The First-tier Tribunal concluded that the taxpayer’s need to care for her twin sister and her sister’s two minor children at a time of crisis caused by the sister’s alcoholism constituted “exceptional circumstances” for the purposes of the exemption from the statutory residence test (SRT) day-counting rule in paragraph 22(4) of Schedule 45 to the Finance Act 2013.
In A Taxpayer v HMRC [2022] UKFTT 133 (TC), the unidentified taxpayer was resident in the UK at periods up to and including the 2014/15 tax year, when she had lived with her husband and their two children in the UK. In September 2014, her husband transferred a substantial shareholding to her. On 4 April 2015, she moved with her younger daughter to Ireland, while her husband remained in the UK in their former home. They were not separated. In the period before 31 March 2016, she received dividends of circa £8 million.
The taxpayer declared herself, on her self-assessment tax return for the 2015/16 tax year, as non-UK resident. Under the SRT, she was neither automatically resident in the UK nor automatically non-resident in the 2015/16 tax year. For the purposes of the SRT, the taxpayer had three ties to the UK – family, accommodation and a 90-day tie. She had also been resident in the UK in at least one of the previous three tax years. Under the ‘days spent’ test, therefore, she would be considered resident in the UK if she had spent 46 days or more in the UK, and non-resident in the UK if she had spent 45 days or fewer in the UK.
By 21 November 2015, the taxpayer had used up 44 days of her 45-day allowance such that two more nights in the UK would make her UK resident. She accepted, in the light of the receipt of the dividends that there was “a lot riding on the day count” but, on 18 to 20 December 2015 and 15 to 19 February 2016, she spent a further six days in the UK.
Via a closure notice issued on 10 March 2020, HMRC amended her tax return to show additional tax due of £3.15 million. The taxpayer appealed, arguing that the six days under consideration fell under the ‘exceptional circumstances’ exemption’ and should be disregarded.
The FTT held that the taxpayer’s need to care for her twin sister and her sister’s two minor children at a time of crisis caused by the sister’s alcoholism did amount to ‘exceptional circumstances’ and, consequently, six of the days on which the taxpayer had been present in the UK at midnight during the 2015-16 tax year were ignored for the purposes of the SRT.
In reaching its decision, the FTT found that the exemption was intended to prevent injustice that could arise from a strict application of the SRT day-counting rules. The test had to be applied at the end of each relevant day that the taxpayer remained in the UK and the burden of proof was on the taxpayer to show that the conditions for the exemption were satisfied according to the ordinary civil standard.
The ‘exceptional circumstances’ exemption, the FTT said, contained four cumulative conditions, all of which had to be satisfied:
- The circumstances were exceptional
- The circumstances were beyond the taxpayer’s control
- The circumstances prevented the taxpayer from leaving the UK
- The taxpayer intended to leave the UK as soon as the circumstances permitted.
Determining whether these conditions were satisfied was an evaluative exercise to be determined in the light of all the relevant facts and circumstances. While accepting that the exemption was tightly drawn, the FTT strongly rejected HMRC’s arguments for an even narrower construction.
Firstly, HMRC submitted that it was necessary to exclude foreseeable circumstances from the exemption because a taxpayer could plan ahead to avoid those circumstances from preventing them from leaving the UK. The FTT did not agree, saying there was no requirement in the statutory language for foreseeability or non-foreseeability. Foreseeability might be a relevant factor, but it was not a determining factor.
Secondly, HMRC submitted that the exemption covered only legal and physical obligations. The word ‘prevent’ in paragraph 22(4) should be construed to preclude a moral obligation or an obligation of conscience, such as caring for a family member or other person. The FTT did not agree. “The word ‘prevent’ can encompass all manner of inhibitions – physical, moral, conscientious or legal – which cause a taxpayer to remain in the UK. To read in the restriction that HMRC suggests, is not an exercise in statutory interpretation but rather an exercise in reading words into a statute which are not there,” it said.
Thirdly, HMRC submitted that the exemption applied only to persons who were already in the UK and were then overtaken by ‘exceptional circumstances’ that prevented them from leaving. The FTT did not agree, saying HMRC’s view was entirely unsupported by the statutory language in paragraph 22(4) and was also contrary to HMRC’s own published practice.
Fourthly, HMRC argued that the term ‘exceptional’ should be given a narrow meaning. The FTT did not agree. HMRC, it said, had “misapplied the concept of purposive construction by seeking, in effect, to read in limiting words”.
The FTT, allowed the taxpayer’s appeal. Therefore, the taxpayer could spend more than 45 days in UK and remain non-UK resident due to the exceptional circumstances’ exemption.
“This is a very interesting case, not only because it is the first court case regarding the SRT but because it’s insightful” said Lynette Chaudhary, Tax Director at Sovereign Tax Services. . “The judgment states that ‘moral obligations and obligations of conscience’ – including those arising by virtue of a close family relationship – can qualify as exceptional circumstances, and those obligations may be strong enough to prevent a taxpayer leaving the UK.”
A person’s residency position is of paramount importance in ascertaining their scope of liability to tax, For any advice on the UK Statutory Residence Test, please contact our UK Chartered Tax team below.
