In 1963, Elizabeth Taylor and Richard Burton starred in a film, the VIPs, set in a fog bound Heathrow airport. A group of travellers needed to get to New York and were waiting for a delayed flight, writes Gerry Brown, trust and estate planning expert at QB Partners.
One of the characters, a film producer played by Orson Welles, needed to leave London by midnight if he was to avoid becoming a UK tax resident and thus incurring a substantial tax bill.
Around 50 years later, the Finance Act 2013 reformed the mish-mash of law and practice that had determined UK tax residence for the previous two hundred years by introducing a statutory residence test (SRT).
Some 10 years later, one key element of the SRT was, for the first time, the subject of a hearing by a tax tribunal.
On 4 April 2015, the taxpayer, known in this case simply as “A” moved from the UK to Ireland. During the following tax year, 2015-16 (the relevant year), A’s husband transferred shares to her on which she received approximately £8m ($9.8m, €9.2m) of dividends.
A completed her 2015-16 self-assessment tax return on the basis that she was not UK resident. HM Revenue and Customs (HMRC) opened an enquiry into that return and decided she had exceeded the permissible number of days in the UK, and so was resident in the UK for tax purposes.
A appealed to the First Tier Tax Tribunal (FTT), where she was successful but HMRC then took the appeal to the Upper Tribunal.
It was agreed that she had been in the UK for 50 nights in the relevant year, which was five days more (in two visits) than the 45 days allowed by the SRT (she had ongoing UK links).
It was also agreed that A would be UK resident for the relevant year unless the extra five days satisfied a legislative provision that a day is ignored for the purposes of the SRT day count in relation to a person if:
- “(a) the person would not be present in the UK at the end of that day but for exceptional circumstances beyond the person’s control that prevent the person from leaving the UK, and
- (b) the person intends to leave the UK as soon as those circumstances permit”.
The exceptional circumstances claimed by A were “the need to care for the consequences of her twin sister’s alcoholism and depression”.
The FTT had found that “the need to care for the consequences of her twin sister’s alcoholism and depression” did not constitute exceptional circumstances, because they were not “in themselves uncommon or unusual illnesses”, and that this remained the position taking into account that it was “true that both conditions cause much suffering and distress both for the individual concerned and for that individual’s family”.
The Upper Tribunal agreed with this analysis.
However, that the FTT concluded that “the combination of the need for the taxpayer to care for her twin sister and, particularly, for her minor children at a time of crisis caused by the twin sister’s alcoholism does constitute exceptional circumstances”. This element of the FTT decision was challenged by HMRC.
The Upper Tribunal disagreed with the FTT analysis: “…, moral obligations are not themselves exceptional circumstances; they are shaped by society and the subjective feelings of an individual. Where a person feels a moral obligation towards (say) a relative whose circumstances are exceptional, the moral obligation does not form part of those circumstances. Accordingly, the person is not prevented by exceptional circumstances from leaving the UK; he is instead prevented by his sense of moral obligation.”
The exceptional circumstances must “prevent” the taxpayer from leaving the UK. “Prevent” means “stopping something from happening or making an intended act impossible”; it is “different from mere hindrance”. The exceptional circumstances must have stopped or rendered impossible leaving the UK; not made it more difficult to leave.
The taxpayer must leave the UK as soon as the exceptional circumstances cease.
The approach adopted by HMRC may seem harsh. However, A did not advance evidence in support of her contentions. She claimed that “nobody else…could provide the care needed” but:
- the sister’s two friends visited “several times a day” to “check up on” her;
- her brother was “keeping a close eye on her”; and
- when A left after the first visit, she put in place no arrangements relating to her sister or her children, so the existing care provided by the friends and the brother continued – there was no evidence or findings that the position was any different after the second visit.
On the second visit she had found time to go to a restaurant, an optician and a children’s hospital, and been unable to explain why she had visited those locations.
The SRT was introduced to bring certainty to the problem of determining tax residence. On the evidence of this case, HMRC will instigate intensive enquiries where exceptional circumstances are claimed.
This article was written for International Adviser by Gerry Brown, trust and estate planning expert at QB Partners.