A Tax On Conscience? A Moral Dilemma for Non-Residents
In HMRC v A Taxpayer [2023] UKUT 00182 (TCC), the Upper Tribunal (UT) considered, for the first time, the meaning of "exceptional circumstances" for the purposes of the Statutory Residency Test (SRT) in the Finance Act 2013 (FA 2013). In overturning the decision of the First-tier Tribunal (FTT), the UT held that moral obligations, specifically the need to care for close relatives, were not exceptional circumstances, creating a potential dilemma for individuals when it comes to managing their tax residency status and their family life.
This blog is based on an article written by Robert Waterson and Liam McKay that appeared in Tax Journal issue on 8 September 2023.
Background
In 2015, the Taxpayer moved to the Republic of Ireland, while her husband remained in the UK. During 2015/16, the Taxpayer’s husband transferred shares to her, on which she received approximately £8 million of dividends. The Taxpayer completed her 2015/16 return on the basis she was not UK resident. HMRC enquired into the return, determining she had exceeded the permissible number of days in the UK and was therefore UK resident for tax purposes. HMRC amended the return, resulting in additional tax of around £3m. The Taxpayer appealed.
In accordance with the table in paragraph 18, Schedule 45, FA 2013, the Taxpayer would be resident in the UK if she spent more than 45 days in the UK. It was common ground that the Taxpayer had exceeded those 45 days, and that she would be UK resident for the relevant year unless the additional days satisfied the exceptional circumstances test in paragraph 22(4), Schedule 45, FA 2013.
The appeal focused on two visits the Taxpayer made to the UK in December 2015 and February 2016. The Taxpayer argued that, in respect of both visits, she was in the UK because her twin sister, who suffered from alcoholism and depression, had threatened to commit suicide and such circumstances constituted exceptional circumstances (the primary case). The Taxpayer also argued that her sister was unable to care for her two dependent children, such that the Taxpayer was prevented from leaving the UK until appropriate care had been arranged, which also amounted to exceptional circumstances (the secondary case).
FTT decision
The Taxpayer's appeal was allowed.
The FTT rejected the Taxpayer’s evidence on her sister's risk of suicide. That was because, inter alia, a report from the sister's consultant indicated the sister had no suicidal ideation, there was no suggestion in her medical records that the sister was threatening suicide and the Taxpayer did not seek medical psychiatric assistance during either visit. The FTT therefore concluded that the Taxpayer had not shown that she came to and remained in the UK because her sister had threatened to commit suicide and rejected the Taxpayer's primary case.
However, the FTT accepted the Taxpayer's evidence in relation to the secondary case, namely, that during her visits she found a dysfunctional household in which her sister was incapable of caring for herself or her children, and nobody else could provide the care needed. The FTT held that moral obligations and obligations of conscience, including those arising by virtue of a close family relationship, could qualify as exceptional circumstances and could be strong enough to prevent a taxpayer leaving the UK. Further, the combination of the need for the Taxpayer to care for her sister and her children at a time of crisis caused by alcoholism constituted exceptional circumstances, and if the reason for the Taxpayer remaining in the UK was the same each day, then that reason remained valid for each relevant day. Accordingly, the FTT allowed the Taxpayer's appeal on the secondary Case. HMRC appealed to the UT.
UT Decision
HMRC's appeal was allowed.
As the Taxpayer did not appeal the FTT's decision in relation to the primary case, the only issue before the UT was whether the secondary case constituted "exceptional circumstances".
In the view of the UT, the requirements contained in paragraph 22(4) were not similar to a "reasonable excuse" test and were entirely objective. To be "exceptional", circumstances must be “out of the ordinary course, or unusual, or special, or uncommon” and not "regularly, or routinely, or normally encountered". Further, for the purposes of paragraph 22(4) “prevent” meant “stopping something from happening or making an intended act impossible”, which was different from mere "hinderance”. It is the “exceptional circumstances” that must prevent the person from leaving the UK.
The UT disagreed with the FTT's finding that a moral or conscientious inhibition could satisfy the requirements of paragraph 22(4). The statutory question was not whether a person was prevented by an inhibition from leaving the UK, but whether "exceptional circumstances" prevented the person leaving. In that regard, the UT's view was that it was not correct to say that because a person genuinely thinks it necessary to be in the UK because a relative is ill or dying, then exceptional circumstances exist. That was because serious illness and death are, themselves, not “exceptional”, and it was also not “out of the ordinary course, or unusual, or special, or uncommon” for a person to have a sense of moral obligation towards a relative in that position. Objectively commonplace circumstances, such as serious illness, could not be converted into "exceptional circumstances" by adding a moral obligation.
Further, the UT confirmed that a taxpayer claiming that paragraph 22(4) applied had the burden of proving that each of the statutory conditions was satisfied for every one of the days in issue. Accordingly, if the taxpayer failed to provide evidence sufficient for the FTT to make findings of fact, the appeal must be dismissed. In that regard, the UT held that there was insufficient evidence before the FTT to support its conclusion in relation to the secondary case, which was an error of law.
As to the Taxpayer's specific circumstances, the UT agreed with HMRC that it could not be inferred that the degree of suffering and distress caused by the Taxpayer's sister’s alcoholism and depression was more than that which commonly arose in families affected by those conditions and the FTT's findings in that regard were inconsistent and perverse. In particular, the FTT could not reasonably find both that alcoholism and depression did not constitute exceptional circumstances for the purposes of the primary case, but that the combination of the need for the Taxpayer to care for her sister and children at a time of crisis caused by her alcoholism constituted exceptional circumstances for the purposes of the secondary case.
Finally, the UT rejected the Taxpayer's submission that her circumstances were similar to the example in paragraph 22(5)(b) on the basis they were not "life threatening" or "sudden". That was because the evidence showed that her sister was not at risk of suicide, and her alcoholism and mental health issues had existed for many years. Therefore, the circumstances the Taxpayer found on her visits did not constitute “exceptional circumstances” and, having regard to its earlier finding that objectively commonplace circumstances do not become exceptional by adding a moral obligation, the UT held that the FTT was wrong to find that the Taxpayer’s sense of obligation and/or her need to care for her sister and her children changed the position. Even if the Taxpayer’s need to care for her sister and for her children did constitute exceptional circumstances, the UT found that the FTT made a further error of law by failing to consider whether this was the case on each of the relevant days.
Accordingly, the UT allowed HMRC's appeal, and found that the Taxpayer was tax resident in the UK during 2015/16.
Comment
Offshore taxation has been a hot issue in recent years, and individuals find themselves navigating an increasing range of regulatory measures when it comes to the protection of their foreign income and assets. Given the current economic climate, those measures are likely to remain a key focus for HMRC in the foreseeable future, emphasising the need for careful management of tax residency status for overseas-based individuals who have ties to the UK.
A Taxpayer is the first time the tax tribunals have considered the meaning of "exceptional circumstances" in the context of the SRT, and it is clear from the UT's decision that the bar has been set extremely high. That is perhaps unsurprising given the examples of exceptional circumstances Parliament chose to include in paragraph 22(5)(b), but it does result in some potentially harsh results. While managing tax residency status is likely to be relatively straightforward for most individuals, the circumstances in A Taxpayer demonstrate that difficult choices, with potentially significant financial consequences, may arise where challenging family circumstances abut against the hard edges of the bright line rules contained in the SRT.
While the UT has made it clear in A Taxpayer that the run-of-the mill complexities of family life will not satisfy the test in paragraph 22(4), it is easy to imagine circumstances in which the application of the UT's decision will be less clear-cut. The UT's view in this case of what is "run-of-the-mill" might not be shared by a differently constituted tax tribunal.
The UT's decision in A Taxpayer presents individuals seeking to avail themselves of paragraph 22(4), with a significant hurdle to overcome. However, when it comes to matters of conscience, the range of circumstances that may fall at the interstices of what can properly be described as "regularly, or routinely, or normally encountered" vis-à-vis circumstances that are truly exceptional are endless and deciding where the boundaries lie may require HMRC and the courts to draw some fine, potentially controversial, distinctions between competing values. Indeed, the increasing complexities of modern life mean that there is likely to be more for the courts to say on the SRT exceptional circumstances test – watch this space.
The decision can be viewed here.