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The Statutory Residence Test allows for “exceptional circumstances” to avoid injustice

The Statutory Residence Test allows for “exceptional circumstances” to avoid injustice

The anonymised case of A taxpayer v Revenue and Customs[2022] UKFTT 133 (TC) provides a useful insight into HMRC’s approach on the conditions to be met for days spent in the UK to be ignored for the purposes of the Statutory Residence test on the grounds of exceptional circumstances.

An individual who lived in Dublin, having moved from the UK, spent more than 45 days in the UK in 2015/6, and argued that she was not UK resident because she fell within the “exceptional circumstances” exemption for a sufficient number of the nights spent in the UK to fall below the relevant day count. She came to the UK to support her twin sister on two occasions, and on both occasions, considered that the situation she found required her to stay for several days. The tribunal held that “the combination of the need for the Appellant to care for her twin sister and, particularly, for her minor children at a time of crisis caused by the twin sister’s alcoholism does constitute exceptional circumstances for the purposes of paragraph 22(4).”

HMRC argued that the circumstances were not exceptional on three grounds;

  • HMRC argued that because the taxpayer would have been able to foresee a need to support her twin sister when she took the decision to take up residence in Ireland, this prevented those circumstances from constituting “exceptional circumstances”.
  • They also argued that the “exceptional circumstances” test did not encompass a person who came to the UK under a moral obligation or an obligation of conscience to care for a family member or other person. Instead, HMRC argued that the “exceptional circumstances” test only applied where a person came to and remained in the UK either under a legal obligation (e.g. to care for their minor child) or was physically prevented from leaving the UK (e.g. by a volcanic eruption which made flights impossible).
  • HMRC also argued that the “exceptional circumstances” exemption applied only to persons who were already in the UK and, while they were in the UK, were overtaken by “exceptional circumstances” which prevented them from leaving. The exemption did not, according to HMRC, apply to a taxpayer who came to the UK because of the “exceptional circumstances” and who was then prevented from leaving by those same circumstances, despite this contradicting their own guidance. HMRC did argue that because the taxpayer had the use of a private jet, she could have flown over each day.

All of these arguments were rejected by the tribunal, who considered that HMRC’s approach to statutory interpretation was clearly wrong:

“If, as we find as a fact, Parliament intended to avoid injustice in the application of the SRT by excluding exceptional circumstances beyond a taxpayer’s control, then it would be hard to imagine a more unjust conclusion than that advocated by HMRC. To conclude otherwise, would favour the kind of injustice that Parliament intended to avoid. It could hardly have been Parliament’s intention to have required the “exceptional circumstances” test to be failed if, for example, a taxpayer thought it necessary to be present because of serious illness or at the death bed of a close relative. “

The judges were also highly critical of HMRC’s attitude to the application of the legislation in other ways. They described HMRC’s wording in the closure notice (with their highlights below) as “a manifestation of their mistaken approach”:

“The circumstances should be highly exceptional, and not merely “unusual, not what happens regularly or is expected”, but out of the ordinary in the extreme.” 

They were also highly critical of HMRC’s comment in a letter, setting out their view that a sibling could not be within the exemption:

“It is agreed the legislation relating to exceptional circumstances (s22 (4) and (5) Schedule 45 FA 2013) is silent on who the person, suffering the sudden or life-threatening illness or injury, must be. At the time the legislation was enacted HMRC’s view was that the legislation (paragraph 22(4)) was intended to apply to the individual, the individuals’ spouse, civil partner, person they live with as a partner or dependent child.”

The intention of the Statutory Residence Test, which replaced a mixture of old case law and HMRC practice, was to set out prescriptive tests in clear language to provide clarity for taxpayers, and in this context the “exceptional circumstances” rules are designed to provide a limited amount of flexibility to get to a fair result.

There is some background in relation to the case which is of interest.

In 2015/16, her husband was charged with tax fraud, but the charges were later dismissed and “the Crown had paid the husband’s reasonable legal costs and he had received unreserved letters of apology from both the Crown Prosecution Service and HMRC.”

The taxpayer claimed to be non-UK resident, while her husband, from whom she was not separated, remained UK tax resident. The amount of tax at stake if she had been UK resident for 2015/16 was over £3m, because her husband had transferred shares to her on which a dividend of £8m had been paid.

In this context, HMRC’s approach in the correspondence does seem to be confrontational rather than considered. We too have seen occasions on which HMRC assert their own view, including their own guidance, as if it was the law, and are unwilling to focus the discussion on the wording of the legislation.

It will be interesting to see how this decision affects HMRC’s approach in those cases where non-UK residents had difficulty in leaving the UK due to COVID 19 lockdown restrictions; we sincerely hope a common sense view is taken.