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KEY POINTS
- The existing test for residence is not sufficiently precise.
- Different treatment of short-term and long-term visitors to the UK.
- Would a statutory test based on the US test make the position more clear?
- The concept of ordinary residence could be maintained.
The concept of residence has long been the primary connecting factor for determining liability in relation to UK taxation. This has applied for both income tax and capital gains tax purposes and, in certain respects, for capital transfer tax and inheritance tax purposes.
The importance of residence for tax purposes will be greater still when the proposals set out in Pre-Budget Report note 18 are implemented.
At the moment, persons resident but domiciled outside the UK are liable to income tax and capital gains tax, broadly speaking, only on income and gains arising in the UK or arising abroad but remitted to the UK.
Under the proposals, there will be further tax on persons resident in the UK for seven or more years.
The concept of residence is widely used by other countries and it is capable of being a simple and objective test. The purpose of this article is to consider the current UK definition of residence and to suggest a statutory test would be preferable, particularly in the light of Pre-Budget Report proposals.
Residence as currently defined
The definition of residence for tax purposes has been considered by the courts in a number of cases, some of which are many years old.
The cases of Levene v CIR [1928] 13 TC 486 and Lysaght v CIR [1928] 13TC 511 contain the most authoritative pronouncements on the concept of residence by the House of Lords.
In Lysaght, the taxpayer was born in England of Irish parents. He lived in England until 1919, and had become managing director of an English company. He retired as managing director in 1919 but continued to act as an 'advisory director' and sold his house in the UK.
From 1920 he lived with his family in Ireland. For the years 1922-1923 and 1923-1924 he visited the UK for business purposes for 101 and 94 days respectively, usually staying at an hotel. He claimed he was not resident in the UK for those years.
The House of Lords upheld the decision of the Special Commissioners that on the evidence he had remained resident in the UK for both years.
Viscount Sumner held that 'it does not follow that keeping up a permanent establishment abroad and having none here is incompatible with being resident here if there is other sufficient evidence of it'.
The House of Lords held that the question of residence or ordinary residence is one of degree and there is no technical or special meaning attached to either expression for tax purposes.
It can be seen from this how imprecise the test of residence really is. The test being one of degree lays the way open for argument and does not help the professional adviser in advising those wanting guidance on when and in what circumstances they will gain, or lose, UK residence.
IR20
For some years most advisers have looked to the formal views of HMRC as expressed in booklet IR20. These views, although not of statutory force, have been of great assistance in the past to advisers in enabling specific advice to be given.
This has been helpful in the light of the other general tests laid down by the cases as shown in Lysaght. While it has been accepted that IR20 does not have legal force and in some respects it is probably concessionary, taxpayers have felt able to rely on it in organising their affairs and their visits to the UK.
While IR20 is a very helpful statement of HMRC's practice, areas of uncertainty have been shown to exist. This was demonstrated in Gaines-Cooper [2007] STC (SCD) 23 (SpC 568) in which a taxpayer who had relied on the day count test set out in IR20 was nonetheless held to be resident in the UK.
Notwithstanding the fact that HMRC have subsequently indicated that the Gaines-Cooper case does not affect the application of IR20, uncertainty remains.
Two tests
It will be recalled that IR20 sets out two tests of residence for those coming to the UK. A person will be resident in the UK as a short term visitor if:
- the person is in the UK for 183 days or more in the tax year; or
- the person visits the UK regularly and after four years the visits during those years average 91 days or more a tax year. However, for this purpose any days spent in the UK for exceptional circumstances beyond the person's control, for example, the illness of the person or a member of his or her immediate family are ignored for the 91 days (but not the 183 day test).
In applying these tests, days of arrival and departure are generally treated as days of absence. But not always, and the circumstances when they will be treated as days of presence in the UK are not spelled out in IR20.
In Gaines-Cooper, HMRC felt the taxpayer was overstepping the mark and these were counted as days of presence. The Special Commissioner held that the taxpayer was to be treated as present in the UK if he was in the UK at the end of the day.
Longer term visitors are treated differently. They are treated as resident in the UK from the day of arrival to the day of departure, if they come to the UK for a purpose (for example employment) that will mean the person remains for at least two years.
The same treatment is applied if the person owns or leases accommodation in the UK in the year he arrives.
The rules in IR20 concerning a person leaving the UK are broadly similar to those for persons arriving in the UK but with one major difference.
Reference is also made to the 183-day test and 91-day test, although there is also a requirement that taxpayers show they have left the UK permanently or intend to live outside the UK for three years or more. It is here that the taxpayer in Gaines-Cooper failed.
There is a special rule for persons working full time abroad where the absence from the UK and the employment abroad last for at least a whole tax year and, during the absence, any visits to the UK total less than 183 days in any tax year and average less than 91 days per tax year.
Current uncertainty
The uncertainty that surrounds the concept of residence for taxation purposes makes it difficult for advisers to give clear-cut advice, particularly to those who may intend to come to the UK. This is a factor which may dissuade people from coming to the UK.
In the light of the proposals in the Pre-Budget Report concerning the taxation of non-domiciliaries after seven years residence, this uncertainty is all the more unsatisfactory.
It would therefore be appropriate to introduce a more certain, statutory test of residence for taxation purposes. It would be unsatisfactory merely to tinker with the test of residence by excluding days of arrival and departure as days of absence from the UK as proposed without, at the same time, undertaking a more fundamental reappraisal of the test.
Enactment of a statutory test
There are a number of examples of other countries which adopt a statutory, objective test of residence, notably the United States and the Republic of Ireland.
A test equivalent to that currently used by the United States for persons who are neither citizens nor green-card holders was in fact advocated in the 1988 consultative document issued by HMRC.
Under a US-style test, an individual would be allowed 180 days per tax year in the UK before becoming resident, but this 180 days would be made up of all the days in the current year, one third of the days in the preceding year and one sixth of the days in the year before that.
For example, a person who was present in the UK for 50 days in year 1, 120 days in year 2 and 138 days in year 3 would be resident under a US-style test. However, a person present less than 30 days in a year would not be resident in that year.
Days of arrival and departure would be treated as days of presence in the UK, which seems more appropriate in the current era of greater personal mobility, particularly if it is coupled with a higher day-count threshold.
This type of test would enable an adviser to tell a client for certain whether a proposed period in the UK would render the client UK resident for taxation purposes in that tax year. By weighting residence in the current tax year more heavily than residence in previous tax years, the test also seems to take a more realistic approach.
Retaining ordinary residence
If a statutory test of residence were adopted, it might be thought too complex to have an additional statutory test for ordinary residence.
However, the experience of other countries shows that it is possible to have statutory tests for both residence and ordinary residence.
In the Republic of Ireland, for example, a person is treated as ordinarily resident after being resident according to the statutory test for three years.
Retaining a statutory test of ordinary residence seems desirable, because the concept is adopted in a number of statutory provisions and to remove the concept of ordinary residence would require a wide ranging reconsideration of those provisions.
New era, new test
As it seems that the test of residence will be crucial to any long term treatment of non-domiciliaries, the test should be put on a clear-cut and statutory basis. This will avoid unnecessary uncertainty and complication both for HMRC and for taxpayers, particularly those who may be contemplating coming to the UK.
The Society of Trust and Estate Practitioners has in the past advocated the adoption of a statutory day count test based on the US model, and it will continue to suggest this approach is adopted following the Pre-Budget Report proposals. In the twenty first century it is no longer good enough to have to rely on early twentieth century cases decided in a different era and which lack the certainty which is so important in an age of greater mobility.
Owen Clutton is a partner in the private client department of Macfarlanes. He can be contacted on 020 7831 9222 or owen.clutton@macfarlanes.com
