Suprise decision in tax residence case
Spring 2009
Doubt has been cast on the strength of one of the main tests for determining whether a person is resident in the UK. Following a High Court decision last November, it may no longer be enough to just spend an average of fewer than 91 days a year in the UK when claiming non-UK residence status.
The case concerned Lyle Dicker Grace, a South African pilot employed by British Airways flying out of Heathrow. He had been resident in the UK since 1986 and owned a house here, but in 1997 he acquired a further home in Cape Town. From then on he stayed in his UK home only for brief periods immediately before and after flights. All his social life was in Cape Town and from the tax year 1997/98 he spent an average of fewer than 91 days a year in the UK.
Grace claimed he was not UK resident from 1997/98 onwards and the Special Commissioner, an independent tax tribunal, agreed. However the decision was overturned in the High Court, largely on two grounds, namely that Grace had not left the UK to live abroad, and that he was not in the UK for only a temporary purpose. He therefore continued to be UK resident.
Make a break
The case highlights the need for a distinct break where someone who has been UK resident claims to be non-resident. This is not new – the tax return pages for claiming non-resident status ask whether a previously resident claimant has left the UK and, if so, the date of departure. But the point is sometimes overlooked. To be safe, a UK resident who wants to become non-resident should move their domestic and business life to another country, and spend as little time as possible in the UK in the first tax year of non-residence.
The High Court also held that Mr Grace was not in the UK for a temporary purpose because he was here to exercise the duties of his permanent employment. Some commentators have suggested that anyone who lives abroad but spends two or three days a month, say, working in the UK for a UK employer is now at risk of being taxed as a UK resident. Others believe this is very unlikely, though there may be a danger in a few cases depending on individual circumstances.
Keep a record
The High Court ruling is controversial and may be subject to an appeal. For most people it will remain the case that if your family and social life is clearly abroad, you are unlikely to be treated as resident in the UK if you are present on fewer than 183 days in any tax year and fewer than 91 days a year on average.
Any non-resident who has to complete a UK tax return should keep a precise record of their movements in and out of the UK. Since 6 April 2008, any day on which you are present in the UK at midnight is counted as a day of presence in the UK for the residence test, unless you are only in transit between two places outside the UK. To be ‘in transit’ you must leave the following day and, while in the UK, not engage in activities unrelated to the journey itself, such as attending a business meeting.
Determining residence status can be complex and needs care. We can advise you on becoming non-resident, maintaining that status, and how much of your income is taxable in the UK if you are nonresident, or indeed non-UK domiciled.
