The Statutory Residence Test and “exceptional circumstances”

Since 6 April 2013 an individual’s UK tax status has been decided by the Statutory Residence Test (SRT). The number of days that the taxpayer spends in the UK is vital in determining tax residence pursuant to the SRT with a variable number being permitted as decided by various factors.

Under an “exceptional circumstances” exemption a day in the UK (up to 60 days in total) can be disregarded if the taxpayer would not be present in the UK at the end of that day but for exceptional circumstances, and the taxpayer intends to leave as soon as the circumstances permit.

Due to the COVID-19 pandemic, and resultant travel restrictions, the claims for exceptional circumstances may temporarily increase. A recent First Tier Tribunal case, the first judicial case considering this aspect of the legislation, may therefore be particularly helpful at the present time.

The dispute

Due to the sensitive nature of some of the evidence in this case the judgment was anonymized, so the identity of the taxpayer (T) is unknown, but we do know that a significant amount of tax was at stake, exceeding £3 million. T contended that she was non-resident throughout the 2015/16 tax year while HMRC argued the opposite and did not accept T’s exceptional circumstances claim for the excess five days she spent in the UK over and above the 45 days that in her particular case was allowable under the legislation. The dispute arose over whether T satisfied the exemption on the facts, and how the exemption should be interpreted, with HMRC’s argument for a narrow construction being rejected by the Tribunal.

The move to Ireland

On 4 April 2015 T and one of her children moved to Ireland and T subsequently declared herself to be non-resident under the SRT for the tax year 2015/16. In September 2014 T’s husband had transferred some shares to his wife which paid dividends to T during the tax year 2015/16 of some £8 million.

T had a twin sister with whom she was emotionally very close. T’s sister was a drug and alcohol addict who was divorced from her husband, the father of her two young children. In December 2015 the twin sister’s situation had worsened and it was feared that she was suicidal. T felt that she was the only person who could support her sister and as a result travelled to the UK for two days followed by a second visit in February when another crisis occurred. On the second visit T found that her sister’s children were being neglected and that her sister was incapable of caring for them. The visits amounted in total to five days over T’s allowance leading to the exceptional circumstances claim.

The decision

It was agreed between the parties that the burden of proof fell on T to demonstrate on the balance of probabilities that the exceptional circumstances exemption should apply.

HMRC submitted that the objective of the SRT was to provide greater certainty than the previous law and day counting was an important aspect of providing this. The exceptional circumstances exemption was to introduce an element of flexibility to ensure injustice did not occur.

It was common ground between the parties that T had to show:

1. The circumstances were exceptional;
2. They were beyond T’s control;
3. T would not be present in the UK at the end of the relevant day but for the circumstances; and
4. T intended to leave the UK as soon as the circumstances permitted.

The Tribunal took the view that the exemption should not be construed narrowly and disagreed with several of HMRC’s submissions:

The Tribunal disagreed that, in construing exceptional circumstances, foreseeable circumstances should be excluded. In the context of this case HMRC’s argument that, because T might have foreseen a need to support her sister when she took up residence in Ireland the circumstances could not be “exceptional”, was rejected by the Tribunal.

HMRC argued that exceptional circumstances could only apply where a person was in the UK under a legal obligation or was physically prevented from leaving the UK. The Tribunal strongly rejected this argument and said that a moral obligation was sufficient. It was stated that “the word “prevent” can encompass all manner of inhibitions-physical, moral, conscientious or legal.”

HMRC argued that the exceptional circumstances exemption only applied to individuals already in the UK when the circumstances arose and not to individuals like T who came to the UK because of the exceptional circumstances which then prevented her from leaving. This argument was not accepted by the Tribunal.

Finally, HMRC’s argument that “exceptional” should be given a narrow meaning, because examples of circumstances that may be exceptional were given in the legislation, was regarded by the Tribunal as being a mistaken approach.

The Tribunal found that there was no evidence that T’s twin sister was suicidal as claimed. It was held that the two visits, if they arose from the sister’s alcoholism and depression, did not constitute exceptional circumstances, but the necessity to care for T’s sister’s children did amount to such circumstances. There was no need for an itemised timeline for each of the days in question as if the reason for one day constituted exceptional circumstances that reason remained valid for each day.

A helpful decision

The rejection of a narrow construction of the exceptional circumstances exemption will be welcomed by those who advise non-residents and it is also helpful that the operation of the exemption has been clarified.