance note: HMRC6. Any hopes that this would provide some much-needed certainty are dealt a blow by the opening few lines of the introduction: “This guidance outlines our (the HMRC) view and interpretation of legislation and case law. The material is guidance only. It has no legal force, nor does it seek to set out regulation or practice.” Furthermore, HMRC6 is itself in draft form and subject to change.
But HMRC6 does give a flavour of HMRC’s approach. For example, while the 91-day test is still cited as a factor for those who have left the UK, the guidance makes clear that UK residence will be affected by other factors such as the reason for leaving, subsequent visits to the UK and any ongoing connections with the UK.
Conclusion
The one thing that is certain is that regular visitors to the UK cannot now rely on the old straightforward 91-day test to achieve or maintain non-UK resident status. The law has moved towards a much wider (as well as more nebulous) test, where the day-count is merely one factor in determining a person’s residence status, but where personal, family, work, lifestyle and other factors can all play a role in deciding a person’s residence status.
In particular, the Grace case shows that HMRC will look very closely at taxpayers who have previously been UK tax residents and now claim to have left the UK. The threshold for demonstrating that one has left the UK has certainly moved considerably higher; perhaps even moving towards the test for demonstrating a change of domicile.
The bottom line is that, as matters stand, taxpayers and their professional advisers are having to rely on a wholly unsatisfactory mixture of conflicting case law and uncertain HMRC practice in order to determine the fundamental question of UK tax residence.
The introduction of a comprehensive, precise, statutory definition of residence to provide certainty in this key area is long overdue.
Simon Malkiel is a solicitor and chartered tax adviser in the Private Client Department of Finers Stephens Innocent LLP, specialising in tax planning, UK and offshore trusts.