UK tax residence – when does the 91-day test apply?
As a general rule a UK resident is subject to UK income tax on all his income worldwide whereas a foreign resident is liable to UK income tax only on income arising in the UK. As an exception to that general principle a UK resident who has a foreign domicile will generally be taxed on foreign income only if it is remitted to the UK.
“Residence”, and the linked but separate expression “ordinary residence”, are not defined in the tax legislation and the meaning of these terms has to be sought from decisions of the Courts. The practice of HMRC is set out at length in its booklet IR20 and perhaps the best known of HMRC’s “rules” has been to regard a person who has left the UK for permanent residence abroad as still resident here for tax purposes if his visits to the UK average 91 days or more per tax year – the “91-day test”; and for the purpose of counting the days spent in the UK HMRC’s normal rule” is that days of arrival in, and departure from, the UK are ignored.
The “91-day test” was analysed in great detail (and to different effect) by the protagonists in the recent Special Commissioners’ case of Gaines-Cooper v HMRC. The Commissioners’ decision, issued towards the end of last year, has generated some confusion amongst commentators but its main effect is to make clear that the first issue to be decided where a taxpayer has set up a home in another country is whether or not he has truly left the UK for permanent residence abroad. If he has not, then he has not passed first base as far as establishing non-UK residence is concerned and the “91-day test” does not even have to be considered.
Mr Gaines-Cooper was born in England and lived here until his 30s when his business interests took him overseas. He first visited the Seychelles in 1973 and in his own words “immediately fell in love with the Seychelles and wanted to make his permanent home there”. He bought a property in the Seychelles in October 1975 but became a truly mobile international businessman with interests in many jurisdictions. Significantly however he maintained a home in the UK at all times and made annual visits for pheasant shooting and Royal Ascot. He also attended many other social functions here including weddings and funerals. The Special Commissioners were asked to rule on Mr Gaines-Cooper’s residence and ordinary residence from 1993/94 to 2003/04 and during this period he in fact spent more time in the UK than in the Seychelles or anywhere else. Indeed his wife lived in the UK for most of this period, and most of his visits to the UK were to see her and his son James from the time of his birth in 1998.
On many of his visits to the UK Mr Gaines-Cooper would arrive one day and leave the next, which in accordance with “the normal rule” Mr Gaines-Cooper treated as consisting of no days at all for the purpose of the 91-day test. On this basis Mr Gaines-Cooper produced figures to show that he spent less than 91 days a year on average in the UK. HMRC on the other hand argued that to discount the days of arrival and departure in this particular case would provide a distorted picture of the time Mr Gaines-Cooper actually spent in the UK. They produced figures based on the number of nights spent by Mr Gaines-Cooper in the UK. These increased the length of each visit by one day and meant that he would have exceeded the 91-day test.
The Special Commissioners however did not even address the question of whether or not Mr Gaines-Cooper satisfied the 91-day test. They adopted HMRC’s figures in order to make an assessment of the true duration of Mr Gaines-Cooper’s visits to the UK and on account of this, and also the purpose of his visits, concluded that he had not left the UK for permanent residence abroad at all. They found Mr Gaines-Cooper to be both resident and ordinarily resident in the UK throughout the period in question. They also considered that he had retained his English domicile of origin.
The decision has led to charges that HMRC has changed the basis upon which it calculates the “91-day test” and even to calls for IR20 to be withdrawn. Both are misguided. HMRC issued a “Brief” on the decision in January re-asserting their intention to continue applying the “91-day test” where they are satisfied that an individual has actually left the UK for permanent residence abroad and, in applying that test, to maintain their practice of normally disregarding days of arrival and departure. On a careful reading of the Gaines-Cooper decision it is difficult to dispute HMRC’s statements.
The facts of Gaines-Cooper were out of the ordinary but nevertheless there are lessons of general application to be drawn from the decision:
- Where a UK taxpayer has set up a home in another country the first question to address is whether he has left the UK for permanent residence abroad. For this purpose the duration, pattern and purpose of the taxpayer’s visits to the UK are very relevant and in that context HMRC’s normal practice of ignoring days of arrival and departure does not apply.
- It is only if the taxpayer can show that he has established his permanent residence abroad that HMRC will apply the 91-day test (together with the normal practice referred to) in order to determine whether the taxpayer has nevertheless retained his UK residence for tax purposes.
- If a case reaches the Courts HMRC’s “rules” in IR20 are likely to have only a limited bearing on the Court’s decision. As the Special Commissioners said in Gaines-Cooper: “In this appeal we must apply the law rather than the provisions of IR20”. As it turned out, their decision gave considerable support to the “rules” in IR20 that apply in cases where a UK taxpayer sets up home in another country.