Court of Appeal Rules Taxpayer Was Not Resident in UK

The Court of Appeal has reinstated an earlier ruling of the First-tier Tribunal (FTT) that a taxpayer was not resident in the UK for Income Tax purposes during the 2015/16 tax year due to exceptional circumstances that prevented her from leaving the country.

The taxpayer had received dividends of about £8 million in the year. The statutory residence test contained in Schedule 45 of the Finance Act 2013 meant that, in her particular circumstances, she would be resident in the UK if she had spent more than 45 days here during the year. She had in fact spent 50 days in the UK but claimed that six of those days did not count by virtue of Paragraph 22(4) of Schedule 45, which discounts days when a taxpayer would not be present in the UK but for exceptional circumstances beyond their control which prevent them from leaving. She said that she was compelled to remain here to help her sister, who was suffering from alcoholism, was suicidal and was failing to look after her children. HM Revenue and Customs (HMRC) denied that those amounted to exceptional circumstances and issued a closure notice amending her tax return to include the dividend. She appealed to the FTT.

The FTT accepted that her sister had severe problems with alcoholism but was not satisfied, on the balance of probabilities, that she had come to and remained in the UK because her sister had threatened suicide. It did not consider that alcoholism and depression amounted to exceptional circumstances. Allowing the appeal, however, it found that the need to care for her sister's children changed the position. HMRC appealed to the Upper Tribunal (UT).

The UT found that the FTT had erred in deciding that a moral or conscientious obligation could 'prevent' a taxpayer from leaving the UK. It had also erred in failing to apply the statutory test to each individual day. The FTT's findings had been contradictory in that if alcoholism was not exceptional, notwithstanding the consequences it has for an individual and their family members, then being in the UK to deal with those same consequences could not be exceptional either. Allowing HMRC's appeal, the UT remade the FTT's decision and found that the circumstances were not exceptional and had not prevented the taxpayer from leaving the UK. She was therefore tax resident in the year.

Ruling on her appeal against that decision, the Court found that a sufficiently compelling moral obligation could meet the definition of 'prevent'. In circumstances such as family illness, a person would not be under any legal obligation to stay nor physically prevented from leaving, but it could be said that they had no real choice in the matter and were in practical terms obliged to stay. In the Court's judgment, moral and social obligations were also relevant in determining whether the circumstances as a whole were exceptional. The Court found that the FTT's conclusion on exceptional circumstances was a question of fact that could only be disturbed if the only reasonable conclusion contradicted it.

The Court considered that when the FTT said the need to care for the children changed the position, it was considering those circumstances separately from the sister's alcoholism and depression. Its conclusions on those issues could thus be read consistently.

The Court noted that the FTT might have been sceptical whether the need to stay had persisted for each of the six days, and might have placed weight on the fact that it had not been told what had changed to allow the taxpayer to leave when she did. However, the question was not whether the Court would have reached the same conclusion as the FTT, but whether the FTT was entitled to reach the conclusion it did on the evidence. The Court allowed the appeal and restored the FTT's decision.