Statutory Residence Test - A recent tax case on exceptional circumstances

In preparing 2021/22 tax returns, we are seeing the results of the COVID-19 pandemic travel restrictions, which have caused clients to remain in the UK for longer than intended.

For those seeking to remain not-UK resident for the year by managing their days in the UK, additional time spent in the UK can have unintended and potentially costly consequences (see our previous update on COVID-19 and UK residence).

Exemption for exceptional circumstances

Fortunately, there is a limited exemption whereby it is possible to ignore up to 60 days per year in counting days of presence in the UK for some (but not all) of the tests in the Statutory Residence Test (SRT) where that presence in the UK is the result of 'exceptional circumstances'. 

In order for the exemption to apply for a day:

• the circumstances must be exceptional and beyond your control
• the circumstances must have prevented you from leaving the UK
• you would not be present in the UK at the end of the day but for those circumstances and
• you intended to leave the UK as soon as those circumstances permitted.

HMRC’s guidance provides examples of exceptional circumstances which include sudden life-threatening illness or injury to the individual or a spouse, partner or dependent child, and local or national emergencies such as civil unrest, natural disaster or the outbreak of war.

Early in the pandemic HMRC published further COVID-specific guidance confirming that exceptional circumstances would also apply to the following:

• days spent quarantined or self-isolating in the UK as a result of the virus if advised by a health professional or public health guidance
• if official government advice is not to travel from the UK as a result of the virus
• if you are unable to leave the UK as a result of the closure of international borders
• if you are asked by your employer to return to the UK temporarily as a result of the virus.

Recent tax case

A recent case before the First Tier Tax Tribunal considered the application of the law relating to exceptional circumstances. The tax year under examination pre-dated COVID-19, but the case provides some useful pointers as to the interpretation of that law, and in one instance the Tribunal’s ruling directly contradicts HMRC’s published guidance.

In putting their case, HMRC advanced the following arguments, all of which were rejected by the Tribunal.

• A circumstance cannot be exceptional if it is foreseeable. For example, the deteriorating health of a family member. The tribunal held that foreseeability is just one factor to consider in determining whether circumstances are exceptional, and furthermore pointed out that the fact that circumstances may be foreseeable does not necessarily mean they are within the control of the taxpayer.
• Only legal obligations (e.g. to care for a minor child) or physical factors (e.g. a volcanic eruption which made flights impossible) are able to prevent a person from leaving the UK. The Tribunal held that a moral obligation (in this case, to care for a sick sister’s minor children) was sufficient to prevent the taxpayer from leaving the UK.
• Exceptional circumstances can apply only if they arise once the person is already in the UK. HMRC’s published guidance in their Residence Domicile and Remittance Basis Manual says the exemption 'will usually only apply to events that occur while an individual is in the UK and which prevent them from leaving the UK' and 'will generally not apply in respect of events that bring an individual back to the UK'. The Tribunal found there was no statutory justification for this argument.
  
  Interestingly, HMRC’s guidance has since been updated in response to the situation in Ukraine to confirm that since “current Foreign, Commonwealth & Development Office advice is against all travel to Russia, Belarus and Ukraine… individuals returning to the UK from these territories would qualify for days spent in the UK to be disregarded due to exceptional circumstances, subject to the 60-day limit”.

The Tribunal’s rulings on these points suggest that interpretation of the legislation on exceptional circumstances is perhaps wider than HMRC would necessarily wish. However, as the case was heard by the First Tier Tribunal it is not legally binding. Only if an appeal to the Upper Tier Tribunal or beyond also found against HMRC would this case set a binding legal precedent. In the meantime (as often when a case is decided against them) HMRC is likely to argue that the case was decided on its own specific facts and is not therefore of general application.

There is one final point to take away from the case - the Tribunal criticised some of the claimant’s evidence as being 'vague in relation to details'. Therefore, we would advise our clients to keep detailed and preferably contemporaneous records in support of any claim for exceptional circumstances.

If you have any questions about any matters to do with UK tax residence or if you require any assistance in considering a claim for relief for exceptional circumstances, get in touch with Mark Spalding, Jennifer McNally or your usual Crowe contact.