Ordinary residence - a challenge to IR20

Introduction

Residence, ordinary residence and domicile are three key aspects which need to be considered whenever anyone arrives in or leaves the UK (along with their position under any relevant double tax treaty). These concepts are still not defined by statute, but have been principally developed by HMRC (until recently as set out in their booklet IR20) applying the very limited case law in this area.

A practice has grown up of treating someone as ordinarily resident if they are or intend to be in the UK for three years or more. However, a recent case (Genovese v. HMRC) has held that ordinary residence can only be obtained after an individual has been resident in the UK for a sufficient period (3 years in this case). An intention to reside here for a sufficiently long period is not on its own enough to make someone resident from the time of arrival.

Those who have followed HMRC’s advice that they were ordinarily resident from the date of arrival in the UK if they intend to stay for at least three years may therefore be able to reclaim tax paid in the first few years that they were in the UK, i.e. before they established a pattern of residence which would enable HMRC to treat them as ordinarily resident.

Facts

The taxpayer was an Italian national employed by a large international financial group who was sent to the UK for work purposes in July 1998. There was no evidence given as to how long he or his employer envisaged him working in the UK. Like most employees arriving in the UK, shortly after arrival, he completed the relevant HMRC form which new employees from abroad have to file (P86). His response to the question about how long he intended to stay in the UK was “2-3 years”. He continued working in the UK and until July 2002 he lived in rented accommodation, renewed annually in September each year, but in September 2002 he bought a house.

Issues

The issue between the parties was whether the taxpayer became ordinarily resident on 6 April 2002 (as he contended) or in the previous tax year (as HMRC contended).

Those who are resident but not ordinarily resident do not pay UK tax on non-UK income and capital gains unless these are paid (or “remitted”) to the UK. Overseas investment income or separate employment income for overseas duties can therefore be paid and kept overseas without a UK tax charge arising. These benefits still remain available following substantial changes in the law in 2008, although a claim for this favourable treatment now needs to be made (and potentially a £30,000 charge paid for the privilege).

What was at stake in this case was not made clear. Whatever his ordinary residence status, the taxpayer is also likely to have been non-UK domiciled which gives many of the same tax benefits as being non-ordinarily resident, other than in relation to overseas employment duties where a separate non-UK employer is required for someone who is ordinarily resident in order for non-UK duties only to be taxable on the remittance basis (whereas if he is not ordinarily resident, a separate non-UK employer is not required). It may be that this point was relevant in this case.

Judgment

The key point from this case is that the Special Commissioner held that “intention” to remain in the UK was not relevant in determining ordinary residence other than for meeting the basic need for presence in the UK to be voluntary for an individual to become ordinarily resident. In the course of the case, HMRC tried to persuade the Special Commissioner to look at the taxpayer’s intentions but he was not swayed by this and, reviewing the relatively few authorities, held that habitual residence for three years was required, and that this was achieved in October 2001 on the fourth lease renewal. The test was always “look-back” rather than “look forward”. In addition, the Special Commissioner held that if a taxpayer become ordinarily resident in a tax year, he was ordinarily resident as a matter of law for the whole of that tax year and so judgment was given in favour of HMRC (i.e. that the taxpayer was ordinarily resident in 2001-2) albeit on slightly different grounds than they asked for.

Comment

• Although this particular case went against the taxpayer, if the reasoning in this case is accepted by HMRC or upheld on appeal, a number of other taxpayers should be able to reclaim tax on non-UK income. If for previous tax years they followed HMRC practice and treated themselves as ordinarily resident merely on the grounds of intention and subjected themselves to tax on all income and gains, then they may be able to reclaim tax to the extent that they did not remit non-UK income or gains to the UK.
• Care should always be taken in completing any HMRC forms which ask about intention to stay in the UK. Employees can sometimes be keen to demonstrate their enthusiasm for a long posting, but showing an intention to stay longer than three years may, while there is still some uncertainty over the position, mean alerting HMRC to ask for more UK tax than actually needs to be paid.
• The case serves as a welcome reminder that IR 20 (now mostly republished in HMRC6) is not law, although it is often treated as such by advisers and HMRC alike. Despite the large amount of advice that is given in this area, relatively few cases go to Court. This is a very rare case on ordinary residence.
• There has also been a further recent development for taxpayers who are not ordinarily resident and who have non-UK income and gains. Under Statement of Practice 1/09, they can now wait until the end of the tax year to work out what has been remitted to the UK rather than applying complicated statutory rules as and when remittances are brought into the UK. Moreover, HMRC will also accept that the calculation can be conducted so that (broadly) if all income is paid into one account, non-UK income and gains will only be taxable if what is brought into the UK is more than relevant UK income and gains for that year.
• Finally, it is likely that Finance Bill 2010 will contain statutory definitions of residence, ordinary residence and domicile. Accordingly, if there is any relief given by this case, it is likely to be short-lived as HMRC are likely to use this opportunity to restate their position definitively.

Genovese v. HMRC SPC741