Tax residence and 'exceptional circumstances' - Boodle Hatfield

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01 Jul 2022

Tax residence and ‘exceptional circumstances’

The recent case of A Taxpayer v HMRC [2022] UKFTT 133 (TC), provides further guidance on what may constitute 'exceptional circumstances' for the purposes of the statutory residence test (SRT). Whether or not an individual is tax resident in the UK in a tax year may depend on the number of days they have spent in the UK, but days spent in the UK due to exceptional circumstances may be ignored up to a maximum of 60 days.

The case can be read in the context of a couple of updates to the HMRC manual. HMRC have updated their guidance in relation to ‘exceptional circumstances’ following the invasion of the Ukraine to confirm that exceptional circumstances will apply where an individual returns to the UK because of FCDO advice in response to war. HMRC has also provided guidance to confirm when circumstances requiring an individual to be in the UK may be considered exceptional as a result of the Covid-19 pandemic.

More generally, it is thought that circumstances that are not beyond the individual’s control or which could reasonably have been foreseen or predicted are not usually exceptional. Examples such as birth and death are given in the manual as not being routinely regarded as exceptional circumstances.

However, in this case, the First-tier Tribunal considered that the circumstances were exceptional and allowed a taxpayer to ignore certain days for the purpose of the day count test of the SRT.

Broadly, the case involved a taxpayer who needed to stay in the UK to care for her sister during a period of alcoholism and depression and to care for her sister’s two minor children.  The FTT allowed six days on which the taxpayer had been present in the UK at midnight during the 2015-16 tax year to be ignored for the purposes of the SRT, with the result that the taxpayer was non-UK resident for that tax year under the sufficient ties test. This was important to the taxpayer as she had received a significant dividend on which income tax would otherwise be payable.

The FTT reviewed the terms of the exemption set out in legislation and noted that each limb must be satisfied:

(1) the circumstances were exceptional;

(2) the circumstances were beyond the taxpayer’s control;

(3) the taxpayer would not be present in the UK at the end of that day but for those circumstances (i.e. those circumstances prevented the taxpayer from leaving the UK); and

(4) the taxpayer intended to leave the UK as soon as those circumstances permitted.

What is particularly interesting in this case is that the FTT noted that the legislation does not refer to “foreseeability”.

At paragraph 147 of the judgment – “There is no requirement in the statutory language for foreseeability or non-foreseeability to determine whether circumstances are “exceptional”. Foreseeability is not the statutory test. It is true that foreseeability may be an element of exceptionality, but it is not a determining factor which, of itself, excludes the application of the exemption”.

The FTT therefore rejected HMRC’s submission that foreseeability is, of itself, a factor which excludes the application of the “exceptional circumstances” test. This finding appears on the face of it to conflict with HMRC’s existing guidance in its Residence, Domicile and Remittance Basis Manual (RDRM) at RDRM13240 – Residence: The SRT: Annex B: What are exceptional circumstances.

The FTT went on to find that examples of exceptional circumstances given in paragraph 22(5) of Schedule 45 to the Finance Act 2013 were non-exhaustive and illustrative only – those circumstances would not necessarily always be exceptional.

In this case, the FTT commented:

“Alcoholism and depression are not in themselves uncommon or unusual illnesses. It is true that both conditions cause much suffering and distress both for the individual concerned and for that individual’s family. We do not, however, consider that they are exceptional circumstances.

[however]  Moral obligations and obligations of conscience – including those arising by virtue of a close family relationship – can qualify as exceptional circumstances and those obligations may be strong enough to prevent a taxpayer leaving the UK.”

It was therefore the caring element for the taxpayer’s sister and for her minor children that seemed to sway the FTT that the taxpayer should be allowed to claim that certain days in the UK do not count because of exceptional circumstances.

This case was unusual but it may give some taxpayers comfort if they are seeking to rely on the exceptional circumstances exemption that a FTT may have sympathy with them provided, on the balance of probabilities, that the taxpayer can meet the criteria set out in the legislation above. The taxpayer does not need to read or construct the legislation more narrowly than the wording of the legislation. However, the taxpayer should always keep supporting records if they are to rely on this exemption.