The costs of living home and away
Originally sent: August 12, 2005This article was written by Graham Dragon of Adviser Breakthrough Solution, and was originally published on the 11th of August 2005 by Financial Adviser. ? Copyright Financial Times Business Limited - 2005.
MOST financial advisers, particularly those in the corporate market, will by now have heard of Dr Brice, who was in the chair when the Special Commissioners decided on the Arctic Systems case.
This decision was important as it extended the implications of the so-called ?settlements legislation? well beyond the boundaries most of us had assumed existed. It certainly caused pandemonium in the offices of many firms of accountants.
But this is not yet another piece on Arctic Systems, important and far reaching though that case is. Arctic Systems is still going through the appeal process, so you can expect an article about its implications for advice to corporate clients ? particularly smaller companies in the service industry ? when the Lords make their final decision.
Instead I want to introduce you to another case just decided by Dr Brice which also has important implications for income tax planning. A case which you might not have read, as it has not yet been published on the Finance and Tax Tribunals website.
This case concerns a British Airways pilot by the name of Ian Shepherd. When it does eventually appear on the FTT website you can look it up under reference SPC00484.
Mr Shepherd thought to rely on the advice on residence given in the Revenue publication IR20 ? Residents and Non-Residents: Liability to Tax in the United Kingdom. If you have any clients who spend time outside the UK, you have probably relied on the guidance of IR20 too. The question of residence for the purpose of tax can be quite a difficult one, and the guidance given by Her Majesty?s Revenue & Customs ought to help us determine a client?s residence, should it not?
Opinion
It can certainly point us in the right direction, and might give us the answer we need in the simpler cases. But it would be very dangerous to rely on IR20 as a definitive statement of the law on residence. First, it is merely the opinion of the Revenue on the law. It does not make the law, it follows it ? and it can always be wrong. Second, some of the information in IR20 is based on concessions ? and concessions are not given where HMRC believe they are being abused. Third, the notice only gives a broad outline, which may well not be sufficient to decide a particular case.
The point being considered by the Commissioner in the case of Mr Shepherd, and one which is relevant for many financial advisers and their clients, was whether or not he was resident in the UK in certain tax years. If he was resident, he had to pay tax on all his income, regardless of the source. If he was not resident he would not have to pay tax on income arising outside the UK. This seems quite simple. I suppose compared with the rather complex and at times almost unpredictable rules we have for capital gains tax and particularly for inheritance tax, the basic principles for income tax are fairly straightforward. But everything hinges around that definition of ?resident?. When do you become resident in the UK? Or perhaps, more to the point, when do you cease to be resident in the UK?
This question of residence is a difficult one. It is not defined by statute, so we and the Revenue have to rely on past decisions to try to define it. There is talk of reviewing it and issuing some statutory definitions, but there has been talk of this for some time. In fact, in the case of ?domicile? we have been promised a review for over 50 years and there is still no real sign of one. So, at the moment, we are stuck with looking at case law, which the Revenue has tried to summarise in IR20.
One fact of which most of us are probably aware is that if you spend 183 or more days in the UK in any tax year, you will be regarded as resident. As it says in the Revenue notice, there are no exceptions to this. But this does not mean that you are not a resident if you spend fewer days than this in the UK.
The next test is to look at the average number of days spent in the UK over the period you are claiming to be non-resident. The rule here is that you should not spend more than 90 days on average over that period ? with the measure limited to four years if you claim to be non-resident for longer than this. Most of us probably stop at those two tests. Mr Shepherd did, and claimed that as a result he was non-resident and not subject to UK tax on his foreign income. Dr Brice begged to differ.
While there was some dispute about exactly how many days Mr Shepherd had been in the UK in one of the years, it was clear he had met the requirements if the 183 days rule were interpreted rigidly. Over the period in question, it was also clear that his average stay in the UK was less than 91 days a year. On a simple reading of IR20, therefore, Mr Shepherd had passed the tests and his foreign income should not have been subject to income tax in the UK. But his local inspector, perhaps imagining the consequences if all international pilots made similar claims, disagreed and ruled that Mr Shepherd was a UK resident throughout, despite apparently passing the simple tests in IR20.
Appeal
Mr Shepherd, quite naturally, was not happy with this decision and appealed to the Special Commissioners. The Special Commissioner in this case, Dr Brice, found in favour of the Revenue and decided that Mr Shepherd was tax resident in the UK.
Some accountants are already seizing on the fact that there were not clear records of Mr Shepherd?s absences from the UK, and reasoning that this must be why Dr Brice found in favour of the Revenue. After all, if there is some doubt about how many days you are here, how can you state categorically that you have met the requirements of IR20? But if you read the case carefully, this is not the reason for her decision. What really decided the case here was not a counting of the days, but an examination of the nature of Mr Shepherd?s ongoing connection with the UK and the nature of his residence in another country. Dr Brice found that Mr Shepherd had not created a significant enough difference between the period in which he was resident and the period in which he claimed to be non-resident.
Occasional
This is the key point which all advisers who may encounter questions of residence should note. And this is also the point which I believe makes the Shepherd case rather a turning point in income tax law. There has always been a principle that ?occasional absence? from the UK does not count as non-residence, but there has been no clear definition of occasional absence. And I think many advisers have simply taken the concept as another way of expressing the 183 day and 91 day rules. But this way of looking at it is wrong, and the Shepherd case underlines this point.
It seems to have been the fashion for some time to live in Jersey or Guernsey during the week, return home to the UK every weekend, use the ?days of arrival and departure do not count? rule to claim you are only in the UK one day a week, and then pay no tax here on foreign income. Perhaps some of these ?Channel Island commuters? are going to get a nasty shock quite soon when an aggressive local inspector decides the Shepherd case means this position can be challenged.
We must now look carefully at the nature of a client?s absence from the UK, and also the nature of any ongoing connection with the UK. I am not saying the client has to sever all connection with the UK. We are not talking about a regime anywhere near as draconian as the inheritance tax regime in that respect.
But we do have to look well beyond a simple statement by our clients of how many days they were in the UK over what period. This does not give us enough information to advise on whether or not a client was tax resident. If we give advice based on this inadequate information, we have nobody to blame but ourselves when a client sues us for giving inappropriate advice.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
Adviser Breakthrough Free IFA News Service
About
Adviser Breakthrough Training Solutions provides the IFA community with a FREE and easy way to keep ahead of the game - so why not sign up today ?
Subscription to this newsletter is FREE. To sign up simply enter your name and email address in the form below.
