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One sister comforting another | accoutingweb | Exceptional moral circumstances
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Twins’ bond not ‘exceptional’ in residence dispute

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The upper tribunal overturned the decision in a relatively straightforward residence case because the exceptional circumstances were not deemed unforeseeable.

18th Aug 2023
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There are few bonds stronger than that between twins, so when the taxpayer’s twin sister in this case needed her she did not hesitate to go to help. HMRC’s position is less sympathetic.

A, who must remain strictly anonymous, moved to Ireland in April 2015. In the year 2015/16 she received £8m of dividends, which would be subject to £3,142,550.58 of income tax if she was a UK resident. In order to remain non-UK resident, A needed to spend 45 days or fewer in the UK but in 2015/16 she spent 50.

A’s twin sister was suffering from serious mental health issues and as a result A spent time in the UK caring for her twin’s children. A argued that six of the additional days should be treated as exceptional due to her moral obligation to her family.

Exceptional circumstances

The first tier tribunal originally found in favour of A on the basis that exceptional circumstances do not necessarily have to be unforeseeable and that the exemption could apply where a moral or conscientious inhibition prevented the taxpayer from leaving the UK. The judge also noted that HMRC’s submission that she could have left the UK at the end of each day and then returned the next was impractical, despite the fact that she had a private jet at her disposal.

However the upper tribunal re-made the decision, ruling that A had overstayed her 45-day limit in the UK and hence was a UK resident in 2015/16.

According to HMRC’s internal manual: “In order to be ignored as days spent in the UK, there must be exceptional circumstances beyond the control of the individual. In other words, the event or situation in question must be one over which the individual has no control or influence, and which cannot reasonably have been foreseen.” HMRC’s argument, and the UT agreed, was that A’s circumstances were foreseeable as she would have been aware of her sister’s difficulties before she travelled to the UK and hence did not qualify as exceptional.

Relative unambiguity 

This case, although sad, reminds us of the relative unambiguity of the statutory residence test (SRT). The rules are very clear and in the vast majority of cases easy to apply leaving very little wriggle room for favourable interpretations. The number of days a taxpayer can spend in the UK is codified in legislation and even the definition of “exceptional circumstances” is fairly concrete. Other areas of tax could take a leaf out of the SRT’s book.

Before the SRT was introduced, residence disputes were based on a combination of the old IR20, Revenue practice and case law, with lengthy complicated and often contentious tribunals that, in some cases dragged on for months or years. Replacing this process with the SRT in April 2013 disposed of the majority of these arguments and saved HMRC, tribunals, and taxpayers and their agents a considerable amount of hassle and uncertainty.

Lessons for other tax areas

So are there other analogous areas of tax that could benefit from being codified in a similar way?

The most obvious one is employment status. Time after time we see a concoction of Revenue practice, longstanding case law and IR35 leading taxpayers, agents, HMRC and the tribunals on a less-than-merry dance in the quest to determine whether individuals should be treated as employed or self-employed for tax purposes.

Perhaps it’s time HMRC moved towards a simpler method along the same principles as the SRT. Determining whether a worker should be taxed as an employee based on the number of days worked for an organisation in the tax year would seem a sensible starting point – such an approach would almost certainly afford less AccountingWEB column space to the likes of Gary Lineker.

There is an argument that a more rules-based approach naturally leads to loopholes and unintended consequences where new situations arise that are not covered by existing rules – such as A’s moral obligation argument for exceptional circumstances. There will always be anomalies and cases that don’t quite fit the mould, but at least having an underlying bedrock based on clear, concise rules should smooth the path for the vast majority of contractors and their clients. One thing’s for sure: the current process is well overdue a parliamentary shake-up.

Replies (11)

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By SM80
18th Aug 2023 19:51

Residence

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Replying to SM80:
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By Catherine Newman
19th Aug 2023 08:50

Agreed. Domicile is completely different.

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Replying to Catherine Newman:
Richard Hattersley
By Richard Hattersley
19th Aug 2023 10:45

Thanks both – the article has now been updated.

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Replying to Richard Hattersley:
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By Catherine Newman
19th Aug 2023 17:37

Thanks Richard.

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By whopkinscom
21st Aug 2023 09:49

My heart bleeds. Perhaps some of the £3M will be used towards improving mental health services in this country - but we'd need a change of govt for that!

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7om
By Tom 7000
21st Aug 2023 09:53

Nice touch with the private jet......

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By Mike Warburton
21st Aug 2023 11:02

There are some similarities between the confusion we currently have with IR35 and with the test for residence.
Until HMRC moved the goal posts everybody applied IR20 without difficulty.
The Gains -Cooper case created massive uncertainty which made the statutory residence test necessary.
I was one of the expert witnesses at the Court of Appeal in Gains-Cooper and saw the way the three HMRC inspectors presented their evidence.
Even with the Atholl House Court of Appeal judgement there remains uncertainty
I can therefore see some merit in a statutory test of employment
Mike

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Replying to Mike Warburton:
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By Catherine Newman
21st Aug 2023 12:03

Thank you very much for the insight Mike. It is very useful.

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By Postingcomments
21st Aug 2023 15:34

Some clients seem to like stuffing up even the best and simplest tax advice.

Years ago, a client went to live in Monaco to avoid a big tax bill. He lasted about 3 days before flying back to Blighty!

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By cfield
22nd Aug 2023 09:10

The only trouble with a statutory employment test is that they'll make it practically impossible for one NOT to be an employee. You've only got to look at the CEST tool and the SDC criteria for agency workers.

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By cfield
22nd Aug 2023 09:10

In the case of the twin sisters, with money like that rolling in, you'd have thought the sister with the care responsibilities could have afforded pre-emptive tax advice and made sure, one way or another, that she was out of the UK for those 5 days. All she had to do was go to Ireland or France for 3 weekend breaks and take the kids with her. Eurocamp would have been ideal.

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