Court of Appeal provides helpful guidance in first statutory UK tax residence decision

Steven Porter, tax expert at Pinsent Masons, said: “The court has given clear guidance on how the question of ‘exceptional circumstances’ should be addressed. While the guidance is for the First-tier Tribunal, it is equally helpful for taxpayers and their advisers trying to grapple with these complex rules.”

The case (27 pages/574 KB) revolved around a taxpayer’s residency status for the 2015-16 tax year, which significantly impacted her UK tax liabilities. The taxpayer argued that she was not a UK resident during that year and therefore not subject to UK taxation on a substantial dividend received during that year. However, HM Revenue and Customs (HMRC) contended that she was a UK resident based on the statutory residence test (SRT) outlined in the Finance Act 2013 (686 pages/16.6 MB). There are a number of complex provisions in the SRT which determine how many days an individual can spend in the UK without becoming resident. In this case, the taxpayer needed to spend no more than45 days in the UK during the year in order to remain non-UK resident.

It was accepted that, applying the usual rules of a day “spent” in the UK, she would have spent 50 days in the UK during that year. She argued that the five extra days should not be counted because she was prevented by exceptional circumstances from leaving the UK. These circumstances were that her sister was suffering from alcoholism and depression and had reached crisis point and her children were not being appropriately cared for, so the taxpayer therefore stayed longer than planned in order to stabilise the position.

The First-tier Tribunal (FTT) decided in favour of the taxpayer – that she had been prevented from leaving the UK by the “exceptional” circumstances relating to her sister’s health and the need to care for her sister’s children. The Upper Tribunal (UT) then overturned that decision, concluding that she had not been prevented from leaving and that the circumstances were not “exceptional”.

However, the Court of Appeal reinstated the FTT’s decision. It was held that prevention can include a taxpayer who was not under any legal obligation to stay, nor physically prevented from leaving, but has no “real choice” in “practical terms”. Under this rule, “exceptional” means out of the ordinary course, unusual, special or uncommon, but need not be unique, unprecedented or very rare. The FTT had decided that the circumstances were exceptional based on their findings of fact and, since these were not perverse or unreasonable, the appellate courts cannot disturb those conclusions.

Porter said: “The extent of moral obligation is clearly going to be very fact specific. The taxpayers will need to be in a position to explain exactly what it was that prevented them from leaving the UK and why it was an exceptional circumstance in their personal case.”