Residence and Court of Appeal - Working abroad with UK working obligations.
In the current economic climate, many employers and employees are considering the potential of UK non-residence, with the largest motivator being the advantageous position for avoiding tax liability.
Undoubtedly the attractive tax position on corporation tax and employer national insurance for companies, and substantially lower income tax and national insurance contributions for employees provide an irresistible opportunity.
Furthermore tax benefits and personal control of an individual's pension fund are available by using an individual's non residency in combination with transfer of retirement funds to a Qualifying Recognised Overseas Pension Schemes (QROPS) .
QROPS can help you to avoid the most common reservations in UK Pension planning:
- Buying an annuity by age 75 years
- 100% of funds passed to beneficiaries on death
- Restrictions on taking cash.
QROPS are proving to be a revelation for non UK residents. With full approval from HMRC and simpler rules, UK Pensions funds will once again be the best investment you ever made.
Great care needs to be taken in considering becoming non resident as a recent Court of Appeal hearing considers:
Background to the Case
An airline pilot works for British Airways and flies long-haul flights out of the UK. This scenario is common in the airline industry, and many other occupations that take individuals away from the UK for long periods of time.
Generally an airline pilot will need to be in the UK a day or so before and after a series of flights.
This case reviews that the individual was resident in the UK from 1986 to 1997. In 1997 he rented and then purchases a property in Cape Town, South Africa. Therefore considers that he is non UK resident since that date being resident in South Africa. Spending as much time there as he can and performing his duties as a BA pilot, and intending to spend his retirement there in due course.
HMRC argue that his continued presence in the UK, as the base from which he does his work, shows that he is still resident here, just as he was before 1997.
The court of appeal agreed with a list of factors that the high court judge produced. The list stated by both the high court and court of appeal is:
(i) The word "reside" is a familiar English word which means "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place": Levene v Commissioners of Inland Revenue (1928) 13 TC 486, 505. This is the definition taken from the Oxford English Dictionary in 1928, and is still the definition in the current on-line edition;
(ii) Physical presence in a particular place does not necessarily amount to residence in that place where, for example, a person's physical presence there is no more than a stop gap measure: Goodwin v Curtis (1998) 70 TC 478, 510;
(iii) In considering whether a person's presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place: Commissioners of Inland Revenue v Zorab (1926) 11 TC 289, 291;
(iv) Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity: Fox v Stirk  2 QB 463, 477; Goodwin v Curtis (1998) 70 TC 478, 510;
(v) However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as business obligations) and the sequence of visits excludes the elements of chance and of occasion: Lysaght v Commissioners of Inland Revenue (1928) 13 TC 511, 529;
(vi) Although a person can have only one domicile at a time, he may simultaneously reside in more than one place, or in more than one country: Levene v Commissioners of Inland Revenue (1928) 13 TC 486, 505;
(vii) "Ordinarily resident" refers to a person's abode in a particular place or country which he has adopted voluntarily and for settled purposes as part of the regular order of his life, whether of short or long duration: R v Barnet LBC ex p Shah  2 AC 309, 343;
(viii) Just as a person may be resident in two countries at the same time, he may be ordinarily resident in two countries at the same time: Re Norris (1888) 4 TLR 452; R v Barnet LBC ex p Shah  2 AC 309, 342;
(ix) It is wrong to conduct a search for the place where a person has his permanent base or centre adopted for general purposes; or, in other words to look for his "real home": R v Barnet LBC ex p Shah  2 AC 309, 345 and 348;
(x) There are only two respects in which a person's state of mind is relevant in determining ordinary residence. First, the residence must be voluntarily adopted; and second, there must be a degree of settled purpose: R v Barnet LBC ex p Shah  2 AC 309, 344;
(xi) Although residence must be voluntarily adopted, a residence dictated by the exigencies of business will count as voluntary residence: Lysaght v Commissioners of Inland Revenue (1928) 13 TC 511, 535;
(xii) The purpose, while settled, may be for a limited period; and the relevant purposes may include education, business or profession as well as a love of a place: R v Barnet LBC ex p Shah  2 AC 309, 344;
(xiii) Where a person has had his sole residence in the United Kingdom he is unlikely to be held to have ceased to reside in the United Kingdom (or to have "left" the United Kingdom) unless there has been a definite break in his pattern of life: Re Combe (1932) 17 TC 405, 411."
Of most significance; although some degree of permanence is required to establish residence this states that recurrent visits to the UK can constitute permanence if they are regular and based on a continuous obligation.
Tax legislation for Temporary residence
The special commissioners had originally relied on a specific provision in the tax legislation that applies to temporary residents. These state:
Temporary residence in the United Kingdom:
- For the purposes of Cases III of Schedule E, a person who is in the United Kingdom for some temporary purpose only and not with the intention of establishing his residence there shall not be treated as resident in the United Kingdom if he has not in the aggregate spent at least six months in the United Kingdom in the year of assessment, but shall be treated as resident there if he has.
- The question whether:- for the purposes of subsection above a person is in the United Kingdom for some temporary purpose only and not with the intention of establishing his residence there, shall be decided without regard to any living accommodation available in the United Kingdom for his use.
The court of appeal agreed with the high court in that they felt the pilot was not in the UK for a temporary purpose stating:
'It seems to me that Mr Grace's presence in this country before every outward long-haul flight, and between flights on some occasions, this country being the base from which he operated as a pilot, does not fit the statutory words "who is in the United Kingdom for some temporary purpose only". I would accept that he was not here "with the intention of establishing his residence" here.’
He had previously established his residence here and the question is whether he had retained it or not. However, for the section to apply, both requirements have to be satisfied
Distinct Residency break with the UK
The court of appeal felt that there had not been a distinct break with the UK by the pilot:
‘The demands of his employment did not change in 1997, and the time which he spent in the UK attributable to his employment did not change. In that respect there was continuity in his pattern of existence. What did change was the place where he spent that part of his time when his whereabouts was not dictated by his employment.
This is as far as the court of appeal went:
'I agree that a finding of residence is a possible conclusion, and perhaps a likely one, but it does not seem to me that it would be right for the court to pre-empt the decision of the Special Commissioner on that issue.
It seems to me that it would be wrong to treat the appellant's presence for the purposes of his employment as a factor which necessarily shows residence.
It may well be a strong pointer in that direction, but the decisions in Scotland, in the House of Lords and by Rowlatt J highlights the need to take into account all relevant factors. I do not think it would be right to regard Mr Grace's presence in this country in order to perform the duties of his employment as a trump card which of itself concludes the issue in favour of residence'
Establishing non UK residence
If you are looking at establish non UK residence it is crucial that you:
- Limit visits to the UK, particularly if there is any continuous obligation
- Show a distinct break from the UK, including a change in the established pattern of your life
- Avoid having a UK home or any UK available accommodation
Also consider - with individual advice - establishment of treaty residence overseas under the terms of a double tax treaty between the UK and your new country of residence. This could then limit the scope of any UK tax liability.