Residence - No Useful Purpose Served

The concept of ordinary residence could very well be done without, argues DAVID JEFFREY.
It is commonplace to say that our taxation system has become stifled by increasing complexity. As legalisation grows, attempts by practitioners to retain an overall grasp of the system become virtually impossible. There are opportunities to simplify the fundamentals of the system, but sometimes we cling to familiar concepts even when they have outlived their usefulness.
Such a concept is 'ordinary residence'. Most readers will have a working knowledge of what it means: 'ordinary residence' means 'habitually resident' in the United Kingdom. In the leading case of Commissioners of Inland Revenue v Lysaght 13 TC 511, it was held that 'I think the converse to ordinarily is extraordinarily and that part of the regular order of a man's life, adopted voluntarily and for settled purposes, is not extraordinary'. Thus, ignoring temporary absences, a taxpayer is 'ordinarily resident' if he habitually resides in the United Kingdom 'voluntarily and for settled purposes'.
Nevertheless, there is a difference between understanding what something means, and deciding whether it serves any useful purpose. Creating a category only serves a useful purpose, if that category acts so as to facilitate a charge to tax on those that would not otherwise be charged, or to make possible a relief or allowance for those who would not otherwise be relieved. Ordinary residence does neither, or at least not to any significant extent. If I am correct, then we can do without it.
What is the difference?
It has firstly to be emphasised that the meanings of 'residence' and 'ordinary residence' overlap. In my previous article, 'Unquestioned For Too Long', in Taxation, 29 November 2001 at pages 223 to 225, I discussed the basic meaning of 'residence' and the circumstances of Mr Lysaght, who was the subject of the tax case referred to above. Although he did not have a home in the United Kingdom, his visits to the United Kingdom were so regular and frequent, that it was held that 'the ordinary course of his life made him resident in this country …'. So, if someone is present in the United Kingdom as part of the ordinary course of his life, then he is resident, and if coming to the United Kingdom is 'part of the regular order of a man's life …' then he is ordinarily resident. If there is a difference, it is indeed fine.
Such difference as there is derives from the six-months, or 183-days, rule referred to at section 336, Taxes Act 1988. On the basis of section 336, the Revenue has ruled that a person present in the United Kingdom for at least 183 days in a tax year is to be treated as United Kingdom-resident, for tax purposes, without exception whatever the circumstances. So, a person can be taxed as a resident of the United Kingdom, even though he has come to the United Kingdom for temporary purposes, just because he has spent at least six months in the tax year in the United Kingdom.
It is this six-months rule which has the effect of deeming certain persons to be resident who would not otherwise be, and that distinguishes 'residence' from 'ordinary residence'. What this means is that, because of section 336, 'residence' has a wider application, and there are numerous persons treated as resident but not ordinarily resident. But are there individuals who can be regarded as ordinarily resident, but who are not resident?
Capital gains tax
It is well known that capital gains tax is imposed on the chargeable gains of persons resident or ordinarily resident in the United Kingdom. If the legislation applied only to those resident in the United Kingdom, and disregarded ordinary residence, would that make any practical difference?
It is convenient to consider the position by looking at those coming to the United Kingdom and those leaving the United Kingdom.
Coming to the United Kingdom
Many people come to the United Kingdom without a fixed intention of living here for a long time. Often, they will become resident simply because they stay in the United Kingdom for six months or more. But, irrespective of whether they pass or fail the six-months test in any one tax year, they will be regarded as resident if they intend to live in the United Kingdom for at least two years (an employment contract of two or more years would be one indicator of such an intention) and ordinarily resident if they intend to spend at least three years in the United Kingdom. If someone has no such long-term intentions, he will be regarded as having established a pattern of regular living in the United Kingdom only if he has been present in the United Kingdom for more than 90 days on average over four years, in which case he will be regarded as both ordinarily resident and resident from the beginning of the fifth year. This assumes that he would not have become resident already by virtue of the six-months rule.
In this scenario it is possible to envisage persons who will be resident in the United Kingdom, but not ordinarily resident. I cannot think of any who would be ordinarily resident, but not resident.
Leaving the United Kingdom
Under section 334, Taxes Act 1988, any United Kingdom, Commonwealth or Irish citizen who has been ordinarily resident in the United Kingdom will remain chargeable 'as a person residing in the United Kingdom' to United Kingdom income tax if he leaves the United Kingdom only for 'the purpose of occasional residence abroad'; 'occasional residence' has been explained in case law as the opposite of 'ordinary residence'.
What this means in effect is that virtually all people leaving the United Kingdom have to shed their ordinarily resident status if they are to become non-resident. The two concepts go hand in hand, and it is difficult to see how in normal circumstances someone can cease to be ordinarily resident without giving up residence, or vice versa. This is borne out by the 'Notes on non-residence, etc.' in the Revenue's tax return guide. In the section 'Deciding your ordinary residence status', question 6 asks 'Were you resident in the United Kingdom in the year ended 5 April 2001?' and then concludes 'If "no", you are not ordinarily resident in the United Kingdom'. That is a clear-cut statement. Nevertheless it seems that the Revenue does not in all circumstances follow its own guidelines and the notes also state 'your precise position will depend on your particular circumstances …'.
My understanding is that in circumstances where, for example, a person decides to go on a long cruise, and is out of the United Kingdom for a complete tax year (without setting foot in the United Kingdom), he will probably end up being treated as non-resident, but also as having retained his ordinary residence.
Temporary non-residents
Nevertheless, it is only in relatively unusual situations that there may exist those who are in practice treated as ordinarily resident but non-resident. Returning to capital gains tax, if the charge to capital gains tax were on residents only, and we were to forget about ordinary residence as a separate status, would there be any loss of tax? The answer is that it would make no difference at all, because the 'temporary non-residents' rules at section 10A, Taxation of Chargeable Gains Act 1992 indicate that a person who has been United Kingdom-resident will normally be required to be non-resident for at least five complete tax years to escape the charge to capital gains tax (gains on assets acquired and disposed of during a shorter period of non-residence are an exception) and a person non-resident for that length of time will inevitably be not ordinarily resident as well.
Income tax
As far as income tax is concerned, what turns on the difference as regards those who are resident in the United Kingdom without being ordinarily resident? Income tax is predominantly a tax on those who are resident in the United Kingdom, with non-residents being taxed only on United Kingdom income. However, there are certain circumstances in which ordinary residence is relevant to an individual's tax liability. These are as follow.
 A person resident but not ordinarily resident is taxed under Schedule E, Case II by reference to earnings from United Kingdom duties only (earnings from non-United Kingdom duties are taxed only if remitted).
 Such an individual is not subject to the anti-avoidance provisions at section 739 et seq, Taxes Act 1988 which apply only to persons ordinarily resident in the United Kingdom (and not simply to residents).
 A Commonwealth or Irish citizen who is not ordinarily resident, and who receives overseas income within Case IV or V of Schedule D, is, if resident, subject to the remittance basis only on that income.
 The rules at section 65(6) to (9), Taxes Act 1988 relating to 'constructive remittances' of overseas Schedule D income apply only to those ordinarily resident in the United Kingdom.
There are, therefore, circumstances in which persons not ordinarily resident escape the full impact of United Kingdom tax as it applies to other residents. However, in the overall scheme of things, these are relatively minor exceptions and the differences could be accommodated without requiring a separate category of taxpayer. For example, those not ordinarily resident in the United Kingdom are for the most part also non-domiciled and can relatively easily arrange their affairs so as to avoid United Kingdom income tax on overseas income by correct use of the remittance basis.
Is 'ordinary residence' necessary?
Having considered the matter, we return to the question 'What is the practical use of the distinction between residence and ordinary residence?'. Can we sideline 'ordinarily resident' and simply rely on 'resident'?
The distinction is virtually irrelevant to capital gains tax. It is virtually irrelevant to persons leaving the United Kingdom. Its main impact on those arriving in the United Kingdom is mostly limited to United Kingdom-domiciliaries who become resident but not ordinarily resident (for the reason that the non-domiciled are already exempt on non-remitted overseas income), and how many fall into that category?
Is it really worth maintaining a distinction, full of subtlety and room for argument, which is of negligible relevance to the tax yield? The truth is that the distinction serves no useful purpose and, if dispensed with by Parliament, few would notice the change.
David Jeffery MA(Oxon), MSc is a director of WJB Chiltern (Isle of Man) Ltd, taxation consultants of PO Box 238, Douglas, Isle of Man IM99 2EP. He can be contacted on tel: 01624 618467.

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