Unquestioned For Too Long?

The concepts of residence and ordinary residence contain various inconsistencies which should be reviewed, argues DAVID JEFFERY.
OFTEN, WORKING IN taxation, we can get attached to familiar concepts. Over time, we gain a working knowledge of what various concepts mean and some practical experience of how they apply. They become a comfortable part of the scenery, and we overlook the fact that they are full of unchallenged imperfections. Such are the concepts of both 'residence' and 'ordinary residence'.
In this article, I shall attempt to point out some of the confusion, reflected in the legislation, about the meaning of 'residence' as it applies to taxing the income and capital gains of individuals. In another article, I shall ask why, apart from inertia, we should bother to retain 'ordinary residence' as a separate category at all.
Undefined term
The first main problem is that the term 'residence' is not defined in the Taxes Acts. This is perhaps surprising, given how fundamental it is to the United Kingdom's tax system: residents are charged to income tax on their world-wide income (except to the extent that the remittance basis applies). There are, however, legislative pointers at sections 334 to 336, Taxes Act 1988 and section 9, Taxation of Chargeable Gains Act 1992. These provisions augment, or in some circumstances supplant, the underlying meaning of residence which is only to be found in case law, with the Revenue line being set out in booklet IR20.
So when is someone, on basic principles, resident, that is residing or living in, the United Kingdom?
Case law in 1928
First, what is meant by residing or living in? It has been said by learned judges that a physical residence is not required to reside in the United Kingdom; a tramp could be resident as much as any owner-occupier if he lives in the United Kingdom. Thus, for example, in Commissioners of Inland Revenue v Levene 13 TC 486, Mr Levene who came to the United Kingdom on a regular year-by-year basis, was held to be resident in the United Kingdom, even though he did not have a United Kingdom home (he stayed in hotels or with family and friends when visiting). He was described as 'a bird of passage of almost mechanical regularity'.
Mr Levene not only did not have a house in the United Kingdom, but he did not have a fixed place of abode anywhere else. The courts found much more difficulty with the subsequent case, Commissioners of Inland Revenue v Lysaght 13 TC 511. Mr Lysaght had left the United Kingdom to live permanently in Ireland, but returned on a regular basis for about a week or so each month to attend board meetings of a company of which he was a director, always staying in hotels (he had no United Kingdom home). The Commissioners decided that he was resident in the United Kingdom. The judges through to the House of Lords found considerable difficulty with this decision. He clearly lived in Ireland because that was where his home was, and where he spent most of his time. Did he live in the United Kingdom if he merely visited the United Kingdom, albeit on a regular basis? Because of the unease of the judges, their judgments related mainly to the question of whether they could properly overturn a decision of the Commissioners. On the basis that the Commissioners' finding was one of fact rather than law, they felt they could not, and Mr Lysaght was held to be United Kingdom-resident. Mr Justice Rowlatt, in the High Court, took the view that he had to decide whether or not Mr Lysaght was 'a mere visitor'. He accepted that he had at least a case for being non-resident because of his permanent family home in Ireland, but said:
'Here is the great business … of Lysaght and Company. He is the advisory director of it, at £1,500 a year, and he comes here every month for the average of a week. He sleeps here and he has to be here doing the business of the company for about a week a month. As things are … he came this month, he will have to come next month … and he will have to come the month after. He will have to come perfectly regularly and unless he gives up his position he could not alter it. … Under the circumstances – I do not decide more than this particular case – … the ordinary course of his life made him resident in this country.'
The conclusion is therefore that someone is resident in the United Kingdom, if he lives in the United Kingdom, and it is possible to be regarded as living in the United Kingdom, even if the individual concerned has a home and mainly lives abroad. However, if his economic and social links with the United Kingdom and the extent and frequency of his visits to the United Kingdom are taken into account, then it is possible to conclude that he is resident in the United Kingdom because he is present in the United Kingdom (taking one year with another) to a significant extent and such presence is part of the normal pattern of his life.
The Revenue felt none of the reservations of the judges in Lysaght. Furthermore, it has had to lay down some objective guidelines for its own staff, if there is to be consistency of treatment between one taxpayer and another. Mr Lysaght was present in the three years ended 5 April 1925 for 101, 94 and 84 days respectively, being 93 days on average. The Revenue, disregarding the fact that the courts' rejection of Mr Lysaght's appeal was based on a reluctance to overturn a decision of the Commissioners and was in no way an enthusiastic endorsement of their finding, has stated that anyone who is present in the United Kingdom over a period of several years for more than 90 days on average each tax year will be treated as resident.
Basic guidelines
It is all very 'rule of thumb', but at least this practice does provide firm guidelines as a basis for advising clients. However, they are not definitive, because the legislative pointers referred to earlier need to be considered. Section 334, Taxes Act 1988 is concerned only with persons who have been ordinarily resident in the United Kingdom, who choose to leave the United Kingdom to live abroad. In essence it states that anyone who is a Commonwealth or Irish citizen, who has been ordinarily resident in the United Kingdom, and who leaves the United Kingdom 'for the purpose only of occasional residence abroad' shall be charged to United Kingdom income tax as though he were 'a person actually residing in the United Kingdom …'. Typically, section 334 will affect someone who leaves the United Kingdom, not to set up home abroad, but simply to drift, while perhaps retaining a home in the United Kingdom. Technically, it is possible to be physically absent from the United Kingdom throughout a complete tax year, and yet still be resident.
Absent but resident
In 1879, Rogers v Commissioners of Inland Revenue 1 TC 225, which involved a ship's captain, established that a man can be taxed as a resident even though he is out of the country throughout the whole tax year, if his home, i.e. where he lives, remains in the United Kingdom. The Revenue does not normally argue that a person not present at all in the United Kingdom can be resident for that year, but certainly will take the point from time to time. Furthermore, in the well-known case of Reed v Clarke 58 TC 528, this point was confirmed specifically:
'A man ordinarily resident here may go to live abroad in March intending to return some months later but through serious illness of himself or others or other unforeseen circumstances not return until the end of the following March. I can see no reason why, depending on all the facts, such a man may not fall within section 49 [now section 334]. If that is right, it would be absurd that such a man should fall outside section 49 if the emergency which kept him abroad should chance to last for a week or two longer and not permit his return until after 5 April.'
The way the Revenue has applied section 334 has recently been seen in the hullabaloo relating to mobile workers. In brief, many full-time lorry drivers are accustomed to taking lorries to a port on Sunday afternoon or evening, and taking the ferry to the Continent, where they will deliver goods at various destinations throughout the following week, returning to the United Kingdom on Friday to spend the weekend at home with family.
In the past, the Revenue has not only allowed, but in some cases actively encouraged (according to the testimony of the accountants involved), claims to non-residence on the basis that, disregarding days of departure and arrival, these drivers are present in the United Kingdom for less than 91 days on average each tax year, and have therefore become non-resident. But now the Revenue considers that they have not left the United Kingdom for more than 'occasional residence abroad', and therefore remain United Kingdom-resident.
The contrary view is that the pattern of the working life of these drivers is such that, over a period of years, living outside the United Kingdom has become part of the regular order of their lives. In Reed v Clark, it was also noted that 'in this section occasional residence is the converse of ordinary residence'. What this means, therefore, is that someone leaving the United Kingdom has to shed his ordinarily resident status in order to become non-resident. Nevertheless, this section applies only to Commonwealth, including United Kingdom and Irish, citizens.
What is the status of Americans, Germans or Israelis who have been ordinarily resident in the United Kingdom, and then leave for some temporary purpose? On the face of it, at least, they need not shed their ordinarily resident status in order to cease to be resident.
Six-months rule
The second legislative pointer, section 336, stipulates that someone who is in the United Kingdom 'for some temporary purpose only' and not with any view or intent of establishing his residence there, and who has not 'actually resided' in the United Kingdom for six months in total in any tax year, shall not be taxed under Schedule D or E as a resident, but someone who has lived in the United Kingdom for six months shall be so taxed. So, if you are present in the United Kingdom for six months, that is, 183 days or more, then you are caught. The Revenue states its policy unambiguously in booklet IR20 as follows:
'You will always be resident if you are here for 183 days or more in the tax year. There are no exceptions to this.'
No exceptions?
The comment about there being no exceptions may need qualification. Consider the following example.
Sheila was brought up in the United Kingdom, but left to set up home in Australia many years ago. On her father's death three years ago, she received his shares in the family company. Early in the tax year 1999-2000, she returned to the United Kingdom because of her mother's serious illness. She stayed on to look after her mother and, after her death, to arrange the funeral and the winding up of the estate. After she returned to Australia, the family's United Kingdom accountants worked out that she had been present in the United Kingdom for precisely 183 days (ignoring days of arrival and departure). During her time in the United Kingdom, she received a dividend on her United Kingdom shares, which helped her to meet her extra living expenses. Shortly before her departure to Australia she sold these shares to her brother, and made a capital gain.
Sheila is not United Kingdom-resident in the general sense of the term; she came to the United Kingdom for a temporary purpose only, and living in the United Kingdom was not part of the regular pattern of her life. If she is United Kingdom-resident, it is solely because she reached the six months' (183 days') threshold set out in section 336. So is she resident?
Section 336 says that she is taxable as a resident for Schedules D and E purposes. She is not resident for all purposes, only for the purposes of income tax under those Schedules. Sheila received no such income – her income was Schedule F dividend income.
On the face of it, this is the only conclusion that can possible be drawn from the plain words of the legislation. But the Revenue has a different view. It refers to a dicta in the High Court in the Lysaght case, to the effect that section 336 may be regarded as having 'illustrative value' such that it extends to income under the other Schedules. This appears to me to be wishful thinking as the words of section 334 are clear. We can therefore conclude that someone who is not resident in the United Kingdom for the reason that living in the United Kingdom is part of the regular pattern of their lives, but is in the United Kingdom for six months or more in a particular tax year is not resident for Schedule F purposes. He cannot be charged on United Kingdom dividends at any higher rate beyond the tax credit (whatever booklet IR20 says).
I confess this next point is a little unusual and contrived. Nevertheless Sheila was in the United Kingdom for 183 days, out of 366 in the tax year. This we can accept as six months, and she is therefore resident for Schedules D and E purposes. But she made a capital on gain on her shares. As a resident, surely she is taxable? Section 9, Taxation of Chargeable Gains Act 1992 stipulates that an individual present in the United Kingdom 'for some temporary purpose only and not with any view or intent to establish his residence …' can only be charged to capital gains tax if the time 'for which he is resident in the United Kingdom in that year of assessment exceeds six months'. Note the word 'exceeds'. Sheila did not exceed six months, and was not therefore resident for capital gains tax purposes in 1999-2000, whatever booklet IR20 says.
So the next time that booklet IR20 is reprinted, perhaps the words 'no exceptions' should be replaced by 'not many exceptions'!
Arrival and departure days
One final point before leaving section 336. Both the six months rule at section 336, as well as the '91 days on average' rule, require us to count the days that an individual is present in the United Kingdom in the tax years concerned. How do we treat days of arrival and departure? Most readers will probably know that the Revenue practice is to disregard days of arrival and departure. This is sometimes presented as being a Revenue concession, or at least a matter of informal practice. In fact, it derives from a particular tax case, Wilkie v Commissioners of Inland Revenue 32 TC 495. Mr Wilkie worked in India, but came back to the United Kingdom for leave every few years. He arrived back at 2pm on 2 June 1947 and flew out again at 10am 2 December 1947. His visit was for 184 days including days of arrival and departure, and the Revenue asserted that he was resident for 1947-48. Mr Wilkie appealed saying that he had been present in the United Kingdom for only 182 days and 20 hours. The High Court upheld his appeal and decided that the strict basis of calculating a person's time in the United Kingdom requires taking into account hours of part-days.
Since counting the hours is impractical as a rule to be applied on a general basis, the Revenue has had to accept that neither of the days of arrival and departure is to be counted, because if Mr Wilkie's day of arrival had been counted as a day of presence in the United Kingdom, but not his departure, or vice versa, his total would have been 183 days, which would again have indicated a United Kingdom-resident status, i.e. the wrong answer. Therefore, to get to the correct answer in Wilkie by applying a daily test, both days have to be disregarded.
So the practice of ignoring both days is based on case law, rather than simply an impulsive act of generosity on the part of the Revenue, and can be relied on with some confidence.
David Jeffery MA (Oxon), MSc is director of WJB Chiltern (IOM) Ltd, 18 Mount Havelock, Douglas, Isle of Man, IM99 2EP. He can be contacted on 01624 618467.

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