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Counting the days

Revisiting the rules on residence, ordinary residence and domicile

The recently reported Special Commissioners’ case of Gaines-Cooper versus HMRC 2006, dealing with residence, ordinary residence and domicile, all as part of a preliminary hearing, has been reasonably well covered in the professional and quality general press.

One of the points considered in the context of determining the taxpayer’s domicile – and the point that seems to have attracted greatest attention in the press – was the relevance of the days of arrival in and departure from the UK in determining the “day count” in the UK of the taxpayer.

I must, however, stress that the “day count” was just one of many factors that were considered in determining whether the taxpayer had established a new domicile of choice in the Seychelles, losing his domicile of origin.

I will look at the facts of the case in a little more detail in a later article but, importantly, the Special Commissioners stated that in this case the law and not the provisions of booklet IR20 would be the determinant.

For those to whom this was a shock, it is worth noting that booklet IR20 itself states that: “You should bear in mind that the booklet offers general guidance on how the rules apply but whether the guidance is appropriate in a particular case will depend on all the facts of that case. If you have any difficulty in applying the rules in your own case, you should consult an Inland Revenue tax office.

“See paragraphs 7-9 of the introduction on contacting the Inland Revenue.

“Some practices explained in this booklet are concessions made by the Inland Revenue. A concession will not be given in any case where an attempt is made to use it for tax avoidance.”

The publicity given to this case and the reporting that, in some cases, appeared to freely interchange the concept of domicile and residence, made me think that it might be helpful to look at the three key principles of residence, ordinary residence and domicile and their relevance for the purposes of UK taxation.

Let’s first look at residence. This is a question of fact and usually but not always requires a physical presence in the UK in a particular tax year, that is, from April 6 in one year to April 5 in the following year.

An individual will be regarded as resident in the UK during a particular tax year if either:

l He spends 183 or more days in the UK during that year orl Although in the UK for less than 183 days during the tax year, he spends on average over 90 days a year in the UK averaged over a four-year period.

Prior to the 1993/94 tax year, a person was also treated as resident in the UK in any tax year in which he visited the UK, even for a single day, if he had accommodation available for his use in the UK. This test was abolished in 1993 for tax year 1993/94 and later years.

In calculating the number of days an individual spends in the UK for the purpose of this test, the days of arrival and departure can be excluded as HMRC is concerned only with whole days spent in the UK.

Apparently, many full-time lorry drivers take their lorries on a ferry to the Continent on a Sunday evening, work on the Continent during the week and return to the UK on a Friday evening. In the past, HMRC treated such drivers as non-UK resident as they were present in the UK for fewer than 91 days on average each tax year. Now, however, HMRC considers that they have not left the UK for more than occasional residence abroad and therefore remain UK resident.

Mobile workers could argue that their pattern of working life is such that, over a period of years, living outside the UK has become part of the regular order of their lives.

This means that someone leaving the UK now has to shed their ordinarily resident status in order to become non-UK resident.

Residence is particularly important for an individual’s liability to income tax and capital gains tax. If a person is resident in the UK, then he would normally be liable to UK income tax on his worldwide income.

If he is not resident in the UK, he would only be liable to UK tax on income arising in the UK and even then such liability may not arise because of the double taxation rules.

With regard to CGT, if an individual is UK resident, he is potentially subject to tax on worldwide capital gains. If a person is not UK resident, gains on worldwide assets will still be subject to tax unless he is not UK ordinarily resident.

Since March 17, 1998, there are temporary non-resident rules operating for CGT purposes in respect of individuals becoming neither resident nor ordinarily resident in the UK on or after March 17, 1998.

Broadly speaking, such an individual can be subject to UK CGT on any gains made in respect of assets owned before going abroad and disposed of during such a period of non-residence and non-ordinary residence if the individual becomes UK resident or ordinarily resident within five complete tax years of first becoming non-UK resident and nonUK ordinary resident (section lOA TCGA 1992).

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