An exceptionally harsh judgment? Exceptional circumstances revisited

The Upper Tribunal judgment in HMRC v A Taxpayer [2023] UKUT 00182 (TCC) has recently been published. This is a new episode of what seems likely to become a long-running soap opera, featuring private jets, alcohol abuse and headlice ...

Background

Since 2013, the issue of whether an individual is resident in the UK in a tax year has been determined by the statutory residence test (SRT). Day-counting is central to the SRT. The general rule is that an individual is treated as being in the UK on a particular day if he/she is in the UK on that day at midnight. However, there are several reliefs under which presence in the UK at midnight can be disregarded. 

One such relief applies to presence in the UK due to exceptional circumstances beyond the individual’s control, which prevented the individual from leaving the UK. Up to 60 days in the relevant tax year can be left out of account by virtue of this relief, where the applicable conditions are met.

This relief has been the subject of recent litigation between HMRC and a taxpayer whose identity has not been disclosed in the judgments. The taxpayer won her case against HMRC at first instance. However, the Upper Tribunal has overturned the first instance decision, holding that on the facts, the conditions of the relief were not satisfied.

The facts

The case concerned the taxpayer’s residence status in 2015/16. She and her husband had both been UK resident in prior tax years. However, in 2015/16 the taxpayer was residing in the Republic of Ireland, and she had filed in the UK as a non-resident. This filing position depended on certain days spent in the UK in 2015/16 falling within the relief referred to above.  

The amount of tax turning on the taxpayer’s residence status in 2015/16 was significant, as her husband had transferred certain shares to her, and dividends of some £8 million had been received on these. These dividends would be taxable in the UK if the taxpayer was UK resident, and otherwise not. The rate of UK tax would presumably be reduced by the UK/Irish double tax treaty, but the tax bill would nevertheless be over £1 million.

There would not have been any doubt about the taxpayer’s non-resident status had it not been for sad developments in the life of her UK resident twin sister. The sister had for some time been suffering from alcoholism and mental health issues. These issues came to a head in the course of 2015/16, when it became clear that the sister was drinking heavily, behaving erratically, and subjecting her young children to serious neglect.  

The taxpayer’s evidence was that the sister was at risk of suicide. The children were filthy, covered in headlice and at risk of being subject to a care order. She was concerned that there was no-one else able to look after her sister or her children, and on several occasions flew to the UK to stay with the sister for a number of days, to watch over her and care for the children. The time spent in the UK on these visits would have resulted in her being UK resident in 2015/16, were it not for the claimed ability to exclude the relevant days by virtue of the relief for exceptional circumstances.

The first instance decision

The First-tier Tribunal found that the conditions of the relief were met. It did not accept the taxpayer’s evidence that her sister was at risk of suicide and that this necessitated the taxpayer being in the UK on the crucial few days referred to above. However, it did accept that the taxpayer had a moral duty to care for her sister’s children, and that the serious neglect to which the children were being subjected amounted to exceptional circumstances which in practice prevented her from leaving the UK.

The decision on appeal

The Upper Tribunal disagreed. It dissected the statutory test and set out the process which, in its view, should be applied to determine whether the test is met. In the Upper Tribunal’s view, the taxpayer must show, for each day in respect of which the relief is claimed:

(1) That circumstances existed which were exceptional;

(2) That such circumstances were beyond the taxpayer’s control;

(3) That the taxpayer would not have been present in the UK at the end of that day but for those circumstances;

(4) That the circumstances prevented the taxpayer from leaving the UK; and

(5) That the taxpayer intended to leave the UK as soon as those circumstances permitted.

Each of these requirements must be evidenced.

More controversially, the Upper Tribunal held that:

(1) Circumstances ‘prevent’ an individual from leaving the UK if he/she is stopped from leaving, ie leaving is rendered impossible. It is not enough for the circumstances to hinder the individual from leaving the UK, or apply pressure on the individual to stay.

(2) The concept of exceptional circumstances must be construed narrowly, consistently with the statutory examples of such circumstances, which include war, civil unrest, natural disaster, or a sudden or life-threatening illness or injury. The taxpayer’s perceived moral obligation to care for her sister’s children due to the sister’s alcoholism did not amount to exceptional circumstances. Alcoholism is not in itself exceptional, and in the Upper Tribunal’s view, the situation did not become exceptional due to the overlay of a moral obligation to the children.

Is the decision right?

This is a tough, borderline case which will inevitably have a binary outcome – either HMRC will collect £1 million of tax from the taxpayer, or it won’t. Given the amount at stake, it seems fairly likely that she will appeal, so the Upper Tribunal’s decision is unlikely to be the end of the story.

There seems to have been a degree of flakiness in the taxpayer’s evidence as to what she was doing in the UK on the relevant days, which has undoubtedly coloured the Upper Tribunal’s decision. The tribunal may also have been unsympathetic because she was formerly UK resident and had received shares from her still UK resident husband, presumably to secure a tax saving on the dividends. 

Other individuals who may wish to rely on the exceptional circumstances relief will surely be concerned by three features of the Upper Tribunal's decision:

(1) Its narrow interpretation of what counts as exceptional;

(2) The view that circumstances which would otherwise not be exceptional cannot become exceptional due to the addition of a moral obligation; and 

(3) Its narrow interpretation of ‘prevent’. 

Taken individually, none of these points is obviously wrong. However, their cumulative effect is to give the exceptional circumstances relief a very narrow ambit. The First-tier Tribunal had said in its judgment that the relief should not be construed more narrowly than the statutory wording requires, and should be interpreted in a manner which gives effect to Parliament’s intention when the relief was built into the SRT. However, determining Parliament’s intention is a notoriously difficult exercise, into which subjectivity inevitably intrudes.

Hypothetical cases

It is not hard to imagine situations in which, intuitively, one would say that the relief should apply, but which would apparently fail the very stern tests set by the statutory wording, as interpreted by the Upper Tribunal. For example:

(1) Suppose an individual’s elderly parent, who is UK resident, is involved in a serious but non-life threatening fall, resulting in broken bones. The individual flies into the UK to be with the parent in hospital. Are the circumstances exceptional?  Amongst the elderly, falls are commonplace. Do the circumstances prevent the individual from leaving the UK?  Arguably, it was not strictly necessary for him to fly into the UK in the first place, and once in the UK, there is nothing which strictly prevents him from leaving again. The individual may well feel that he has a moral obligation to be at his parent's bedside, but the Upper Tribunal’s view is seemingly that this doesn’t cause the circumstances to be exceptional, or affect the issue of whether the individual is prevented from leaving.

(2) Or suppose an individual is in the UK for heart surgery and during the surgery there are unforeseen complications, which cause her to be kept in hospital for a week longer than planned. Are the circumstances exceptional, once the surgery has been carried out and the individual’s situation has stabilised? Perhaps they are, although on a narrow view, the life-threatening illness is already over by this time. Is the individual prevented from leaving the UK?  She could theoretically book herself a flight out of the UK and discharge herself from hospital to catch it. This would be possible even if it would be painful and medically unwise.

These examples suggest that there is something amiss with the Upper Tribunal’s very restrictive reading of the exceptional circumstances relief. It remains to be seen whether the decision will be appealed, and whether these criticisms are shown to be valid, or nit-picking.