HM Revenue & Customs (HMRC) is taking an ever increasingly aggressive approach to taxpayers who claim a “non-domiciled” or “temporarily resident” tax status in the UK. Whether or not a taxpayer is “ordinarily resident” in the UK, is also relevant to determine the extent to which that taxpayer will be liable to UK tax. It remains a hot topic for those who claim the status.
A recent attack has been looking at “ordinary residence” status, of which the case of Tuczka v HMRC 2010 UKFTT 53 will come as very bad news to taxpayers. There is no statutory definition of “residence” or “ordinary residence” in the UK. The meanings have been derived and blurred through case law. Taxpayers had previously relied on guidance provided by HMRC in booklet IR20 to understand how they are likely to be treated by HMRC. IR20 was replaced with HMRC6 from 6 April 2009.
Under UK legislation, an individual will be taxable as if they were resident in the UK, if they spend 183 days or more in the UK in a given tax year. Ordinary residence is a more difficult concept, being more than residence. Its meaning has been derived from case law, and is “more than temporary [residence]…. it connotes residence in a place with some degree of continuity.”[1] It is on the basis of these concepts that the UK courts and HMRC look at residence and ordinary residence in the UK for tax purposes.
The old guidance in IR20 provided that an individual who came to the UK, with the intention of staying for less than three years could be regarded as not “ordinarily resident” in the UK, potentially until the beginning of the next tax year following the third anniversary of their arrival. Therefore, if a taxpayer arrived on, say 1 June 2004, in tax year 2004/2005, and they could show they had not formed an intention to stay longer than three years, they would not usually be regarded as ordinarily resident until 6 April 2008. However, over the last few years, HMRC frequently challenged those who “passively” overstayed the three years and claimed their intentions had not changed.
In the light of the number of enquiries into this area, it was no surprise when HMRC withdrew IR20 and replaced it with the less prescriptive HMRC6. Although HMRC claimed its views had not changed, HMRC6 indicates that a taxpayer who overstays the three years will be regarded as ordinarily resident in the UK, with effect from the beginning of the tax year in which the third anniversary falls – a year earlier than the previous guidance suggested.
This has caused considerable confusion amongst taxpayers who previously relied on the IR20 approach to residence. It was therefore inevitable that further case law would arise out of this unclear area, which so far in itself has led to further confusion as the courts have considered the law independently of HMRC’s stated practice.
The CaseThe First Tier tax tribunal held that Dr. Tuczka, an Austrian national, was ordinarily resident in the UK although he had intended to spend less than three years there. When he reported himself to the UK tax authorities on form P86, he stated he intended to stay 2½ – 3 years.
Perhaps rather surprisingly, given the previous emphasis by HMRC on “intentions,” the court held Dr. Tuczka’s intentions to be largely irrelevant in this case. The Court held that what mattered was that Dr. Tuczka had come to the UK for a “settled purpose” to work from the outset. His purpose of coming to the UK was held to be more important than his intentions of staying.
It is now very unclear how much reliance can be put on HMRC’s published guidance, potentially resulting in the loss of valuable reliefs. Overseas workday relief is one such relief available to those not ordinarily resident and spend part of their working days outside the UK. Taxpayers who claim overseas workday relief are also likely to be in the UK for the purpose of employment, and hence the Tuczka case is highly relevant to them.
Another important factor the Court took into consideration in this case was that Dr. Tuczka bought a flat in May 1998. HMRC argued that the purchase of a property meant he was automatically ordinarily resident from the beginning of that tax year. The Court did not entirely accept this view, and taxpayers can take some comfort in Mr John Clark’s closing remarks that the purchase of a property would not necessarily prevent a taxpayer from remaining not ordinarily resident, as long as the property was then sold in the limited period as provided in IR20.
A further important point to note from this case is that HMRC previously stated that any guidance produced by it is neither statutory nor binding on it, and therefore cannot be relied upon by a taxpayer in a court of law. This is a very unhelpful position for taxpayers who follow HMRC guidance. Mr John Clark recognised this and stated that where HMRC issues guidance, it is only fair that taxpayers who use it are able to rely upon it in court. However, taxpayers who use these rules without taking advice can expect a costly and lengthy investigation (Dr. Tuczka came to the UK in 1997, and he may appeal against this 2010 decision).
Another case that provides a contrast to Tuczka, is Philip George Turberville v HMRC [2010] UKFTT 69 (TC) which held that a taxpayer who overstayed the three year period indicated by IR20 was not ordinarily resident on his return to the UK for a three month period. As he had been made redundant, his return visit to the UK was not considered to be for a settled purpose.
What these cases show is that going forward, each taxpayer’s circumstances need to be considered on the individual facts.
NOTE:
1. Levene v IRC [1928] AC 217 Viscount Cave