Those uninitiated in tax matters might think that, given the vast amounts of tax legislation disseminated by Parliament in recent years, there could not possibly be any grey areas left, let alone major issues of key importance that are barely touched on by Finance Acts etc. And they would, of course, be entirely wrong in so thinking.
One of the m0st unsatisfactory (actually forget ‘one of the’) elements of the tax system in recent years has been the question of individual taxpayer residence. For many years HMRC had relied upon its version of the law of residence contained in its leaflet IR20 to make up for the absence of legislation on the subject. Thus an uneasy mix of copious case law and extra-statutory HMRC practice regulated a key aspect (arguable the key aspect) of our tax system for a number of years, which may have unsatisfactory in theory but worked after a fashion.
But clearly not after a fashion that suited HMRC. To be fair, the practices adopted by them in respect of residence stemmed from a rather more leisurely age when the world seemed larger, and the idea of commuting from, say, Northern France to London to work on a daily basis would have seemed ridiculous. Thus determining a taxpayer’s residence by reference to whereabouts at midnight and ignoring days of arrival and departure in counting days of presence in the UK became a system unfit for purpose in the modern world.
Thus it was that HMRC shocked a tax profession cosily famiiar with the apparent certainties of IR20 by repudiating that document and restating its position on residence issues. A number of taxpayers (mostly professional airline pilots) fell foul of this in the courts and unexpectedly found themselves deemed resident when they had thought themselves safely ‘offshore’. And advising clients on how to become non-resident suddenly became fraught with peril and uncertainties.
In the past, taxpayers might have sold their Torbay hotel (no, not that one) and swanned off to Spain for 3 years only to finish up counting the days and metaphorically scrabbling at the White Cliffs of Dover on 6th April to come back, but at least they knew where they stood and what they needed to achieve to be regarded as non-resident for their period of absence.
Now taxpayers were told that they had to demonstrate a ‘distinct break in the pattern of their lives’ in order to satisfy HMRC that they had become non-resident in the UK. Revenge at last for HMRC for the much loathed decision in Reed v Clark, where Dave Clark of the eponymous ‘Five’ (no, not that one) succeeded in swanning off to California for 13 months and making himself not resident and, rather remarkably, not ordinarily resident for the tax year of absence.
Coupled with this was a hugely ill-conceived challenge to the concept of non-UK domicile. Here was that most dangerous of things, a non-tax legal concept exploited by taxpayers to significant fiscal advantage, akin in that respect to the legal definition of employment so beloved of those seeking to establish themselves or their clients as self-employed.
And just as HMRC’s difficulties with employment status gave birth to the problem child that is IR35, so its difficulties in a socially and geographically mobile modern world with the many who could establish non-UK domicile through their father were responsible for the abomination that is the current domicile regime.
Never has the paucity of imagination or the inability of politicians to grapple with the complexities of the modern world been so clearly brought into focus as by the concensus on a domicile regime which caught the ordinary man in the street whilst allowing the fabulously rich to buy their way out of the UK tax system.
George Osborne might shed crocodile tears about ‘the general principle …. that people should pay income tax and that includes people with the highest incomes’. but let us not forget that he was the man responsible for initially proposing, and subsequently acquiescing in the introduction of, what passes for an income tax regime dealing with domicile, a regime that ensures that fabulously rich non-doms can base themselves here without making more than a token contribution to the UK exchequer by way of income tax. If he truly believes that milionaires should be taxed ‘at a rate equivalent to a third of their earnings’ then he might like to start with an urgent review of the domicile regime he was so keen to see introduced.
Instead we are to have the abolition of the concept of ordinary residence, not before time given the disrepute into which the Dave Clark case brought the concept, and a statutory definition of residence. Given the torrent of tax legislation that pours forth annually from the Palace of Westminster I already felt sorry for Parliamentary draftsmen, but here is a labour of Hercules indeed, or perhaps to take another Ancient Greek legend, a Sisyphean task.
So what factors from the current regime, such as it is, will need to be borne in mind in conjuring up this statutory definition, presumably intended to be simple and all-encompassing? Well, how about:
1. Actual days of presence in the UK
2. Habitual and substantial visits to the UK
3. Available accommodation in the UK
4. A distinct break in the pattern of life
5. 5 years’ non-residence for capital gains tax purposes
6. Deemed domicile for inheritance tax on the grounds of long-term UK residence
7. Full-time employment abroad under a contract covering a complete tax year
8. Full-time self-employment abroad for a period covering a complete tax year
9. Presence in, or absence from, the UK for temporary purposes only
10. Presence in the UK under exceptional circumstances
for a start? Something is going to have to give, and one suspects that it is likely to be simplicity. To look to the new statutory definition of residence for a comprehensive solution to an age-old problem is, one fears, going to be to look in vain.