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MIKE TRUMAN looks at the case of Shepherd v CIR, about an ailine pilot's ordinary residence, and says it's time for new legislation
Revenue booklet1 IR20 says that 'If you go abroad permanently, you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more a year'.
Elsewhere in IR20 it says that these are to be calculated ignoring the day of arrival and day of departure in respect of each visit.
Advisers unfamiliar with this area of tax law would naturally look for the statutory provision that imposes this 90-day limit on visits, but they would look in vain. The only sections dealing with residence for income tax purposes, TA 1988, ss 334-336, refer only to a limit of six months, made up of one or more visits.
Turning in puzzlement to the case law, an adviser might find the case of Wilkie v CIR (1951) 32 TC 495 which discusses this six month limit. On reading the arguments, the same adviser might look at the front cover again, to make sure they haven't picked up a copy of A P Herbert's Misleading Cases by mistake. Surely the Revenue did not argue, with a straight face, that 'six months' meant six lunar months? Yes, it did, although it lost; the judge pointing out that the Revenue's argument would lead to the taxpayer being simultaneously resident and non-resident under the same test, 'an absurdity remarkable even in an Income Tax Act'.
Wilkie does, however, clearly establish that you calculate the six-month test by counting fractions of a day where necessary, so where does the practice of not counting the day of arrival and day of departure come from? The answer is that it came in a letter from the Revenue to the CCAB following Wilkie, but it has no statutory authority whatsoever.
Still searching for a reference to the 90-day limit, the adviser finally alights on the case of Lysaght v CIR (1928) 13 TC 511, where Mr Lysaght was resident mainly in the Irish Free State but came to the UK for a period of approximately one week in every month, and was held by the Special Commissioners to be both resident and ordinarily resident, though no reasons were given.
The House of Lords said that the question was one for the Commissioners and therefore upheld their decision, Viscount Cave LC dissenting and Lord Warrington of Clyffe indicating that he would probably have found for the taxpayer if he had been deciding the facts. So a decision of the Special Commissioners nearly eighty years ago on the particular facts and circumstances of a visitor from the Irish Free State is the source of the 90-day 'rule' so confidently stated in IR20.
Rules are for fools
Unfortunately, when it comes to appealing against an HM Revenue and Customs' decision, the 90-day 'rule' turns out to be no such thing. IR20 is only guidance, and therefore the only practical way of referring to the 90-day limit is to refer to the case of Lysaght above — which specifically does not lay down a limit, but merely says (effectively on a 3-2 majority) that the Special Commissioners were right to hold Mr Lysaght resident based on his one week a month visits.
This was the problem encountered by Michael Sherry when he appeared for a taxpayer, Mr Shepherd, in an appeal before Dr Nuala Brice as Special Commissioner against a ruling that Mr Shepherd was resident for the years 1998-99 and 1999-2000. The nub of Mr Shepherd's case was that in October 1998 he had set up a home in Cyprus, the country where he intended to spend his retirement. However, he was not going to retire from his job as an airline pilot until April 2000. He therefore ensured that from October 1998 onwards he spent on average less than 91 days a year in the UK. Initially he rented a fully furnished flat, buying a property in November 2002.
Mr Sherry's first problem was that, following IR20, Mr Shepherd expected to be treated as non-resident from October 1998, under ESC A11. Concessions, however, cannot be argued in front of the tribunal, and case law is clear that residence for any part of a tax year is residence for the year, so at the start of the hearing he accepted that the only year in question was 1999-2000.
His second problem was the absence of any statutory 90-day limit. Although there was a dispute about the number of days Mr Shepherd was in the UK, Dr Brice concluded that, ignoring the days of arrival and days of departure, Mr Shepherd was in the UK for 80 days in 1999/2000.
From June 2000 he went off on a round the world sailing cruise that lasted over two years, so he certainly did not subsequently breach the 90-day limit, and it is clear that from the start he intended to keep to the rule about visits as he understood it. In fact, he told the Revenue that this was what he intended to do in January 1999 when he first claimed non-resident status.
One might expect that Mr Sherry's client was therefore home and dry. Unfortunately, although Mr Sherry referred to IR20 (according to Dr Brice's written decision), he could not use it as a strong argument, since it has no statutory, and very little case-law, justification. Dr Brice came to her decision based on case law and (perhaps more clearly than is at first apparent from the case) on a construction of TA 1988, ss 334 and 336. Her conclusion was that Mr Shepherd was resident and ordinarily resident for the year.
Devilish details
Unfortunately for Mr Shepherd, some of the factual evidence he gave was not fully accepted by Dr Brice. He said that, although he was still married and living prior to October 1998 in the family home at Wokingham, he and his wife had been living separate lives following an affair between Mr Shepherd and an air stewardess in 1996.
However, he continued to pay for all the expenses of the house, stated on his tax return that he was 'married' not 'separated', and in 2001 made a will in Cyprus leaving his property to 'his dearest wife'. Rather than the merely formal relationship claimed by Mr Shepherd, Dr Brice concluded that 'the Appellant and his wife remain good friends'.
Mr Shepherd's visits to the UK were mainly in order to be ready to captain planes flying out long-haul from Heathrow and Gatwick. In order to avoid being tired after the long flight in from Cyprus, he would normally spend between one and four days in the UK prior to a flight. He claimed that he normally stayed at his parents' house in London. Dr Brice found that, whilst he stayed there sometimes, on most occasions he stayed in the family house at Wokingham.
Finally, there was also some dispute about the amount of time spent in Cyprus. The Cypriot authorities said that he spent 68 days there between October 1998 and December 1999. Dr Brice calculated that he spent 52 days in Cyprus in 1998-99 and 77 days in 1999-2000. The apparently higher figures of Dr Brice reflected, she thought, the fact that she included the days of arrival and departure. However, by far the largest part of Mr Shepherd's time was spent flying in the course of his employment — 180 days a year, including days of arrival and departure.
Three little words
Although Dr Brice's decision spends some time analysing the cases, it is perhaps more notable for the weight it gives to the statutory provisions on residence. The House of Lords in Lysaght and Levene completely failed to take these into account (by contrast with the Court of Appeal, which did, and which found for the taxpayers). With the honourable exception of Wilkie, detailed analysis of the statutory provisions had to wait until Reed v Clark [1985] STC 323.
The provisions which now make up ss 334 and 336 have been consolidated with very little amendment from the Income Tax Act 1842, which reintroduced the tax after it had been abolished when the Napoleonic wars ended. What is now s 334 says that Commonwealth citizens (originally a 'British subject') whose ordinary residence was in the UK are still taxable as residents if they have left for occasional residence abroad.
Section 336 says that people in the UK for a temporary purpose only, not with a view to establishing their residence here, are not liable to tax as residents — unless they have spent six months in the year of assessment here, in which case they are liable to tax as residents.
Mr Justice Nicholls in Reed v Clark pointed out that in the 1842 Act these sections were originally one, joined by the words 'provided always that'. Section 334 should therefore arguably be seen as dependent on s 336, and certainly s 336 is a relieving provision as well as a charging provision.
Dr Brice follows this analysis, although does not bring it out explicitly. She does, however, say that if s 336 had applied to Mr Shepherd, he would not have been resident here. Unfortunately she also held that he was in the UK for more than just a 'temporary purpose'. He was here to carry out the duties of his employment (like Mr Lysaght); and he already had a residence here which he continued to use.
She also comments that he came to the UK to visit the Boat Show and to celebrate the Millennium, and that these were not temporary purposes. At first sight it is hard to see how celebrating the Millennium can be seen as anything other than a temporary purpose. However, what she perhaps had in mind is that by continuing to return to the UK for events such as this Mr Shepherd made it clear that the UK was still really his base, and therefore his ordinary residence.
How far can you go?
On the law, I find Dr Brice convincing. I have two problems with the case — how far will the law as it stands stretch to keep people resident, and how are we supposed to know, when IR20 is so far out of kilter with what the law says?
Taking Mr Shepherd first, Dr Brice says that 'at least until 5 April 2000' he was still UK resident. But what about after that date, when he was off on his world cruise? Following the master mariner case of Re Young (1875) 1 TC 57 it is at least arguable that the failure to set up any truly permanent base in Cyprus followed by an absence on board ship (which the cases say cannot be considered as a place of abode) would have left Mr Shepherd still ordinarily resident in the UK. Reed v Clark where the absence was for just over a year can be distinguished, because Mr Clark established a new home for the period in Los Angeles.
What if Mr Shepherd had left his wife and the family home in 1996, never to darken its doors again, and had gone back to stay with his parents during the days he was not away flying, and had then continued to do so for the days he was in the UK? Although Dr Brice laid a great deal of stress on the considerable investment in the Wokingham home rather than the Cyprus one, Levene seems to suggest that Mr Shepherd would have been caught, as Mr Levene had been living in hotels both before and after he left
the UK.
What if Mr Shepherd had been employed full time outside the UK? This is the situation that is envisaged in Example 2 of Jon Golding's article Flying the nest, which presciently and not entirely coincidentally concerned the treatment of an airline pilot. John concludes that he would not be liable to tax, and I'm sure that's right under IR20 provided he undertakes no more than incidental duties in the UK, but I'm not so sure that (working from first principles) s 334 does not still apply.
On the other hand
On the other hand, what if Mr Shepherd had the right to citizenship of another, non-Commonwealth, country — say, France. He could have renounced his British citizenship and would not then have fallen within s 334. It is not clear whether Dr Brice would then still have held him to be resident. Her analysis of the legislation clearly would not, but she does also conclude from Levene that the concepts of residence and ordinary residence are not defined in the legislation.
Above all, what if Mr Shepherd had returned to the UK after a period when he was clearly and unambiguously non-resident, and had taken up a job and lifestyle which meant that he still spent less than 91 days a year in the UK? It seems to me that it would then be impossible to say that there had not been a clear break in his ordinary residence, and the onus is now back on the Revenue to show that his time in the UK is not for some 'temporary' purpose.
According to Dr Brice's interpretation this would, admittedly, depend on the quality as well as the length of the time he spent in the UK, but particularly if there was an intention to retire abroad in a few years' time, as in Mr Shepherd's case, the task of the Revenue would be that much harder.
Clarity, not obscurity
'Rules are for fools and the guidance of wise men', or so the saying goes, but in tax it is better to have clear rules than unreliable guidance. It really cannot be right that I can outline half a dozen fairly normal possibilities and not be able to give a clear answer from the legislation and case law (rather than from IR 20) in each case as to whether the individual would be resident or not. It is even less acceptable that the debate that advisers have with HMRC when trying to reach agreement on these issues, centring on meeting the requirements of IR 20, bears little or no relation to the arguments which have to be put forward in a tribunal.
As I mentioned above, the provisions date from at least 1842, and many of them were to be found in the first Income Tax Acts of the Napoleonic wars. It is not surprising that the provisions relating to residence which were appropriate two centuries ago no longer suit a modern world of ubiquitous air travel and multi-national company 'road warriors' who live in hotel rooms, out of suitcases, and (strikes permitting) off airline food. What is surprising is that the rules have not been changed.
It is now more than three years ago that the Government announced a plan to consult on, and then to amend, the law of residence and domicile. It is a perennial problem for Chancellors, because as soon as they announce that they are going to make changes they get lobbied heavily by influential people.
It is understandable that changing the rules to create a sensible, workable, and (above all) comprehensible system was not possible in the shadow of an impending election. But the election has now been and gone. The Pre-Budget Report would be a good time to announce that these foolish rules and unwise guidance were shortly to go too.
