When a statutory test of residence was proposed by the Government, the professional bodies most concerned with taxation suggested a straightforward day-counting test. The Government of the day insisted on introducing the convoluted provisions of Schedule 45 on the grounds that they were necessary to produce a rational scheme of taxation taking account of the real nature of individuals’ connections with this country. The result of the Government ignoring the expert advice it was given is that the SRT is riddled with anomalies. Such unintended consequences always result when fiscal provisions are over-elaborated.
John Barnett, Chairman of the CIOT’s Technical Committee and a member of its Governing Council and a partner in Burges Salmon LLP, has brought our attention to yet another anomaly in the SRT, an anomaly concerning the split year provisions.
The following example illustrates the anomaly.
An individual, Mr A, had for many years been single (being widowed), retired and not resident for UK fiscal purposes in the UK. He came to the UK shortly after 5th April 2021 and will have spent over 300 days in the UK in this fiscal year. His previous occasional visits to the UK have never exceeded sixty days in any UK fiscal year. His children are all in their 30’s and 40’s.
So far, in this fiscal year, he has stayed either with his children or friends or in hotels. He expects to buy a residential property in March 2022 which he will probably occupy as a home. He will not satisfy any of the Automatic Overseas Tests and, as he will have spent over 183 days in the UK in this fiscal year, he will satisfy the First Automatic UK Test (in FA 2013 Sch 45 para. 7) and, therefore be resident in the UK for 2021/22. He expects to spend at least 300 days in the UK in 2022/23 and to continue to have a home here throughout that year.
If, as he expects, he acquires a home in the UK in March he will satisfy Case 8 of the Split Year Cases (set out in FA 2013 para. 51) and no other Split Year Case.
He will satisfy Case 8 because he will satisfy three conditions. First, he will be resident in the UK in 2021/22 and not in 2020/21 (paras. 43(1)(a) and 51(2)). Secondly, at the start of 2021/22 he did not have a home in the UK but there will come a day in the fiscal year when for the first time in the year he will have a UK home and he will continue to do so for the rest of the year and throughout the UK fiscal year 2022/23 (para. 51(3)). Thirdly, for the part of the fiscal year ending with the day before the day on which he first has a home in the UK, he will not have had ‘sufficient ties’ (para. 51(4)).
In determining whether he has sufficient ties for this purpose references to the paragraphs setting out the Sufficient Ties Tests (paras. 17 – 20) are to be read as references to the part of the fiscal year ending on the day before he acquires his UK home and each number of days mentioned in the first column of the Sufficient Ties Tables (in paras. 18 and 19) is to be reduced by an ‘appropriate number’.
The appropriate number is found by multiplying the number of days in each case by the fraction A/12 where ‘A’ is the number of whole months in the part of the relevant year beginning with the day on which he first has a UK home (but counting 6th April – 30th April as a whole month (para. 51(7) & (8) and para. 145)).
So one reduces the day limits in the Sufficient UK Ties Table applicable to Mr A. The applicable table is that in para. 19 which applies where the taxpayer concerned has not been UK resident in any of the three fiscal years preceding the year concerned; that is in respect of Mr A, 2018/19 – 2020/21.
Mr A in the period before he acquires a UK home will have had an Accommodation Tie (para. 34) but not a Family (para. 32), Work (paras. 35 & 36) or 90-Day Tie (para. 37). He will, therefore, have only one UK Tie in this period. To have sufficient ties under the Table in para. 19 he must have at least two ties and he will therefore satisfy the condition that he does not have sufficient UK ties in the period ending with the day before he acquires a UK home.
Under Case 8, the overseas part of 2021/22 in respect of Mr A is the period ending with the day on which he acquires a UK home (para. 53(9)). It is expected that will be a day in March. The Split Year provisions will apply to ensure that most of his foreign income and gains arising in that overseas part of 2021/22 will not be subject to UK Income Tax or Capital Gains Tax.
The anomaly is that if he does not acquire a home in 2021/22 he will not satisfy the Conditions of Case 8 and we have already seen that he does not satisfy the Conditions of any of the other Split Year Cases. He will, therefore, be resident in the UK for 2021/22 but will not be protected at all by the application of the Split Year Rules against Income Tax and Capital Gains Tax being charged on his foreign income and capital gains arising in 2021/22.
It must be obvious, however, that a person who does not have a home in the UK at any time in a fiscal year will have a lesser connection with it than one whose circumstances are otherwise the same but who does have a UK home. Yet the Split Year Rules protect the latter and not the former.
It is always dangerous, for governments as for anyone else, to ignore expert advice.