The case is the Grace case.
2011 - Case Law Development on Residence
4 February 2011
Grace v The Commissioners for Her Majesty's Revenue & Customs (TC00913)
A year after the Court of Appeal's decision in Gaines-Cooper [2010] STC 860, the First-Tier Tribunal has held that another individual, Mr Grace, a long-haul pilot for British Airways, remained tax-resident in the UK, despite establishing his main home in South Africa.
The Tribunal's decision is not surprising; the High Court had previously found Mr Grace to be UK resident and, when the Court of Appeal referred the case back to the Tribunal, it did so with thinly-veiled hints that a finding of residence was likely. However, the Tribunal adopts an interesting approach to several of the indicators of tax residence, as summarised below.
CASE LAW PRINCIPLES
The Tribunal approached the case by setting out the principles on residence which can be derived from case law, as summarised by Lewison J (in the High Court: Grace [2009] STC 213) and Dr Brice (in the Special Commissioners: Shepherd [2005] STC (SCD) 644). These formulations, which were approved by the Court of Appeal in Grace [2009] STC 2707, appear now to be the standard starting point for the Tribunal when considering the residence of individuals.
THE IMPORTANCE OF A DISTINCT BREAK
The Tribunal considered whether residence (under case law principles as opposed to statute) has an "adhesive" nature, such that an individual who has been resident in the UK must make a "distinct break" in the pattern of their life in order to become non-resident.
The Tribunal concluded that an individual who has been a UK resident must demonstrate that they have lost that status. The Tribunal considered that this would be difficult, although not impossible, without showing a "distinct break". The Tribunal envisaged a taxpayer who gradually reduced his ties with the UK over time would ultimately become non-resident without having made a distinct break. (The comparison being drawn would appear to be between the breaking of ties which occurs suddenly or more gradual. In either case, it will need to be comprehensive and identifiable in order to show that residence has been lost.) For the majority of individuals who claim to have left the UK, the "distinct break" concept will be "inextricably linked to the question of residence".
Mr Grace claimed to have made a distinct break in one year, 1997. The Tribunal disagreed. It found that, although Mr Grace had established ties in South Africa, where he had acquired a home and engaged in an active social life (and had reduced the time he spent in the UK), he had not severed his main ties with the UK, being his house and employment.
THE RELEVANCE OF DAY COUNTING
The Tribunal considered Mr Grace's presence in the UK and in South Africa in the relevant periods, focusing in particular on the comparison between the amount of time he spent in the UK and the amount of time he spent in South Africa (where he accepted he was resident).
The Tribunal found that the number of days Mr Grace spent in the UK (being 106 days a year on average, compared to 85 in South Africa) did not point strongly to residence or non-residence, noting that the time spent in the UK was both higher than individuals who had been found to be resident and lower than individuals who had been found to be non-resident. Further, the Tribunal did not focus on the "91 day" average rule found in IR20, stating that the rule has no basis in the case law.
Mr Grace's relatively low day-count was held not to preclude residence. The Tribunal considered the pattern of his visits to the UK in light of his occupation as a long-haul pilot. The Tribunal found that the short, very frequent and predictable visits to fulfil employment duties were sufficient to amount to residence.
YOU TREAT THIS PLACE LIKE A HOTEL
The Tribunal accepted that a person living in a hotel, or in a house treated like a hotel, in the UK was less likely to be (but not precluded from being) a UK resident. In Mr Grace's case, the Tribunal found that he did not treat his house near Gatwick airport "just like a hotel", keeping his car, furniture and personal possessions there, receiving mail doing paperwork there and doing his own washing and shopping whilst staying there. The Tribunal found that the use of his own house pointed to Mr Grace being resident.
FANCY GOING OUT?
Mr Grace argued that his presence in the UK lacked the quality of residence. He claimed to have no social life or hobbies in the UK; he was merely killing time here before or after flights by sleeping, watching TV and surfing the internet. In contrast, his life in South Africa was described as "gregarious". South Africa was where the focus of his life was, where he spent his leisure time with friends and family, stored his private aircraft and lived in a more substantial house that he considered to be his home.
The Tribunal acknowledged the differences between Mr Grace's lifestyle in the UK and South Africa, although it considered such differences were inevitable for a person based in one country for work and another for leisure.
The Tribunal rejected Mr Grace's claim that he spent all his leisure time in South Africa – he spent time in the UK resting before or after flights. The fact that he chose to spend his leisure time in the UK was considered important, although what he did with that time (eating in rather than going out, etc.) was not considered determinative.
It is interesting to note that the Tribunal was careful to avoid a search for the taxpayer's "home" (an ever-present temptation in residence cases). The Tribunal simply noted the existence of the South African home as relevant to the case, but not conclusive.
BRITISH AIRWAYS
Arguably the most important feature in this case was Mr Grace's long term employment with British Airways. The Tribunal noted that this employment was (and continues to be) a very important part of Mr Grace's life, without which he would not be in the UK. It made his presence in the UK a permanent feature of his life which would continue so long as his employment continued. It was the basis of the settled purpose for which he was in the UK, making him much more than a visitor when he was in the UK. It was the reason for the frequency and predictability of his return visits to the UK (Mr Grace was required to fly every 28 days to maintain his pilot's licence) and it gave rise to the frequent use of his UK house which was found to be a settled abode.
Mr Grace's employment, together with his house, was his main tie to the UK which he retained, despite also establishing himself in South Africa.
CLOUDY SKIES
HMRC has won almost all of the individual residence cases which have come before the courts in the last ten years.
The Tribunal's decision in Grace is a reminder that short, frequent and predictable visits to the UK in connection with a UK employment can be sufficient to establish residence. In order to illustrate a "distinct break", those who have been UK resident will need to show that their main ties to the UK (e.g. employment and accommodation) have been significantly reduced, not merely that additional ties have been established elsewhere.
This decision also demonstrates the difficultly which individuals who have retained UK accommodation will have in showing that they have become non-resident.
ccs notes.
HMRC6 is the new and relevant HMRC guideline on residence and domicile.
At the present time the steps someone must take to establish non residence are almost as severe as those needed to establish non domicile.
It would be very helpful, probably for all, if Britain adopted a statutory residence test. This is not something that has proved difficult for other European countries, the US or Australia and New Zealand to establish. One can only conclude that it suits HMRC to keep matters in the unofficial dark.
Stability is not a keystone of the British tax system.
(There are, by the way, tax implications regarding the import into the UK of certain types of income during the first five years of non residence, assuming that at some stage in the future you resume residence in the UK. I think this mostly relates to income not from employment but you might want to check up on that with your soon to be appointed professional advisor!?) )
Last edited by cavortingcheetah; 19th Feb 2011 at 18:33.