U.K. Court Cases and Tax Residence
U.K. Court Cases and Tax Residence
Two judgements have recently been issued by the U.K. courts regarding U.K. tax residence which will have implications for certain international assignees inbound to and outbound from the United Kingdom. The first, the Gaines-Cooper case1, concerns the circumstances in which an individual ceases to be U.K. tax resident, while the second, the Tuczka case2, involved a non-U.K national and considers when someone becomes ordinarily resident in the United Kingdom.
Gaines-Cooper Case
Mr. Gaines-Cooper had claimed to have become non-U.K. resident by virtue of meeting the day-count test (see below) for someone leaving the U.K. permanently or indefinitely. He had lost on this point in the lower courts, but this hearing concerned a judicial review about whether the U.K tax authorities (HMRC) had correctly applied their guidance on residence, then published in booklet IR20, and whether they had unlawfully refused to apply that guidance. The case also involved two other individuals, Mr. Davies and Mr. James, and whether they could rely on the guidance in IR20 concerning those who go to work full-time abroad and the somewhat different circumstances in which they can shed their U.K. resident status.
The judges confirmed in the case the importance of the principle that HMRC should be required to abide by its guidance, but concluded that the taxpayers were not within the guidance. Although the judgement is unanimous, Lord Justice Ward expresses some “considerable hesitation” in agreeing with the judgement of his colleagues.
The judgement also contained a great detail of comment on the tests that an individual needs to satisfy to become non-U.K. resident. Firstly, taking full-time work abroad, the requirement then (as now) is broadly that an individual leaves the U.K. to work full-time abroad under a contract of employment for a complete U.K. tax year (a U.K. tax year is from 6 April to 5 April) and that any visits to the United Kingdom:
• are less than 183 days per year, and
• average less than 91 days in any tax year.
Alternatively, an individual may be regarded as non-U.K. resident if he or she leaves the U.K. permanently or indefinitely (for at least three years) and visits to the U.K. are within the limits described above. The point made by the judges was that, in thecontext of the IR20 guidance, they considered that a distinction had been made by HMRC between “leaving” the U.K for full-time work abroad and leaving the U.K. permanently or indefinitely. This is discussed further below.
KPMG Note
The important point, when leaving permanently or indefinitely (for at least three years), is the need to leave the U.K in terms of social, economic, and other ties to the U.K., rather than simply applying a pure day-count test. The judges said that HMRC was entitled to look at the individual’s connections with the U.K., including whether his family has remained in the U.K., when considering whether the individual had made a “clean break” with the U.K. and, crucially, that the IR20 guidance had indeed reflected this position.
Very significantly, for multinational employers and their employees, the judgement clarifies that this requirement for a “clean break” does not apply if the individual goes to work full-time abroad under a contract of employment for a complete U.K. tax year. There is, under these circumstances, no requirement for there to be such a “clean break.” Again, the judges considered that this was clear from IR20; the problem for Mr. Davies and Mr. James was that they did not apparently satisfy the requirement to have worked full-time abroad over the relevant period.
A point not covered in the judgement is precisely what is meant by “working full-time abroad.” If for example, an individual worked in the U.K. one day a week he could keep within the 183 and 91 day rules, but would he then be regarded as working full-time abroad? Infrequent business visits to the U.K. may be acceptable, but when do they become too frequent?
KPMG LLP (U.K.) will endeavour to seek clarity on this point from the U.K. tax authorities.
Tuczka Case
Individuals can be regarded as U.K resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).
The distinction is important because, with one exception involving employment with no U.K. duties, ROR employees are taxable on their worldwide earnings whether remitted to the U.K. or not. RNOR employees are taxable on their earnings for U.K. duties whether the employee’s earnings are paid in the U.K. or not. Such employees, however, can elect for the remittance basis and then their earnings for non-U.K. duties are only taxed in the U.K. if remitted to the United Kingdom.
It is HMRC practice3 to treat individuals who come to the U.K. with the intention of remaining for less than three years as not ordinarily resident in the United Kingdom. Individuals who come to the U.K. with the intention of remaining for three or more years are regarded as ordinarily resident in the U.K. from their date of arrival.
Additionally, HMRC will regard individuals as ROR in the U.K. if they occupy rented property under a lease of three years or more or they purchase property in the U.K. even when their intention was to remain for less than three years. Under such circumstances HMRC will review the residence status if the individual does leave within three years and sells the property.
Uncertainty has arisen because individuals who originally intended to remain in the U.K. for less than three years sometimes remain for more than three years. The question then arises when did/do they become ordinarily resident?
As explained in Flash International Executive Alert 2009-155, (14 August 2009) HMRC was going to publish revised guidance on this point. This amended guidance was to be published as a revised version of HMRC64. (HMRC6 replaced IR20 as HMRC’s general guidance on residence). This revision was delayed, however, by the judicial review in the Gaines-Cooper case.5
Dr. Tuczka claimed to have no intention of remaining in the U.K. for three years. He arrived in the U.K. in July 1997, but was held to be ordinarily resident for the years 1998/1999, 1999/2000, and 2000/2001. In reaching this decision, one factor that was considered – albeit not on its own being determinative – was that Dr. Tuczka purchased a flat and lived there with his future wife who was in the U.K. on a training contract that would last for more than three years. In the words of the Judge:
One factor in considering this question is Dr. Tuczka’s decision to purchase the Notting Hill flat. In our view this is not determinative of the question; it is an added factor demonstrating that his purpose in living in London for the time being was settled. Even without the purchase of the flat, we consider that the evidence shows Dr. Tuczka to have become ordinarily resident during 1998-99. He chose to remain in London for a settled purpose, namely his employment, and adopted a pattern of living which in fact continued until 2002 (and, with certain changes, subsequently).
KPMG Note
HMRC always look closely at claims to be not ordinarily resident when an individual remains in the U.K. for more than three years. HMRC typically looks to see whether the individual came to the U.K. for a settled purpose or, if not, whether circumstances changed so that there was a subsequent settled purpose in being in the U.K. and whether this occurred earlier than in the tax year of the third anniversary of arrival.
Individuals should not assume that they will automatically be regarded as not ordinarily resident for three years if they do not leave the U.K. before their third anniversary of arrival. If they become “settled,” they may become ordinarily resident at an earlier date. Employers of assignees to the U.K. should review the length their assignees are in the U.K. and, where business needs permit, consider the possibility of ending assignments before the third anniversary of arrival rather than shortly afterwards. The difference in taxation can be significant, particularly with the introduction of the 50-percent income tax rate. For tax-equalized individuals on net packages, the tax is 100 percent of the remuneration.
KPMG LLP (U.K.) believes it would be a good idea if HMRC were to amend HMRC6 to reflect the judicial decisions in these two cases and to add guidance regarding the meaning of “working full-time abroad.”
Source: KPMG
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