Exceptional circumstances in residence test

The issue

The statutory residence test (introduced in 2013) is a very scientific way of determining whether a person is UK tax resident in a particular year. Unless a person falls within the automatic residence or non-UK residence rules, you need to determine whether the person is a ‘leaver’ or an ‘arriver’ and then identify the number of ‘ties’ that they have. Broadly, this will then dictate how many midnights that person can spend in the UK before becoming UK resident for a particular tax year. However, there is a rule about ‘exceptional circumstances’ which can add a healthy dose of subjectivity into the science.

Where the individual is in the UK at midnight, for reasons beyond his or her control, then that day is not counted for the purposes of the test and this argument can be used in respect of up to 60 midnights. A recent case has highlighted how subjective the ‘exceptional circumstances’ rule is in practice.

The case

Key points of the case were as follows:

1. The taxpayer was a wealthy jetsetter who thought she had moved from the UK to Ireland.
2. She received an £8m dividend in 2015/2016 and HMRC wanted to tax it on the basis that she was UK resident.
3. The tax-payer and her twin sister had experienced a rocky childhood which included physical and mental abuse at the hands of their father.
4. The twin sister’s mental health grew worse following the breakdown of her marriage in 2010 and this came to a head in 2015/2016.
5. The tax-payer felt that she needed to be there for her sister.
6. By November 2015 the taxpayer had spent 44 nights in the UK, and she would become UK resident if she exceeded 45 nights.
7. In December 2015 and February 2016, the taxpayer came back to the UK to see her sister, who was in a particularly bad way, and care for her minor children and spent six nights in the UK.
8. Normally this would have made the taxpayer UK resident, but she argued that the extra days were due to exceptional circumstances required to tend to her suicidal sister.
9. In order to avoid UK tax on the £8m dividend she needed to argue that five nights could be disregarded.
10. The tribunal were not convinced that the state of mind of the twin sister was enough to demonstrate exceptional circumstances.
11. However, the ‘get out of jail card’ was the moral obligation to care for her sister’s minor children. The fact that the sister’s house, in which the minor children stayed, was in a state of squalor meant that the taxpayer had to stick around. Therefore, she won the case.

The tribunal also strongly disagreed with HMRC’s contention that:

1. Foreseeable circumstances could not be exceptional.
2. Presence in the UK arising out of a moral obligation could not be exceptional.
3. To be exceptional something has to happen while an individual is in the UK and stop them from leaving.

Forbes Dawson view

I think that the main message here is that tax-payers should not expect an easy ride from HMRC when applying the ‘exceptional circumstances’ rule. However, on the flip-side, hopefully HMRC appreciate that they have had their knuckles rapped by the tribunal and so may make their approach more lenient. It certainly will not do any harm for taxpayers to contemporaneously document their reasons for exceeding the day-count when it becomes apparent that they will do so – and seek medical advice where appropriate. This case did not really shed any light on whether there can be exceptional circumstances at the start of a tax year, although I assume that there could be, based on HMRC COVID-19 commentary. 




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