Continuing relevance of the pre-SRT rules
The introduction of the SRT has done something to make the determination of residence a little less uncertain than it was under the chronically uncertain case law by which it was previously determined. Unfortunately for taxpayers, in many situations that case law is still relevant. That is principally for two reasons.
First, because residence cases are heavily fact dependent, they take a long time to reach the Tribunal. The First Tier Tribunal’s judgment in McCabe v. HMRC, for example, was delivered on 30th September 2022, but concerned Mr McCabe’s residence for the UK fiscal years 2006/07 and 2007/08.
Secondly, because the SRT is partly determined by reference to the residence of the taxpayer concerned in the three fiscal years preceding the year at issue and the application of the Split Year Rules is partly determined by reference to the five fiscal years preceding the year at issue. The result of that is that, in determining an individual’s residence for 2015/16 or before and the application of the Split Year Rules for 2017/18 and before, the individual’s residence for the year or years before the SRT first applied, which was the fiscal year 2013/14, will be relevant.
Thus, it is clear that cases concerning determining pre-SRT residence rules will continue to come before the Tribunals and the Courts for many years.
Ernest Batten v. HMRC
The case of Ernest Batten v. HMRC on which judgment was given on 22nd June 2022 was just such a case.
It cannot be said that the Tribunal’s reasoning is very well organised or explained in the Case Report and the result of that is that the reader is often left to infer the chain of reasoning by which the Tribunal reached its various conclusions rather than its being expressly stated.
The case concerned assessments to Income Tax and CGT for the UK fiscal year 2014/15. The correctness of those assessments depended upon whether the appellant, Mr Batten, was resident in the UK for UK fiscal purposes in that year. Whether he was UK resident in that year depended upon whether he was UK resident in all years from 2010/11 to 2013/14 because of the Sufficient Tie provisions of FA 2013 Sch 45 paras. 18 and 19.
It was accepted by HMRC that Mr Batten was not UK resident in 2010/11 and 2011/12 under the pre-SRT rules or in 2013/14 under the SRT and Mr Batten accepted that he was UK resident in 2015/16.
Mr Batten asserted that he was also not UK resident in 2012/13 but HMRC disputed that assertion.
It was agreed by the parties, that Mr Batten’s fiscal residence in 2012/13 was to be determined under the ‘pre-SRT common law’. We shall return to that agreement in due course.
It was also agreed that Mr Batten was employed full-time abroad from 21st March 2010 to 12th June 2012.
He did not set foot in the UK at all from 21st March 2010 to 1st October 2011. The numbers of days in which he was present at midnight in the relevant UK fiscal years were as follows:
|UK Fiscal Year||Number of Days|
Repeated distinct breaks?
HMRC accepted that Mr Batten was non-UK resident in 2010/11 and 2011/12 only on the basis that its guidance in HMRC6 was applied even though it was clear from the decision in R (on the Application of Gaines-Cooper) v. HMRC that the practice set out in that guidance did not in any way determine the law. HMRC submitted that, if the guidance were ignored, even if ITA 2007 s.830 applied:
‘… the question of whether he had made a relevant “distinct break” from the UK prior to 6 April 2012 would be a finely balanced question, although HMRC maintains that the extent of his links to the UK throughout the period of his employment would be sufficient to mean that he had not done so.’
At the relevant times s.830 instructed that where an individual works full-time abroad:
‘In determining whether the individual is UK resident ignore any living accommodation available in the United Kingdom for the individual’s use.’
HMRC further submitted that:
‘… on the basis that Mr Batten did not seek to rely upon s830, the links that he retained including his family home are plainly sufficient to conclude that he had not made a “distinct break”.’
This reference to a ‘distinct break’ was a reference to one of the principles in Mr Justice Lewison’s summary of the principles for determining residence, derived from the pre-SRT case law, which he made in HMRC v. Grace at para. 3. Rather oddly, however, the Tribunal referred to them as having been ‘set out’ in the case of HMRC v. Glyn where the summary in Grace was quoted.
The reference to a ‘distinct break’ is the thirteenth, and last, principle of Mr Justice Lewison’s summary:
‘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.’
In Gaines-Cooper, Lord Wilson had provided an explanation of what is required for there to have been such a ‘distinct break’:
‘The requirement of a distinct break mandates a multifactorial inquiry. In my view however the controversial references in the judgment of Moses LJ [in the Court of Appeal] in the decision under appeal to the need in law for “severance of social and family ties” pitch the requirement, at any rate by implication, at too high a level. The distinct break relates to the pattern of the taxpayer’s life in the UK and no doubt it encompasses a substantial loosening of social and family ties; but the allowance, to which I will refer, of limited visits to the UK on the part of the taxpayer who has become non-resident, clearly foreshadows their continued existence in a loosened form. “Severance” of such ties is too strong a word in this context.’
Counsel for Mr Batten submitted that:
‘On any view Mr Batten’s departure on 21 March 2010 and the subsequent 18-month absence from the UK is more than sufficient to establish the requisite distinct break as a matter of common law.
Ms Shaw submits that the question is whether having made the requisite distinct break and established himself as non-resident for 2010-2011 and 2011-2012, Mr Batten resumed or regained UK residence for 2012-2013. The fact that Mr Batten stopped working does not in and of itself mean that he became UK resident once more. It is necessary to look at Mr Batten’s actions and the pattern of his presence in the UK in order to assess whether what in fact happened is that he resumed UK residence.’
HMRC, in contrast, submitted that:
‘In essence, HMRC say that Mr Batten was UK resident for 2012-2013 on the basis that either:
(1) he did not affect a “distinct break in the pattern of his life in the UK” by
“substantially loosening” his ties in the UK such that he remained UK resident
immediately prior to 6 April 2012 and consequently remained UK resident
(2) even if Mr Batten was not UK resident for 2010-2011 and/or 2011-2012,
he regained his former UK residence for 2012-2013 on a straightforward
application of the pre-SRT law of residence, in particular, due to the fact that
his full-time employment ended on 12 June 2012.’
The Tribunal gives and explains its decision as to Mr Batten’s residence in paras. 206-215 of the Case Report. Those paragraphs have a major heading ‘Residence’ and a minor heading, ‘Did Mr Batten make a “distinct break”?’ It is surely implicit in these headings that the paragraphs which follow are directed to determining Mr Batten’s residence from a consideration of whether there had been a ‘distinct break’ in Mr Batten’s mode of life.
In its analysis in these paragraphs, the Tribunal applied a concept of a ‘break’ as being a period in which exists a situation which is radically different from the situation which ruled before its start and that might be radically different to the situation which rules after its close, so that the term ‘break’ is used in the sense in which it is used when we refer, for example, to a holiday as a ‘break’ from work rather than when we refer to a discrete event in time such as the breaking of an object, a promise or a relationship.
The Tribunal found that in 2010/11:
‘However, we consider that the relocation to Gibraltar taken together with the circumstances of his new employment there, looking for opportunities to expand the care home business, gives rise to the necessary degree of change in the pattern of Mr Batten’s life in the UK for a cessation of his settled or usual abode in the UK to have taken place.’
From that it is implicit that the Tribunal accepted that there was the requisite ‘distinct break’ in Mr Batten’s mode of life in 2010/11 with the result that he was not UK resident in that year.
In respect of 2011/12 it found:
‘ … that when the multifactorial enquiry is conducted for this year the conclusion remains that a distinct break continued despite some visits to the UK.’
In respect of 2012/13, however, it concluded that, because Mr Batten’s overseas employment came to an end in that year, from the end of that employment onwards in conducting its multifactorial enquiry as to his residence in that year, the Tribunal had to take account of the availability to Mr Batten of UK accommodation. The result of that, according to the Tribunal was:
‘ … that the distinct break came to an end in 2012-13’ with the result that according to the Tribunal: ‘ … the result is that Mr Batten was UK resident’.
The principle requiring a complete break in Mr Justice Lewison’s summary, however, was not that non-UK residence would only continue as long as a situation exists which can be characterised as a ‘break’ but rather that, in respect of a person who has been UK resident at some period in the past, a distinct break must have occurred at a particular point in the past:
‘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 … unless there has been [emphasis added] a definite break in his pattern of life .’
The undoubted fact that residence must be determined for each fiscal year does not require the break to have continued to the end of the fiscal year for which it is to be determined.
It is because the Tribunal adopted an incorrect understanding of the nature of the break required that it emphasised the fact that there was no previous case concerning the situation of a person who has been UK resident and has become non-UK resident thereafter in which the question at issue was whether, in a subsequent year, he resumed UK residence.
The Tribunal noted for example that:
‘[Counsel for the taxpayer] acknowledges that there are no direct authorities addressing the position of someone such as Mr Batten. Various cases have considered the question of whether a UK person has left the UK, or whether someone who has never lived in the UK has established an abode here, but Mr Batten fits neither of those patterns.’
These characteristics of Mr Batten’s situation, however, are only of significance if the Tribunal was correct to hold that the complete break must not only have occurred but must have continued. If that view is incorrect, as we consider it is, a person who has ceased to reside in the UK is in the same position as one who has not previously resided here in respect of deciding whether, in a subsequent year, he is UK resident.
It is surely on this question of law that any appeal by Mr Batten should concentrate. One can only hope that, if there is such an appeal, the Upper Tribunal will issue a more satisfactory report of its reasoning than has the FTT.
The transitional election
Before we leave our consideration of this case, we draw our readers’ attention to another of its peculiarities. We have seen that it was agreed by the parties, that for the purposes of determining Mr Batten’s fiscal residence in 2014/15 his residence in 2012/13 was to be determined under the ‘pre-SRT common law’. Later in the judgment the Tribunal said:
‘We also recognise that the application of the SRT to the tax year 2012-2013 would have produced a different result. However, those rules are not applicable to that year.’
As we explained in McKie on Statutory Residence (Pub CCH – 2014):
‘Paragraph 154 contains a transitional rule under which an individual may elect (the “General Transitional Election”) to apply the SRT in determining whether he was resident or not in the UK in a year before 2013/14 (a “Pre-Commencement Year”). A General Transitional Election can only be made in respect of determining an individual’s residence status for any of the fiscal years 2013/14 – 2017/18 or in determining the application of the Split Year Rules to any of those years. We shall call such a year a “determination year.” The election does not affect an individual’s actual residence status for any year before 2013/14.
The election must be made in writing and is irrevocable. It must be made by the first anniversary of the end of the determination year in respect of which it is made.’
Mr Batten might, therefore, have made an election under para. 154 to determine his residence in 2012/13 under the SRT for the purpose of determining his residence in 2014/15 and, if he had done so, he would have been non-resident in 2014/15. If he had done so, as appears from the Case Report, although the exact amounts at stake are not quantified, he would have saved himself a very considerable sum in Income Tax. This possibility is not referred to in the Case Report and so there is no explanation as to why he did not take this simple step of making an election under para. 154.
Perhaps it was because the election had to be made by 5th April 2016 at which time it may well not have occurred to Mr Batten that there was a possibility that he would be found to have been non-UK resident in 2010/11, 2011/12 and 2013/14 but not in 2012/13, although his circumstances in 2012/13 were not significantly different to his circumstances in his succeeding year of non-UK residence; a result which is so bizarre that it may well not have occurred to any ordinary taxpayer or, indeed, to the agents dealing with his returns.