Highly paid executives are frequently in and out of the UK, and some recent tax developments have caused them unease in a number of quarters...

Highly paid executives are frequently in and out of the UK, and some recent tax developments have caused them unease in a number of quarters. Tim Gregory expands his earlier WealthBriefing feature to look at the intricacies of UK tax residence.

Simple tax cases are often only heard by Tax Commissioners, and the Special Commissioners recently ruled in the case of an airline pilot who claimed not to be UK resident and therefore to some extent not taxable in the UK (Shepherd v HMRC). Mr Shepherd had lived for a substantial period of time in Cyprus since October 1998, and claimed that he was not Resident in the UK in the tax year 1999/2000, on the basis that his visits to the UK were less than 90 days in that tax year.

In this case, the outcome was a verdict in favour of HM Revenue & Customs. In adjudicating on the 1999/2000 tax-year, Mr Shepherd was deemed fully taxable in the UK because he had left the United Kingdom for the purpose of only occasional residence abroad, albeit that he had indeed spent less than 90 days in the UK.

When I read about the case, it brought to mind a case in the 1980s involving the Dave Clark Five, one of the top British bands of the 1960s.

They had 22 hit records in Britain and 24 in the United States, along with six sell-out US tours and 13 appearances on the Ed Sullivan Show, the definitive and longest running variety series in television history.

As you might have guessed from the band’s title, drummer Dave Clark was the driving force behind the ‘Five’ and when, during the late 1970s, he received a huge royalty payment while on tour in the USA, he decided to extend the band’s tour – to the point that he was absent from the UK for a full tax year.

Perhaps Mr Clark was simply well advised by his accountants, or maybe he knew a thing or two about tax himself, but this turned out in the end to be a very tax-efficient move, and it provides a lesson for anyone in the UK seeking non-resident status.

It would appear from reports on the Shepherd case that a large portion of Mr Shepherd’s claim rested upon reliance of the so-called “90-day rule” – commonly believed to mean that an individual is able to qualify as UK non-resident simply because they spend no more than 90 days in the country.

Mr Shepherd apparently spent 180 days in the tax year out of the UK on flights, 77 days in Cyprus where he rented a furnished flat, and 80 in the UK in the family home. Clearly, he spent less than 90 days in the UK, but he was still treated as UK resident.

It has been claimed that the Shepherd ruling marks the start of a clampdown on people whom they see as tax malingerers, whether through a tightening-up of the rules, or even a moving of the goalposts by HM Revenue and Customs. However, the fact is that successfully claiming to be UK non-resident has always involved a lot more than simply ticking off the days you spend in the country.

Back to our tax-savvy Sixties Rockstar and, needless to say, the taxman was not very happy with Mr Clark’s extension of his US tour. The Inland Revenue (as they were then) felt that it might have been lengthened purely to minimise his time in Britain that year in order to disqualify the tax liability on his royalty payment on the basis of a claim of being UK non-resident.

In this instance, the ensuing tax case (Reed v Clark) saw the Inland Revenue claiming taxes they felt were owed in relation to the band’s 1978/79 tour of America. However, the Revenue was defeated, and Dave Clark was treated as non-resident for the relevant tax year.

Crucially, Dave Clark and his band were clearly out of the UK for a period of time much greater than 90 days, but still he had to fight to avoid being caught by UK taxes. The Dave Clark Five case demonstrated that successfully claiming to be UK non-resident depends on a lot more than counting off the days to meet the so-called “90-day rule”.

In the more recent case of the airline pilot, Mr Shepherd, the Special Commissioner’s conclusion was that, “after taking into consideration…the appellant’s past and present habits of life, the regularity and length of his visits here, his ties with this country, and the somewhat temporary nature of his attachments abroad, I have come to the conclusion that at least until 5 April 2000 he continued to be resident and ordinarily resident in the United Kingdom”.

The Special Commissioner added: “He dwelt permanently here and this was where he had his settled or usual abode and so he was resident here.” Mr Shepherd had simply not done enough to show that he had left the UK.

Rather than, on its own, signalling the start of a stricter and more ominous regime, the case should reinforce the fact that people who have previously been resident in the UK really do need to demonstrate that they have left. Temporary absence is not enough. And, contrary to the opinion of many, the burden of proof rests firmly on the individual, rather than the taxman.

In the case of Mr Shepherd, he still had his family home in the UK and the Special Commissioner found that “his residence here was part of the regular and habitual pattern of his mode of life”. Clearly, as an airline pilot, he spent a long time outside the UK, and he may have thought he had a strong claim because of his time spent in Cyprus. However, his absence from the UK was found to be insufficient to be anything more than temporary.

The Shepherd case is a reminder that individuals need to think about their claim to be UK non-resident very carefully and – as always – there is no substitute for proper professional advice. However, it may help to bear one or two things in mind:

If an employee is sent to work abroad full time by their employer, the employee is likely to qualify as UK non-resident even if the arrangement is only temporary, provided that two criteria are met:

· The absence includes a complete tax year; and
· Visits to the UK are less than 183 days in any one tax year, and less than 91 days on average.

Individuals will retain, or regain, their status as UK resident by being here for 91 days or more on average, and this is the so-called “90-day rule” but, as explained above, it applies only after you have actually left.

Individuals from overseas, who are not already UK resident, are under different, although in many ways similar, rules. Assuming that they do not buy a home in the UK, such individuals will generally avoid treatment as resident or ordinarily resident by ensuring that they do not spend more than 90 days in the UK in any single tax year. Such people do not need to demonstrate that they have left, because they clearly were not “here” in the first place!

However, it is important to note that someone coming into the UK may also find themselves classed as resident by HM Revenue & Customs if they intend to spend 91 or more days per year here.

The question – where intent is concerned – is of course: “how on earth do you prove it?” There are ways of doing so, but it may not be easy if you did not anticipate the question or failed to take professional advice at an early stage. The most important factor worth noting here is that, because individuals are effectively responsible for establishing their own case under self-assessment, the burden of proof rests with the individual to prove his or her view. In the first instance, it is for you to convince the taxman of your status, not for him to prove you wrong.

The issue of ordinary residence can also be much less straightforward that that of simple Residence. A place of ordinary residence is the country where a person normally lives or makes habitual visits. You need to bear in mind that you can be ordinarily resident even if you are not resident and that you can be considered to be ordinarily resident in more than one jurisdiction.

If classification of both UK residence and UK ordinary residence can be avoided, people who spend time in the UK but whose work and duties are outside the UK will generally escape any UK tax. In one sense, that simply means that someone who comes to the UK on holiday will not have to complete a UK tax return. Of course, that is not surprising, but there is much more potential here, as demonstrated in the following example.

Example
Hank is employed by Investment Bank Inc (IBI). IBI has subsidiaries throughout Europe and sends Hank on secondment to oversee them for a couple of years. Hank decides to base himself in London because of the transport links to all of the IBI subsidiaries and to IBI Head Office. However, the UK subsidiary in London has direct links to head office, and it is not considered that Hank need deal with London at all.

Since none of Hank’s duties are in the UK, he should not have any UK tax liabilities whatsoever, so long as he does not become resident in the UK.

Given that he would be travelling around Europe most of the time, Hank would probably not become UK Resident (under the “90-day rule”), but even if he did, he would only be taxed on amounts that were earned whilst he was Resident and that were brought into the UK. Hank was well-paid before the secondment, and decides to use his savings to support himself during his UK experience, leaving outside of the UK everything he earns whilst staying in the UK. In this way, he is bringing to the UK only amounts that he earned when he was not UK resident, and so none of this is taxable. What Hank must avoid doing is becoming ordinarily resident but, on a secondment of a couple of years or so, this would be unlikely.

Of course, in the example above, Hank may well face tax liabilities in the jurisdictions in which he is actually carrying out his work (although, in the scenario suggested, this ought to be fairly easily avoided), and also in the country from which he was seconded. These are outside the scope of this article, but it is always important to remember that a tax problem solved in one country does not mean that it is solved in another.

Another issue highlighted recently is the popular misconception is that offshore accounts are not taxable in the UK. HM Revenue & Customs made the news recently when it sent letters to hundreds of offshore account holders warning of the consequences of tax evasion, dropping some rather unsubtle hints such as: “…experience has shown such accounts are often associated with tax evasion.”

The tax authorities were widely criticised for the aggressive tone of the letters, which appeared to threaten account-holders with criminal prosecution. The Institute of Chartered Accountants in England & Wales described them as “intimidating and hardly conducive to encouraging people to sort out their tax affairs.”

Revenue & Customs have declined to say how they acquired the names of the offshore account holders, but it is thought that implementation of the EU Savings Directive, a new instruction that came into force on July 1, may well have played a key part. Under the directive, financial centres are obliged to share information with the tax authorities of the account holder’s relevant EU member state.

It is also worth noting that, although it is a European Directive, the scope of the law goes beyond the EU – various other jurisdictions have signed up, including all Crown dependencies such as the Channel Islands and Isle of Man, as well as UK overseas territories in the Caribbean and equivalent French and Dutch territories.

Many commentators have claimed that the letters are indicative of an increasingly tough approach to the use of tax havens for tax avoidance purposes. However, for many years now, someone who has no non-UK status but fails to declare offshore income has been breaking UK law. It may well be that certain individuals are unaware of this, but ignorance is no defence. There are many ways to mitigate UK tax liabilities entirely legitimately, and reliance on something criminal is hardly advisable.

Individuals who do not have UK domicile are in a different category again, and they are generally likely not to have UK tax liabilities on income arising from offshore assets, so long as they do not bring that income into the UK.

As always, it pays to take professional advice in any of these situations.

Tim Gregory is a Partner in the Private Wealth Group at Chartered Accountants Saffery Champness.