International Assignments: Residency in the UK- where are we now?
In recent weeks, there have been a number of decisions highlighting the complexities surrounding residence in the UK
All of the decisions, including the well-known Court of Appeal case involving Robert Gaines-Cooper, have been decided in favour of H M Revenue & Customs (HMRC). As a result, HMRC is likely to increase its scrutiny of those situations which concern residency.
A person’s residency status is relevant for UK for tax purposes. For example, under UK legislation individuals living outside the UK will be regarded as UK resident if they regularly visit the UK for a period exceeding 90 days in each tax year, on average, for four consecutive tax years. Therefore, if an individual’s visits do not exceed 90 days per tax year, they are generally not regarded, for tax purposes, as being resident in the UK.
This case involved a British national, Mr Gaines-Cooper, a businessman with assets in the UK and Seychelles. Mr Gaines-Cooper claimed that he had been living in the Seychelles since 1976 and therefore was not, and could not be considered to be, resident in the UK. Mr Gaines-Cooper was careful not to spend more than 90 days on average in the UK in each tax year, in order to fall within the non-resident exemption noted above. Mr Gaines-Cooper’s position was based on HMRC’s residency guidance booklet IR 20 (although this guidance has, from 2009, been replaced by booklet HMRC6).
The Court of Appeal ruled that Mr Gaines-Cooper had not severed his ties with the UK and therefore, irrespective of not spending more than 90 days in the UK on average during each tax year, he should be regarded as UK resident. The Court ruled that Mr Gaines-Cooper maintained close ties with the UK and the centre of gravity of his life and interests remained in the UK. The Court considered that Mr Gaines-Cooper had never made a ‘distinct break’ with the UK when he moved to the Seychelles in 1976 and had continued to live his life in the same way in which he did before he moved.
The Court noted that HMRC had not changed its policy in this area but was effecting ‘closer and more rigorous scrutiny and policing of the growing numbers of claims’.
Another recent case involving residency considered the concept of ordinary residence.
Individuals may become UK resident but if they are not likely to stay in the UK for a period of more than 3 years, they will generally be regarded as not ‘ordinarily resident’. A UK resident who is not also ordinarily resident can request to be taxed on his UK earnings only and will only be subject to UK tax on earnings and gains arising outside the UK where these are remitted to the UK.
Dr Tuczka, an Austrian national working in the UK as an investment banker, had initially planned to stay in the UK for less than 3 years but ended up staying longer. The court ruled that Dr Tuczka remained in the UK for a settled purpose, namely his employment, and had adopted a pattern of living which continued. However, rather than finding that Dr Tuczka became ordinarily resident after the third anniversary of his arrival (which is normal practice as set out in HMRC booklet IR20), the court considered that Dr Tuczka should be regarded as ordinarily resident from the earliest year in which his pattern of continuous living in the UK was established.
HMRC has a period of six tax years in which to review a person’s tax affairs. Such reviews could include cases where individuals have claimed to have left the UK but who are still making regular visits back (as in Gaines-Cooper). Individuals coming to the UK should be aware of the court’s finding in Tuczka which could result in them becoming ordinarily resident far earlier than anticipated. The decision in Tuczka seems to suggest that anyone who expects to be in the UK for a period of less than 3 years at the outset, but who ends up staying longer, may be at risk of challenge from HMRC where they have requested to be subject only to UK tax on a remittance basis. If a pattern of continuous living can be established, individuals may be considered by HMRC to be ordinarily resident and hence subjected to more onerous levels of UK tax far sooner than originally envisaged. Such a finding by HMRC could also have an impact for their employers.