Residence and Returns

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DAVID JEFFERY of WJB Chiltern reviews some topical issues relating to the determination of residence status.

THIS IS THE follow-up to two previous articles concerning residence, ordinary residence and related matters (see 'Unquestioned For Too Long' in Taxation, 29 November 2001 at page 223 and 'No Useful Purpose Served' in Taxation, 6 December 2001 at page 254). In this final article, I deal with two of topics of current concern.

Frequent trips abroad

The first relates to a recent change in the wording of the guidance notes attaching to the non-residence, etc. pages of the self-assessment tax return. These notes include a simple straightforward question and answer test to determine a person's residence and ordinary residence status. A new question, Question 2A, has been slipped into the notes on non-residence, etc. pages of the Self-Assessment Tax Return Guide for the year ended 5 April 2002. Whenever a change in any Revenue form or publication is made, it is usually for a reason. So what then is the new question? Perhaps more importantly, what is it driving at? The new Question 2A, on page NRN2, reads as follows:

'Have you left the United Kingdom?

'Note: Even if you make frequent trips abroad in the course of your employment you will not have "left" the United Kingdom if you usually live in the United Kingdom, and your home and settled domestic life remain there.'

The background to this change lies in the Revenue's concern that employees living in the United Kingdom, but spending much of their working life abroad, have been incorrectly (allegedly) claiming non-resident status. Let us return to the example in my 29 November 2001 article. A lorry driver with his home and family in the United Kingdom may take a wagonload of goods to the Continent, returning to his home and base here on a Friday in order to spend the weekend with his family. On Sunday afternoon he loads up again at his depot to take his van to the docks and leaves on the overnight crossing to the Continent. If, in accordance with normal Inland Revenue practice, the driver disregards his day of arrival here (Friday) and also the day of departure (Sunday) then he will have spent one day only in the United Kingdom. Over the course of a year it will be possible to fall comfortably inside the 'ninety days on average per tax year' threshold within which he may be treated as non-resident. As such, these drivers could claim that the wording of booklet IR20: Residents and Non-Residents - Liability to tax in the United Kingdom applies to them, in particular, paragraph 2.2. This indicates that where 'your absence from the United Kingdom and your employment abroad both last for at least a whole tax year' during which visits back to the United Kingdom are within the prescribed limits, then 'you are treated as not resident and not ordinarily resident in the United Kingdom from the day after you leave the United Kingdom to the day before you return to the United Kingdom at the end of your employment abroad'.

As such, a non-resident would be taxable only under Case II of Schedule E to the extent that his duties are performed in this country. Substantial Schedule E repayments were on the line! The Revenue's view has changed and now it is that these individuals have never become non-resident because they have continued to live in the United Kingdom, the location of their only home and working base. To use the wording of Question 2A, they have never 'left' the United Kingdom.

The legislative basis

Underlying the Revenue's standpoint is section 334, Taxes Act 1988. This stipulates that a Commonwealth (including United Kingdom) or Irish citizen who has been ordinarily resident in the United Kingdom and who leaves this country for the purposes only of occasional residence abroad is to be charged to income tax as a person actually residing in the United Kingdom. Section 334 applies to these lorry drivers (according to the Revenue). They go abroad only for a temporary purpose each time they leave the country, intending to come back later in the same week. They do not move themselves abroad in any substantial sense; neither their domestic nor working lives are based there. So they have not left the United Kingdom.

In support of this approach, the Revenue looks back to Captain Rogers who set sail on the Saint Magnus (so we are told) from the Clyde in June 1877 bound for the East Indies. He had still not returned to the United Kingdom in June 1879 when his appeal against an income tax assessment for the 1878-79 tax year was heard by the General Commissioners in Fifeshire. He was held to be resident; he still lived in Fife with his wife and children and had no dwelling house in any other country; so he had left the country 'for the purpose only of occasional residence' (Rogers v Inland Revenue 1 TC 225).

There is a general message here. Becoming non-resident is not simply a matter of arithmetic - spending time abroad and limiting visits back to the United Kingdom to less that 183 days in any tax year and less than 91 days on average. It requires an act of departure, such that someone who has lived in this country leaves it and bases himself abroad.

On the face of it, this may seem reasonable enough. And yet, there is an odd lack of symmetry. It is seemingly quite acceptable for someone whose home is abroad, and who has no home in this country, to be treated as United Kingdom-resident if he comes here and his visits exceed the 90 days on average threshold. However, if he has a home in the United Kingdom and no home abroad, the converse does not apply and it is seemingly impossible for him to become non-resident and not ordinarily resident by spending a lengthy period abroad and limiting his visits back to the United Kingdom. (I disregard the special case of someone who does not set foot at all in the United Kingdom in a tax year.) Surely the lorry drivers who go abroad in the course of their duties, and whose visits back home are limited, should over a period be able to demonstrate that when they leave the United Kingdom this is not a single insignificant act, evidence merely of some 'occasional' purpose, but has become part of the established pattern of their lives. There is a settled purpose which involves living (as well as working) predominantly abroad, in the same way as an overseas resident who merely visits the United Kingdom can become resident because his presence here has become an integral part of the pattern of his life.

Exceptional circumstances

The next matter relates to the Revenue's application of Statement of Practice 2/91, entitled 'Residence in the United Kingdom - Visits extended because of exceptional circumstances'.

The Statement of Practice refers to section 336, Taxes Act 1988. Whilst section 334 relates to those leaving the United Kingdom, section 336 is of more general application and is relevant not only to those who have previously been ordinarily resident in this country, but to those who come to the United Kingdom without ever intending to become resident here. Section 336 applies to someone who is present in the United Kingdom for some temporary purpose only and without any intent of establishing residence here. That person is treated as not resident in the United Kingdom (provided of course he is not resident here for six months or more in the tax year).

The Statement of Practice goes on to state that in applying the first condition, and deciding whether someone is in the United Kingdom for a temporary purpose only, the Revenue will normally treat someone as resident if in the United Kingdom for at least three months per tax year (i.e. more than 90 days). This is normally calculated over a maximum of four years. (Someone who has previously been non-resident, and comes to the United Kingdom for more than three months on average - without ever admitting to any permanent intent - will usually be regarded as resident and ordinarily resident from the beginning of the fifth year.)

The Statement stipulates that 'Where this rule applies, any days which are spent in the United Kingdom because of exceptional circumstances beyond an individual's control, for example, illness, will be excluded from the calculation'. It is made clear that this 'relaxation' does not apply to the so-called six months' (183 days) rule which is absolute, and only whilst the individual comes into the United Kingdom for temporary purposes. There is the usual warning about each case being considered 'in the light of its own facts'.

The legislative basis

The thinking behind Statement of Practice 2/91 is very much bound up with the wording of section 336. This is because courts have interpreted section 336 as indicating that a person can be resident if the length and frequency of his visits to this country, and his social and economic links, indicate that his presence in the United Kingdom is part of the ordinary course of his life. There is nothing in the legislation about 91 days; this is merely a Revenue attempt to bring a degree of objectivity to what would otherwise be a very subjective matter. In reality, the Statement of Practice is therefore an acknowledgement by the Revenue that the three months' rule cannot reasonably be applied to someone who is in the United Kingdom 'because of exceptional circumstances beyond an individual's control'. Any individual in the United Kingdom under those circumstances must, almost by definition, be in this country for a temporary purpose, and his time here should therefore be disregarded in deciding whether or not he is resident (provided of course that this does not cause him to cross the six months' threshold).

So perhaps the word 'relaxation' is a misnomer; the taxpayer is not being granted a concession, but rather the law is being applied in line with the proper meaning of 'residence' in a tax context.

Medical treatment in the United Kingdom

'Exceptional circumstances' obviously covers the boat that does not sail and the flight that is cancelled. It would also cover time spent in the United Kingdom because of the death of a close relative. Illness, of course, is specifically mentioned in the Statement, but matters are less clear than they might at first sight appear. I have found that there is a general impression amongst advisers that if someone comes to the United Kingdom for medical treatment, then he or she is covered by the Statement, and days in the United Kingdom for that reason need not be counted. This is certainly not the Revenue's view.

As far as the Revenue is concerned, the Statement will certainly cover unexpected illness, causing unforeseen time to be spent in the United Kingdom. However, it may not cover other situations where the time spent here is pre-planned. Let us consider some typical situations, relating to a Mr Patient who lives in the Isle of Man, but visits the United Kingdom.

Sudden illness

Mr Patient comes to Blackpool for a holiday, and he suffers a stroke; he is hospitalised for two weeks, before being allowed to return to his home abroad. He falls within the Statement and his enforced stay will be disregarded.

Urgent medical treatment

Mr Patient lives in the Isle of Man, and becomes seriously ill. He cannot obtain treatment in the Isle of Man and instead attends a National Health Service hospital on Merseyside, and receives treatment there. Although the position is not quite as strong as in 'Sudden illness', because his stay in the United Kingdom is not entirely unforeseen, nevertheless he very probably falls the right side of the line, and the United Kingdom days would be disregarded for the purposes of the three months' rule.

Ongoing care

The facts are the same as in 'Urgent medical treatment' except that Mr Patient's condition has become chronic and so he returns to the United Kingdom for treatment on a regular basis over several years. By this time, his visits here have become part of the pattern of his life and the Revenue may well take the view that - although treatment in the United Kingdom is necessary - the circumstances are no longer exceptional and unforeseen.

Choice of medical treatment

Mr Patient becomes ill and could receive treatment on the Isle of Man, but instead chooses to be treated in the United Kingdom. This is less easy to decide, and the outcome may well lie in convincing the Revenue that he has genuinely felt that the quality of treatment would be better in the United Kingdom. If there is no significant difference in the quality of treatment or care, then his visit to the United Kingdom would only be a matter of personal choice, and his visit would not be exceptional or outside his control. Days in the United Kingdom would accordingly be counted.

Opting for United Kingdom hospital care

Mr Patient, residing in the Isle of Man, signs up for private medical insurance and, when ill, opts for treatment in the United Kingdom under the scheme. In these circumstances, his visit to the United Kingdom for treatment would not be unforeseen, but would have arisen out of pre-planned arrangements. The days would therefore be counted in.

I think it would be true to say that the Revenue does not take a hard and fast line on these matters. It is inclined to consider each case on its merits and thus will not commit itself to saying in advance that visits for medical treatment are all disregarded. Conversely, it does not mean to say that they will be counted in; much will depend upon the presentation upon the taxpayer's case. For example, the fact that insurance is taken out for medical treatment does not of itself mean that illness is regarded as expected or likely. I insure my house against fire, but I think I would regard it as exceptional if it were to burn down!

Working overseas

There is another area in which unforeseen illness can impact upon residence status. This can be considered in the light of the Revenue's practice of treating a person who works abroad on a full-time basis for a complete tax year, as being (in normal circumstances) neither resident nor ordinarily resident in the United Kingdom. Let us imagine that Mr Patient had been residing and working here for several years, then left the United Kingdom to work abroad on 1 April 2001 intending to work full-time until 30 April 2002 when he would return to the United Kingdom. However, his intentions were interrupted by serious illness, which required him to return to the United Kingdom for treatment for a total period of some four months in tax year 2001-02.

Booklet IR20 sets out the normal Revenue practice of regarding someone who has left the United Kingdom for a complete tax year to work abroad on a full-time basis as being non-resident and not ordinarily resident throughout that tax year. Accordingly, there are two issues:

(a) The first, which has been considered above, is should any visits back to the United Kingdom for medical treatment be disregarded for the purposes of the three months on average rule?

(b) Secondly, if Mr Patient has been ill for four months, has he been working full-time throughout the tax year?

It is understood that the Revenue's view is that the 'full-time work abroad' condition will not have been met, and therefore Mr Patient will have remained United Kingdom-resident. However, there is nothing in the Taxes Act which specifically states that a person working abroad full-time is neither resident nor ordinarily resident in the United Kingdom. The point is that the existence of a full-time job outside the United Kingdom indicates that Mr Patient has left this country for more than 'occasional residence' abroad and therefore should have become neither resident nor ordinarily resident in the United Kingdom. Surely, because a person who leaves the United Kingdom intending to work full-time abroad and who sets up home abroad and begins working there on a full-time basis, and then has his plans interrupted by illness, this should not mean that he has left the United Kingdom for merely a temporary purpose. In Commissioners of Inland Revenue v Lysaght 13 TC 511 it was held that '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'. Mr Patient's purpose in leaving the United Kingdom to set up home and work abroad was a 'settled purpose' and is not the less so because his plans were interrupted by unforeseen circumstances.

Conclusion

It is stating the obvious to say that serious illness can be very disruptive of a person's plans and arrangements, and the last thing the individual needs is for it to cause him to become enmeshed in a contentious argument with the Inland Revenue. Greater flexibility on the Revenue's part would be appropriate and welcome.

David Jeffery MA (Oxon), MSc is a director of WJB Chiltern (IOM) Ltd and can be contacted on 01624 618467.

Issue: 3864 / Categories: Comment & Analysis