Feb 2010
In brief:
A long awaited judgment has been handed down in the Judicial Review of Her Majesty's Revenue and Custom's (HMRC) application of its guidance on UK tax residency, IR20. Although the taxpayers were unable to persuade the Court that if HMRC applied its guidance as published they would be regarded as non-resident as claimed, the guidance it had issued was held to be binding on HMRC. The taxpayer has a legitimate expectation that HMRC will not resile on its assurance that he should be regarded as not resident and not ordinary resident, provided that he meets the terms of that guidance. |
Residency of taxpayers working abroad In long standing guidance (originally published in 1973) and in the terms of one of its published concessions, HMRC has stated that it will regard taxpayers who leave the UK to take up full-time employment abroad as ceasing to be UK tax resident, provided that certain conditions are met. Those who are engaged in full-time self employment abroad qualify for the same treatment.
In a number of recent cases, HMRC has argued that taxpayers who understood themselves to have broken UK residence actually did not do so, either because they had never left the UK or because their employment abroad was not full-time. In particular, HMRC appears to be challenging taxpayers whose families remain in the UK while they are working abroad, especially if they perform substantive duties of the employment in the UK.
The classic example would be that of a taxpayer whose spouse and children remained UK resident while he / she worked abroad, and who worked at home a few days a month in order to facilitate this arrangement. Any taxpayer in this position is vulnerable to HMRC challenge of having remained UK resident, because he / she will not show a clear break in the pattern of his / her UK living and is unlikely to be able to show a regular pattern of full-time working abroad.
The Judicial Review hearing was to consider both whether the guidance applied and if it did, what its effect would be on the taxpayers' UK resident status.
All the taxpayers retained some links to the UK despite having extensive business interests outside the UK and working abroad. Mr Davies and Mr James, in particular, had argued that being employed full-time abroad was sufficient to break UK residence under the terms of the guidance.
HMRC claimed that social and family ties in the UK had to be cut in order for the guidance to apply, but the Court held that if the taxpayer left for full-time employment abroad in the context of paragraph 2.2 of IR20 the phrase "leaving the UK" in IR20 "connotes no more than a departure". Therefore, the existence of ongoing social and family ties are not sufficient to allow HMRC to renege on its guidance, provided those ongoing ties do not in themselves call into question the full-time nature of the employment abroad.
Application of HMRC guidance Although the decision for the taxpayers was disappointing and despite HMRC's approach in some of the earlier hearings, the Court has held HMRC to be bound by its published guidance. Therefore, to the extent that taxpayers can show they have acted exactly in accordance with that guidance, they are entitled to be treated as not resident in the UK, even if they might not be regarded as having broken UK residence under UK law.
This may be less easy to demonstrate in practice than might be imagined, because there could, for example, be more than one possible interpretation of the guidance. The Judicial Review process has also confirmed that it is not necessary, as HMRC had originally asserted, for the taxpayer to indicate which part of the guidance he / she was relying upon in his / her claim to non-residence.
IR20 v HMRC6 The Judicial Review concerned IR20, a booklet that had for many years formed the backbone of HMRC's guidance on residency.
Following changes to the law on residency introduced by FA 2008, this guidance was formally withdrawn with effect from 6 April 2009, together with all other statements of practice concerned with residence that had been issued by HMRC previously.
New guidance, HMRC6, has been issued, but remains in draft form. In addition, IR20 contained guidance that was aimed at taxpayers and their advisers. The stated aim of HMRC6 is to help unrepresented taxpayers self-assess their residency status. As its content is far from clear and in some places is contradictory, it is difficult to see how it can achieve this. Although HMRC plans both to finalize this guidance and publish new guidance aimed at represented taxpayers, tax professionals and its own staff in due course, at present nothing has been made available to these groups.
Taxpayers and their advisers therefore face an extremely difficult time in determining UK tax residency, especially as the case law that formed the basis of much of HMRC's guidance derives from a time (late 19th and early 20th centuries) when international travel was less easy than it now is and international commuting was unknown.
Full-time working abroad The critical test in determining whether a taxpayer who has left the UK is likely to have broken residence or not, is whether the employment (or self employment) is regarded as full-time and will encompass an entire UK tax year. There is no definition as such of "full-time" in this context, although HMRC6 offers the following guidance:
"UK tax law does not give a definition of 'full time employment'. The decision on whether or not you are employed abroad full-time will depend on the particular circumstances of your case. If you say that you are working abroad full time, we would expect you to be able to show that your employment:
- Has a standard pattern of hours which can be compared to a typical UK working week, or
- If your employment does not have a formal structure or fixed number of working days, it can, by looking at the local conditions and practices of the particular occupation, be compared to similar full-time employment in the country where you are working".
Taxpayers who continue to perform duties in the UK on anything other than an exceptional basis while working abroad may struggle to fall within this guidance.
Other recent cases Over the past 5 years we have seen more cases on tax residence than in the previous half-century. While two well publicized cases (Shepherd and Grace) concerned airline pilots, and others (Gaines-Cooper and Barrett) entrepreneurs, HMRC appears now to be turning its attention to directors and employees more generally, both these groups being taxed on the same basis under UK law.
Two recent First Tier Tribunal decisions, Karim TC00306 and Hankinson TC00319, concerned taxpayers who claimed to have broken UK residence by leaving to take up full-time employment abroad. In Miss Karim's case, it was suggested that the employment did not start until 2003, when she was relying on it to establish non-residence during 2000. Mr Hankinson did start an employment outside the UK, but it was held not to have been full-time, nor of sufficient duration to indicate that he had left the UK in such a way as to fall within the "full-time working abroad" concession.
In both these cases, HMRC used "discovery" provisions to open up tax cases that were beyond the date at which they could normally be subject to an enquiry. This only serves to underline how serious HMRC is about challenging taxpayers whose circumstances do not fit with its interpretation of the guidance.
The bottom line Whilst the Court's confirmation that HMRC must stand by its own guidance is to be welcomed, HMRC is showing an appetite for litigation in residency cases that taxpayers ignore at their peril. In particular, taxpayers who leave the UK to take up employment abroad but whose families remain in the UK are at risk of remaining UK resident unless they can demonstrate that their pattern of working abroad would be regarded as full-time under the terms of HMRC's published guidance.
Note: This bulletin is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this bulletin may not be comprehensive or may not yet be passed into law. Recipients should not act upon it without seeking professional advice. 
