In A Taxpayer v HMRC [2022] TC08464, the First Tier Tribunal held that a taxpayer’s need to be in the UK to care for her alcoholic sister’s minor children constituted exceptional circumstances for the purposes of the statutory residence test.
Exceptional Circumstances
In one of the first cases dealing with the Statutory Residence Test (‘the SRT’), the First Tier Tax Tribunal has helpfully clarified a number of aspects surrounding when days may count as ‘exceptional circumstances’. Up to 60 such days may be excluded from the SRT’s day-count calculations.
The case gives useful guidance on what it means to be ‘prevented from leaving the UK’ and also on whether ‘foreseeable’ situations can count as exceptional.
Background
An individual’s liability to UK tax on their income and gains depends on the individual’s residence status in the UK. Whether an individual is resident for UK tax purposes is determined by the rules known as the statutory residence test (‘the SRT’) contained in Schedule 45, the Finance Act 2013.
The SRT involves a detailed three-step test, with each step to be taken in turn:
1. The automatic overseas test (also known as the automatic non-resident test);
2. The automatic UK test (also known as the automatic resident test); and
3. The sufficient ties test.
For each of the above three steps, a key consideration is the number of ‘days’ an individual spends in the UK.
Exemptions?
For the purposes of day counting under the SRT, the general rule is that an individual is considered to have spent a day in the UK where the individual is present in the UK at the end of that day (i.e. at midnight).
However, there are exceptions to this rule. One of the main ones is the ‘exceptional circumstances’ exemption.
For an individual to be able to rely on the exceptional circumstances exemption, each of the following conditions must be satisfied:
1. The circumstances must be exceptional;
2. The circumstances were beyond the individual’s control;
3. The circumstances prevented the individual from leaving the UK;
4. The individual would not be present in the UK at the end of the day but for those circumstances; and
5. The individual intended to leave the UK as soon as those circumstances permitted.
If the individual is able to prove, on the balance of probabilities, that the above conditions are met, then (subject to the cap below) the days spent in the UK by the individual during the period of exceptional circumstances will be disregarded under the SRT.
Examples of exceptional circumstances contained in statute include ‘national or local emergencies’ (e.g. war, civil unrest or natural disasters) and ‘a sudden or life-threatening illness or injury’.
It is useful to note that the exemption is subject to a cap - the maximum number of days which can be ignored due to exceptional circumstances is limited to 60 days per tax year. From the 61st exceptional day, any midnights spent in the UK will constitute days spent by the individual in the UK, regardless of whether the exceptional circumstances continue to exist, or new exceptional circumstances arise.
Facts
While the case does not explicitly say so, the facts of the case suggest that the taxpayer and her husband had taken careful tax advice about their position. The taxpayer left the UK just one day before the end of the previous tax year, and – as will be seen below – was right up against her limit of days she could spend in the UK without remaining UK resident.
In more detail
For the 2015/16 tax year, the taxpayer declared herself a non-UK tax resident on her self-assessment tax return, having moved with her daughter to Ireland on 4 April 2015. Her husband appears to have remained resident in the UK.
In March 2016, the taxpayer received dividends of approximately £8 million from the family company. As a non-UK resident, she would not be liable to pay UK income tax on the dividends.
For the purposes of the SRT, the taxpayer was not automatically overseas or automatically resident, and thus the sufficient ties test applied. With the taxpayer having three ties to the UK – family, accommodation and the 90-day tie – and having been a UK resident in the previous tax year, the taxpayer would be considered a UK resident if she spent 46 days or more in the UK during the 2015/16 tax year.
Having spent over 46 days in the UK, HMRC deemed the taxpayer to be UK resident, and amended her 2015/16 self-assessment tax return to reflect additional tax due of approximately £3.15million.
The taxpayer appealed the assessment, relying on the ‘exceptional circumstances’ exemption. In doing so, the taxpayer claimed that 6 days spent in the UK - during two separate visits in December 2015 and February 2016 – were due to exceptional circumstances concerning the taxpayer’s need to care for her alcoholic and suicidal sister, and her sister’s minor children.
The removal of these 6 days would make the taxpayer non-resident under the SRT.
The Tribunal’s Decision
Notwithstanding the Tribunal’s acknowledgement of the taxpayer’s vague and inconsistent evidence – including her failure to substantiate the claim that her sister was suicidal – the tribunal permitted the appeal.
In coming to this decision, the Tribunal rejected HMRC’s narrow interpretation of the exceptional circumstances exemption, asserting there was no statutory basis for HMRC limiting the operation of the exemption.
In particular, the Tribunal dismissed each of HMRC’s submissions that:
1. the taxpayer’s ability to foresee a need to care for her sister upon her move to Ireland precluded a finding of exceptional circumstances;
2. the exceptional circumstances exemption does not apply to those who came to and remained in the UK due to a moral obligation or an obligation of conscience to care for another;
3. the exceptional circumstances exemption could only apply to those already in the UK, and whilst in the UK, the exceptional circumstances prevented them from leaving.
The Tribunal found that the taxpayer’s need to care for her sister’s minor children, during December 2015 and February 2016 constituted exceptional circumstances. The Tribunal accepted that these circumstances were beyond the taxpayer’s control, that she was unable to leave the UK until the situation had been stabilised, that she would not have been in the UK during these periods but for the need to care for her sister and minor children, and that the taxpayer intended to leave the UK as soon as those circumstances permitted.
As a consequence, the 6 days spent in the UK during these periods were not to be counted in the taxpayer’s day count under the SRT, thus making the taxpayer non-UK resident and no longer liable to pay the £3.15m tax bill.
Key Points
The Tribunal’s judgment brings into focus the interpretation of the statutory exemption, highlighting that:
1. Exceptional circumstances can apply even where the circumstances are foreseeable. Foreseeability may be an element, but it is not a determining factor of the application of the exemption.
2. A wide view should be taking of what it means to be prevented from leaving the UK. This not only applies to physical restrictions (such as fog at the airport) but – according to the Tribunal – can also apply to legal, moral or conscientious obligations. It was noteworthy in the case that the taxpayer did in fact have access to a private jet, so could – in theory – have flown back to Ireland each evening and returned the following morning. However, the Tribunal dismissed this as impractical.
3. The exemption applies to individuals who come to the UK due to the exceptional circumstances, not only to those who are already in the UK.
- To determine whether the exemption applies, there is no requirement to consider the reason why an individual came to the UK, or whether the individual was already in the UK – the exemption merely looks at the taxpayer’s circumstances at the end of a particular day and whether a taxpayer is prevented from leaving the UK.
- This directly contradicts HMRC’s Residence, Domicile and Remittance Basis Manual, which notes that the exemption will ‘usually only apply to events that occur while an individual is in the UK and which prevent them from leaving the UK’ (emphasis added) (RDRM13240) and ‘will generally not apply in respect of events that bring an individual back to the UK’ (RDRM13250).
What does this mean going forward?
The exact consequences of this case remain to be seen, but it is abundantly clear that the Tribunal felt that the ‘exceptional circumstances’ exemption has a wider scope than initially suggested by HMRC.
One point which remains unclear is whether being ‘prevented’ from leaving the UK only applies if an individual is prevented from going to their ‘normal’ or ‘natural’ destination. For instance, if someone is prevented from flying to (say) Hong Kong (for instance because of coronavirus restrictions) might it be said that they are not prevented from leaving the UK? They could in theory go to France (or hundreds of other countries) – even though they have no plans, desire or intention to do so. Even at the height of the pandemic, some destinations (such as Sweden) were still open. This case does not decide the point, but the comments about it being impractical for the taxpayer to fly to Ireland every evening, suggest that a wider interpretation may be applied here.
Is the case final?
In theory, it is possible for HMRC to appeal the case (on matters of law); however, we consider this to be unlikely on the basis that:
a) the Tribunal found various things as a matter of fact, which cannot be appealed; and
b) the FTT’s decision (while unfavourable to HMRC) is not legally binding.
As it currently stands, HMRC may find comfort in the fact that it can claim the case as one ‘very much decided on its own facts’, and that there is no guarantee that another First Tier Tribunal will adopt the same conclusions. If, however, HMRC were to appeal to the Upper Tier Tribunal (and beyond) and lose the case, this would set a binding precedent which will be much more difficult to diverge from.
It will be interesting to see whether HMRC will change the wording of their manual to reflect the Tribunal’s judgment, or continue to retain a narrow interpretation of the exceptional circumstances exemption. For the time-being individuals may be best advised to stick to HMRC’s guidance where they can. However, some reassurance can be taken that they have this case to fall back on if necessary.
Written by Esther Hong.