The issue of residence and/ or ordinarily residence in the UK has attracted fresh media attention and recent cases through the English courts have left some individuals asking important questions about their status.
It seems this is an area of increasing intensity of inquiry or scrutiny by HMRC in their pursuit of higher tax take. A person who is resident but not ordinarily resident is liable to tax on his UK earnings – and his foreign earnings are taxable only on the remittance basis. If, however, he is resident and ordinarily resident he is liable to tax on the whole of the earnings from the employment, irrespective of how little of those earnings are earned in the UK.
Ordinarily Resident
Generally speaking, HMRC's guidance states that if an
individual comes to the UK permanently or for at least three years,
then that individual will be treated as resident in the UK rather
than as a visitor. Unsatisfactorily, there is no statutory
definition of ordinarily residence though in terms of broad
guidance, the courts have held that ordinary residence is a regular
habitual mode of life in a particular place, which is both:
- adopted voluntarily; and
- adopted for one or more settled purposes.
On 1 February 2010 the First Tier Tribunal held in Tuczka v HMRC [2010] UKFTT 53 (TC) that a taxpayer was ordinarily resident in the UK even though he had spent less than three years here. In this case Dr Tuczka was an Austrian national who came to work in the UK but who had no intention of staying here more than three years; his purpose in coming here was to obtain some international work experience and to return to Austria.
What this case highlighted was that although Dr Tuczka clearly intended to leave the UK eventually, his intentions were irrelevant – other than to show his UK residence was voluntarily adopted. What mattered was whether there was a degree of settled purpose. In his form P86 Dr Tuczka said he moved to the UK to work and expected to be here for two and a half years. The working bit was relevant, but the fact that he was going to leave within three years was irrelevant. What was important was his purpose. His purpose was to work in the UK from the outset (found to be a settled purpose), therefore he was to be ordinarily resident from the outset.
One important fact in this case was that Dr Tuczka had purchased a flat in the UK during the three year period that he was here. HMRC insisted that the purchase of a flat in the UK by Dr Tuczka meant that he was ordinarily resident immediately. Contradictorily, HMRC's guidance on residency (IR20, now new HMRC6) at paragraph 3.12 stated that:
"if you are treated as ordinarily resident solely because you have accommodation here and you dispose of the accommodation and leave the UK within three years of your arrival, you may be treated as not ordinarily resident for the duration of your stay if this is to your advantage".
However, individuals will take assurance from Mr Clark's closing statements that:
"[the] acquisition of a property would not necessarily prevent an individual from establishing that he or she was not ordinarily resident provided that the property was sold within the period specified in IR20; in other words an individual could buy instead of renting, based on the same commercial approach as expressed by Dr Tuczka and still not prejudice the ordinary residence status as long as the property was held for a limited period".
Against the backdrop of Tuczka, the decision in Philip George Turberville v HMRC [2010] UKFTT 69 (TC) may offer a glimmer of hope to taxpayers. Here Mr Turberville was UK resident until leaving for a three-year contract in the US. He was made redundant whilst in the US but returned to the UK for three months to help the administrators of the company that had made him redundant. He then left the UK for Monaco. The questions for the Tribunal were whether his decision to take up employment in the US meant that he lost ordinary residence in the UK and whether his return to the UK for three months restored his ordinary resident status. The Tribunal found that on the facts taken together the period of return after redundancy did not mean that the taxpayer became ordinarily resident in the UK as there was not the necessary degree of settled purpose.
This case demonstrates that the Tribunal will consider all the facts and circumstances. In Turberville, for example, the mere fact that the taxpayer had spent more time than originally intended in the UK was not decisive; it was necessary to consider the quality of that time.
Resident
Attempting to leave the UK tax net triggers a different aspect of residence.
In R (on the application of Davies, James and Gaines-Cooper) v
HM Revenue & Customs [2010] EWCA Civ 83, released on 16
February 2010, the court found that a British-born businessman,
Robert Gaines-Cooper, was ordinarily resident in the UK despite
moving to the Seychelles in 1976 and spending less than 91 days in
the UK each year. The decision makes three important points:
- In the case of paragraph 2.2 of IR20, the taxpayer must demonstrate that he has left the UK to work full time abroad and has done so for the whole of the relevant tax year. However, he does not have to demonstrate a distinct break from the UK.
- In the case of paragraphs 2.7 to 2.9, the taxpayer must demonstrate a distinct break from former social and family ties within the UK.
- The number of visits to the UK does not establish non-resident status but once that status is acquired, the number of visits to the UK may result in it being lost.
Although the taxpayer lost, on his (unfavourable) facts, the case
is still useful for others in that it confirmed and emphasised that
HMRC's guidance on residency is binding on HMRC so that if a
taxpayer is able to demonstrate that his or her facts fall within
the guidance, then he or she is to be treated accordingly by HMRC.
It is clear that new HMRC6 is simply "guidance" and that
individuals will need to consider carefully (and be advised
accordingly) as to what steps need to be taken in their particular
case to ensure that they lose the adhesive qualities of their UK
residence status.
Taxpayers who are contemplating becoming non-UK resident need to be cognisant of the fact that simply spending time in another jurisdiction is unlikely to be sufficient evidence that they have left the UK permanently and have become non-resident and not ordinarily resident in the UK. There must be clear evidence of a distinct break from previously held ties in the UK.
There is one key exception to this rule: going abroad to work full time. Under paragraph 8.5 (of HMRC6), in that case, evidence of severance of social and family ties in the UK is not required. There are separate tests that must be satisfied when following that route but clearly it should be the preferred route for those looking to escape the UK tax net.
For a link to the mentioned case law please follow:
http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00366.html (www.bailii.org/uk/cases/UKFTT/TC/2010/TC00366.html).
http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00381.html (www.bailii.org/uk/cases/UKFTT/TC/2010/TC00381.html).
http://www.bailii.org/ew/cases/EWCA/Civ/2010/83.html (www.bailii.org/ew/cases/EWCA/Civ/2010/83.html).
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 18/03/2010.
