The statutory residence test: an exceptionally useful case on ‘exceptional circumstances’

Day-counting is central to the statutory residence test (SRT). The general rule is of course that an individual is treated as being in the UK on a particular day if he/she is in the UK on that day at midnight (FA 2013 Sch 45 para 22(1)). However, there are a number of qualifications to this. In particular, there are several reliefs under which presence in the UK at midnight can be disregarded. One of these applies to presence in the UK due to exceptional circumstances beyond the individual’s control. It is this relief which was the focus of Taxpayer v HMRC [2022] UKFTT 133 (TC).

The relief applies to days on which:

• the individual is in the UK at midnight due to exceptional circumstances beyond his/her control;
• those circumstances prevent the individual from leaving the UK; and
• the individual intends to leave the UK as soon as those circumstances permit.

Up to 60 such days in the relevant tax year can be left out of account by virtue of this relief. However, if the number of days to which these conditions apply in a tax year exceed 60, the excess days over 60 count towards the total (Sch 45 para 22(4-6)). There is therefore a limit on the generosity of the statute towards an individual who find himself or herself stuck in the UK due to circumstances beyond his control.

The facts

The case concerned the appellant’s residence status in 2015/16. She and her husband had both been UK resident in prior tax years. However, in 2015/16 the appellant was residing in the Republic of Ireland and she had filed in the UK as a non-resident. This filing position depended on certain days spent in the UK in 2015/16 falling within the relief referred to above.

The amount of tax turning on the appellant’s status in 2015/16 was significant, as her husband had transferred certain shares to her, and dividends of some £8m had been received on these. In 2015/16, her husband continued to be UK resident.

There would not have been any doubt about the appellant’s non-resident status had it not been for sad developments in the life of her twin sister, who was residing near Manchester and with whom the appellant had a close relationship. The appellant’s sister had for some time been suffering from alcoholism and mental health issues. These issues came to a head in the course of 2015/16, when it became clear that the sister was drinking heavily, behaving erratically, entering into numerous short-term relationships with dubious partners and, most troubling of all, subjecting her own young children to serious neglect.

The appellant’s evidence was that the sister was at risk of suicide and her children were at risk of being subject to a care order under the Children Act 1989. She was concerned that there was no-one else able to look after her sister or her children, and on several occasions flew to the UK to stay with the sister for a number of days, to watch over her and care for the children. The time spent in the UK on these visits would have resulted in the appellant being UK resident in 2015/16, were it not for the claimed ability to exclude the relevant days by virtue of the relief for exceptional circumstances.

HMRC’s arguments

HMRC challenged the appellant’s position that the relief was in point. Inter alia, HMRC argued that:

• The relief did not apply, on the facts of the case, because the circumstances were not truly exceptional, or were not really beyond the appellant’s control. The appellant’s sister’s alcoholism and mental health issues were longstanding and the appellant had been aware of them for many years. It was foreseeable that the sister’s condition might worsen, and the appellant could in principle have taken measures that would have avoided the need for her to fly into the UK to take matters in hand (para 146).
• The relief does not apply to individuals travelling to the UK to meet moral obligations or obligations of conscience. It only applies where an individual comes to the UK and remains there to discharge a legal obligation (e.g. to care for a minor child), or where an individual comes to the UK and is physically prevented from leaving (para 149).
• Alternatively, the relief applies only to individuals who, whilst in the UK, are overtaken by exceptional circumstances which prevent them from leaving. The relief does not apply to a taxpayer who has come to the UK because of exceptional circumstances, and who is then prevented from leaving by those same circumstances (para 151).

As counsel for the appellant pointed out, this third proposition was at odds with HMRC’s own guidance in its Residence, Domicile and Remittance Basis Manual at RDRM13240, where example 2(a) concerns an individual residing overseas whose child suffers a serious injury in the UK. In the example, the individual flies to the UK to be with his child and to arrange her transfer to a hospital in the country in which he is residing. The guidance acknowledges that the relief for days in the UK due to exceptional circumstances applies in this scenario.

The decision

The First-tier Tribunal (FTT) found that, contrary to the arguments advanced by HMRC, the conditions of the relief were made out. Accordingly, the appellant could disregard the midnights spent in the UK due to her emergency flights to the UK to care for her sister and the sister’s children, when counting her days in the UK for 2015/16. The outcome was that she was, as per her tax return, non-resident.

An individual may be prevented from leaving the UK, within the meaning of the rule, not only where leaving the UK would be physically impossible or would require the breach of legal obligations such as obligations to care for minor children, but also where the individual is kept in the UK by an obligation of conscience

The following general points can be drawn from the FTT’s judgment:

1. The purpose of the relief is to prevent injustices that could otherwise arise due to the prescriptive, day-counting based principles of the SRT, in situations where an individual is unable to leave the UK due to circumstances beyond his/her control (para 132).
2. Whether circumstances are exceptional, within the meaning of the relief, is always a question of fact and degree, to be determined in the round (para 156). It is therefore impossible to be definitive or exhaustive regarding the circumstances which will, or will not, qualify as exceptional for the purposes of the relief.
3. The relief must not be construed more narrowly than the statutory wording requires. It must be understood in light of Parliament’s objective in building the relief into the SRT (paras 150, 153).
4. To be exceptional, circumstances need not be unique, or unprecedented, or very rare. However, they cannot be circumstances that are regularly, routinely or normally encountered (para 143, where the FTT quoted from R v Kelly [2000] QB 198 at 208).
5. There is no requirement for circumstances to havebeen unforeseeable for them to count as exceptional. Foreseeability may be an element in the assessment of whether circumstances are exceptional, but it is not determinative. For example, it may be foreseeable that a chronic degenerative disease may worsen and become life-threatening, but this does not preclude such a turn of events from being exceptional (para 147).
6. The rule is not limited in scope to cases in which the individual is in the UK when the exceptional circumstances arise. It can also be engaged where such circumstances arise when the individual is abroad, if the circumstances require the individual to come into the UK, and then prevent him/her from leaving (para 151).
7. Where the exceptional circumstances arise due to another individual’s illness or injury, there is no requirement for such an individual to be a spouse/partner or dependant child (contrary to the indications given in HMRC’s guidance) (para 156).
8. An individual may be prevented from leaving the UK, within the meaning of the rule, not only where leaving the UK would be physically impossible or would require the breach of legal obligations such as obligations to care for minor children, but also where the individual is kept in the UK by an obligation of conscience. The word ‘prevent’ can encompass ‘all manner of inhibitions – physical, moral, conscientious or legal – which cause a taxpayer to remain in the UK’ (paras 149–150).

In relation to this final point, the FTT’s choice of words indicates that the question of whether a particular set of circumstances ‘prevent’ an individual from leaving the UK may, to some degree, be subjective. The FTT felt that it would be unjust were the relief to be unavailable to a taxpayer who ‘thought it necessary to be present because of a serious illness or at the death bed of a close relative’ (emphasis added).

Points of interest

There are two further features of interest.

One is that the appellant had access to a private jet, and instead of staying overnight in the UK to look after her sister and her children, she could, in theory, have flown back and forth every day between Dublin and Manchester, so that she avoided spending midnights in the UK. The appellant’s position was that the journey between Dublin and Manchester would have taken three hours door-to-door, and this conduct would have been absurd (para 68). However, HMRC’s position was that the possibility of being able to leave the UK meant that the appellant was not ‘prevented’ from doing so within the meaning of the legislation.

The FTT rejected HMRC’s argument, observing that to expect the appellant to spend six hours travelling on a daily basis, while attempting to care for her sister and the children would, while theoretically possible, be impracticable (para 160). It follows that the relief is not limited to days on which the circumstances make it completely impossible for the individual to leave the UK; the relief can also apply where the circumstances require the individual to be in the UK and it would be extremely difficult, or severely impractical, for the individual to make day trips to the UK so that he/she avoids being in the UK at midnight. This seems to be a sensible, pragmatic reading of the legislation, which recognises that there is a spectrum from complete impossibility, through extreme difficulty or severe impracticality, to mere inconvenience. This makes sense in light of the indication, noted above, that there is an element of subjectivity to the issue of whether circumstances prevent the individual from leaving the UK.

It is clear from Taxpayer v HMRC that the relief is there to prevent injustices arising from the prescriptive nature of the SRT, and whether it is available depends not on HMRC guidance but on the particular facts and circumstances of each case

The second point of interest is that the FTT found in the appellant’s favour despite the vagueness of her recollection of many aspects of the events, and some significant flaws in her evidence (see para 183). In particular, the FTT did not believe that the appellant genuinely thought her sister’s life was at risk and concluded that, while distressing, alcoholism and depression of a sibling do not constitute exceptional circumstances (see para 179). It was the neglect of the sister’s minor children that was both exceptional and prevented the appellant from leaving, and that swung the judgment in her favour.

This finely balanced decision obviously raises the question of whether HMRC might be able to appeal, in the hope that the Upper Tribunal might have more sympathy with its case and might reach a different determination. However, it is trite that a finding of fact by a decision-making body cannot be disturbed on appeal unless the decision-making body based its finding on an error of law, reached a finding of fact without evidence to support it, or interpreted the evidence so badly that its finding was perverse (see Edwards v Bairstow [1956] AC 14). In the authors’ view, the FTT stated the legal test correctly, based its finding on evidence, and its decision was far from unreasonable. An appeal therefore seems unlikely.

Concluding observations

It is perhaps not surprising that HMRC sought to construe the exceptional circumstances relief narrowly. As observed at the outset, there is already an inbuilt limit to the largesse of the relief (which may have been particularly problematic to taxpayers in recent years, where the various global exceptional circumstances have not confined themselves to a 60 day period), and HMRC is understandably more inclined to maximising tax revenues than showing generosity to taxpayers. Nonetheless, it is clear from Taxpayer v HMRC that the relief is there to prevent injustices arising from the prescriptive nature of the SRT, and whether it is available depends not on HMRC guidance but on the particular facts and circumstances of each case.

This article was written by Dominic Lawrence and Catrin Harrison, originally published on the Tax Journal on 16 June 2022.