Progress?
It is over nine years since the Statutory Residence Test was enacted and yet, whilst only one case has reached the Tribunal in which the detailed provisions of the SRT were in issue, cases concerning fiscal residence for periods before the SRT came into force continue to come before the Tribunals and the Courts. The latest such case being Kevin McCabe v. HMRC, a case which illustrates why, despite its many shortcomings, the SRT is a distinct improvement on determining residence under the old case law.
The case has several interesting features.
Residence under UK domestic law and under an international Treaty
It concerned determining the appellant’s residence both under UK domestic law and under the UK/Belgium Double Tax Treaty and illustrates the different approaches which a Tribunal might take to the two tasks.
In respect of determining Mr McCabe’s residence under UK domestic law the Tribunal Judge, Judge Zaman, approached the question without any overt reference to the function which residence plays in fiscal legislation, or to the purpose of that function, confining herself to applying the principles derived from case law to the facts of Mr McCabe’s habits of life. In determining residence under the Treaty, however, her approach was significantly different:
‘As affirmed by the Supreme Court in Fowler v HMRC [2020] UKSC 22 at [16]-[19], I should be guided in my interpretation of the DTC by the Vienna Convention on the Law of Treaties, OECD commentaries on the OECD Model Tax Convention, on which the DTC is based, and relevant case law…
[Counsel for Mr McCabe] submitted that there was no abuse of the DTC. As a matter of UK law, s10A TCGA 1992 sets out that tax avoidance is the realisation of chargeable gains by temporary non-residents, ie those who are resident overseas for less than five years. So going abroad for more than five years is not tax avoidance, even if that was the reason for the move (which was not accepted).
I consider that I should be cautious about concluding that the transactions or arrangements entered into by Mr McCabe are abusive for this purpose. The authorities set out what it means to be UK or non-UK resident for the purposes of UK law, and where a person actually arranges their life in the knowledge of those rules and in accordance with those rules, I would not consider that of itself to be an abuse of either UK law or the provisions of the DTC. However, when applying the provisions of the DTC (in this case Article 4) to the facts as I have found them, I do consider the purposes of the DTC when assessing the weight to be given to the facts as found.’
An unpredictably subjective evaluation
The differences between the two approaches did not help Mr McCabe, however, who lost on both issues. On the face of it the Tribunal Judge in McCabe v. HMRC made an exhaustive and thorough examination of the relevant facts and of the legal principles derived from prior case law which had been summarised in HMRC v. Grace [2008] EWHC 2708. If one steps back a little, however, and considers the facts of the case in the round it is clear that a different Tribunal Judge might have come to the opposite conclusion and still justified his or her view by reference to the same principles on which Judge Zaman based her decision.
The relevance of the longer term
Mr McCabe paid Belgium tax as a Belgium fiscal resident for the calendar years 2006 – 2013 inclusive. His self-assessment returns for 2006/07 – 2012/13 (being seven fiscal years in total) were made on the basis that he was not resident or ordinarily resident in the UK for UK fiscal purposes in any of those fiscal years because he considered that he had ceased to be UK resident on 4th April 2006 and had resumed residence in the UK again on 3rd May 2013. From 3rd November 2006 to 21st February 2014 he was the serial owner and occupier of successive residential properties in Brussels each of which, HMRC accepted, constituted his home during his occupation of it.
The assessments against which Mr McCabe appealed were made in respect of the UK fiscal years 2006/07 and 2007/08 which Judge Zaman referred to as the ‘Relevant Period’. It was Mr McCabe’s residence in this period which had to be determined so, of course, Judge Zaman’s decision concentrates on the facts of Mr McCabe’s conduct of his life in those years. In evaluating whether Mr McCabe had made a ‘distinct break in the pattern of his life in the UK’ (see below) the fact that the Relevant Period formed part of a much longer period during which the aggregate duration of his presences in the UK was very much reduced from previous periods and during which he had a home in Brussels must have been relevant to evaluating the degree and significance of the changes in his mode of life which he made in the Relevant Period. Yet, in considering his residence status in the Relevant Period, Judge Zaman did not place Mr McCabe’s habits of life in that period in the context of his habits of life during the much longer period of his substantial presence outside the UK of which it formed part.
Very short periods of presence in the UK
Judge Zaman compared the number of days on which Mr McCabe was present at midnight in the UK with the number of days that he was present at midnight in various other countries in the last two years of his undisputed fiscal residence in the UK with his presence in various countries during the Relevant Period. The information she gives in the Case Report may be summarised as follows:
| 2004/05 | 2005/06 | 2006/07 | 2007/08 | |
| UK | 254 | 276 | 33 | 43 |
| Belgium | 3 | 129 | 98 | |
| Other Countries | 111 | 86 | 203 | 225 |
| Total | 365 | 365 | 365 | 366 |
Mr McCabe sometimes flew into and out of the UK on the same day and his visits to the UK were often of short duration so that there were several days on which he was present in the UK at some time but not at midnight. Judge Zaman therefore compared, ignoring days on which Mr McCabe was present in the UK only by virtue of being in a UK airport whilst in transit to another country, the number of days during the Relevant Period on which he was present in the UK at some time in the day, with the number of days when he was present in Belgium:
| 2006/07 | 2007/08 | |
| UK | 79 | 94 |
| Belgium | 175 | 135 |
Business interests
In asking the question, derived from the principles summarised in Grace, whether in moving to Brussels in April 2006, Mr McCabe had made a ‘distinct break in the pattern of his life, in the UK’, Judge Zaman found that he had not. When one considers that she expressly referred to Lord Wilson’s explanation in Gaines-Cooper that this did not require the ‘severance of social and family ties’ but only ‘a substantial loosening of’ them, it is strange that, when one takes into account the periods of his physical presence outside the UK and the resulting change in the location of his social and familial activities which is recorded in the Case Report and which resulted from his physical presence outside the UK for extended periods, she did not find such a loosening in respect of Mr McCabe.
The reason for that appears to be that in reaching her conclusion, although she did consider evidence of his social and family engagements in the Relevant Period, Judge Zaman concentrated largely on his conduct of his business interests and, in doing so, regarded holding meetings in the UK in respect of non-UK businesses and holding meetings outside the UK in respect of UK businesses as equally constituting UK connections. In an age of global business activities, however, it seems clear that there is no contradiction between a person residing in one country and having business interests and activities in another.
Where had the Courts gone wrong?
It is clear that the case law principles on which Judge Zaman founded her decision are sufficiently elastic to have justified a large range of contradictory decisions on the same facts. Why was that? In reading McCabe, we were struck with the paradox that, what had been characterised, since the case of Levene v. IRC in 1928, as a ‘familiar English word, “reside”’ and its cognates, is not used either in the pre-SRT fiscal legislation or in the case law which is relevant to it in the way in which it is used in ordinary English. Except in the context of discussions of fiscal rules the question of in what country one ‘resides’ is not one which presents itself to the ordinary English conversationalist as of much relevance. In ordinary English one might say that ‘our son has gone to live in Canada’ but not that he has ‘gone to reside in Canada.’
Although for fiscal purposes under the pre-SRT case law, the possession of a building in which one resides is not determinative of the country in which one resides, in ordinary non-fiscal English usage references to where one resides are almost always references to where is the place is in which one habitually lives and sleeps. In such usage to say that one ‘resides in the UK’ is normally to say that one has one’s residence, in the sense of the particular place where one lives and sleeps, in the UK. In respect of such usage, it is clear that, in an age of remote working, familial and social relationships which are largely conducted through personal interaction are of much greater relevance than business relationships.
It is the insistence of the Tribunals and the Courts over many decades on maintaining the fiction that the question of where one resides in the UK for fiscal purposes is simply a question of ordinary English usage and their refusal to recognise that the concept has come to bear, through its development in case law, a specialised technical meaning which has bedevilled and confused the concept of ‘fiscal’ residence in case law.
Two cheers for the SRT
That the SRT saved us from that confusion is something for which taxpayers may well give two cheers; at least those taxpayers who are not still affected, as Mr McCabe has been, by the Tribunals’ and Courts’ past failure to develop a coherent, determinable concept of residence. They should give only give two cheers, however, because at the heart of the SRT is an almost equally confused and vague concept that of the ‘home;’ but that is a topic for another day.
