Non-resident penalty appeal allowed

In a recent First-Tier Tax Tribunal case, a non-resident’s appeal for reasonable excuse in relation to late filing penalties was denied, however, interestingly the Tribunal still decided to waive the penalties.

The appellant in A Newton v HMRC was resident in France and filed his 2012/13 tax return late.  He appealed against the higher later filing penalties on the basis that as he was living in France, he had not seen any advertising in relation to the new penalties.

We recently wrote about another case involving a non-resident appealing on similar principles, in relation to the introduction of the Non-Resident Capital Gains Tax (NRCGT) returns.  In that case the appeal was allowed because it was felt to be unreasonable to expect the taxpayer to have found the new rules independently.

However, the tribunal in this case did not feel the same principle would apply.  In this case, the taxpayer would have received documents showing the new penalty levels (for example on the notice to file) and the Tribunal therefore felt that, “a person reasonably trying to meet their tax return filing responsibilities would have realised from reading any of these documents that the penalties had changed”.

However the tribunal judge did overturn the penalties on the basis that the individual did not have a UK tax liability at all and stated that, “he would not have met the “SA criteria” that HMRC use, and he would not have had any obligation to notify chargeability under s 7 Taxes Management Act 1970”.  He was therefore, in the judge’s opinion, not legally obliged to complete the UK return.  The penalties were therefore reduced to nil.

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Tax Residence – An Interesting Break

Tax Residence continues to be an interesting area – and an active one for HMRC challenge.

Having burned many years of their own guidance in taking Gaines-Cooper to the highest court in the land – thereby ignoring their own ‘safe haven’ guidance in IR20, HMRC have made another challenge in the case of James Glynn.  In this case, HMRC HAVE LOST, [at least at the First Tier Tribunal].  The verdict of the judges, over a lengthy(?) day hearing was [simplifying] that the taxpayer had done enough to demonstrate a ‘definite break’ in lifestyle, so was entitled to look at a ‘day counting’ approach to tax residence.

Interestingly, the long memories of HMRC appeared to consider the idea of ‘available property’ relevant – a concept which had been abolished, but is now re-emerging in the new statutory tests.

Pleasingly, the judges looked at the case based on its specific facts.  They took into account factors such as social life, family and religious tradition, changes in business and investment interests, the conduct of the taxpayer’s wife and her charity work etc., – in fact the whole picture of his lifestyle.  This resulted in the conclusion that Mr Glynn had deliberately altered his lifestyle to such an extent that there was a ‘definite break’.

Again, hopefully this gives clarity taxpayers can depend upon.  Further the court went on to say that the fact that part of the motivation was tax avoidance was irrelevant, because the question of motivation should not have an impact on what is (especially under the new statutory rules) a question of fact.  Often the question of fact may not be an easy one, but one to be weighed in the balance, based on the complete picture.

Lessons to be learned include:

  1. The importance of reviewing all the facts and assembling appropriate technical arguments.
  2. The great depth to which HMRC went in investigating detailed elements of the taxpayer’s lifestyle.

Finance Bill 2013: Changes to the Statutory Residence Test

As of 6 April 2013, whether an individual is resident in the UK for tax purposes will be determined by the Statutory Residence Test.

It is designed to give taxpayers greater certainty and clarity as to whether or not they are UK-resident for tax purposes. This in turn will provide certainty as to whether or not they are subject to UK income tax and capital gains tax.  Due to the drafting of these rules, it remains to be seen whether the goal of greater clarity will be met.

In December 2012 HM Revenue & Customs produced draft guidance and legislation for the Statutory Residence Test.  The legislation has since been updated in the draft Finance Bill 2013.

The Main Changes

The main changes to the statutory residence tests were the introduction of ‘sufficient hours’ and the addition of a fifth automatic overseas test.

Sufficient Hours

In the first draft both the third automatic overseas test and third automatic UK test contained reference to ‘full-time work’. This phrase has now been replaced with ‘sufficient hours’, and there is a corresponding test to determine whether an individual has worked ‘sufficient hours’.

The sufficient hours test has been criticised as it does not allow for an adjustment (when determining whether sufficient hours have been worked) for periods of absence other than annual leave, parental leave, sick leave or embedded non-working days.

Therefore an adjustment is not allowed for agreed ad-hoc leave, such as compassionate leave or study days.

The provisions regarding gaps between periods of work are also highly restrictive, applying only where the gap is one between two employments.  It has not been extended to gaps between an employment and a trade, or two trades.

Generally speaking, the sufficient hours test is met when an individual works on average 35 hours per week after making the allowed adjustments, although the actual calculation is complex.

Fifth Automatic Overseas Test

A fifth automatic overseas test has been added where an individual dies during the tax year.

It is, loosely, a test which applies to those who die during the year and who have become non-resident in a previous year because they have gone to work abroad.

Potential Problems

The two most important areas where changes have not been made are in respect of the accommodation tie and of the definition of a ‘home’.

The accommodation tie still contains concepts which have no precise definition such as ‘a holiday home or temporary retreat’.  This is likely to lead to differing interpretations of what is and what is not a holiday home by HMRC and taxpayers.

Perhaps more importantly the Statutory Residence Test uses the concept of home, which is a notoriously difficult word to pin down as it can bear a wide range of meanings.  Unfortunately no clear and exhaustive definition of what constitutes a home has been provided by the Statutory Residence Test which is likely to cause ambiguity in its application.

Insufficient Breaking of Ties (Yates v HM Revenue & Customs TC02220)

In the case of Yates V HM Revenue & Customs, the taxpayer Ms Yates appealed against the decision that she was UK resident from the tax years 2003/04 to 2006/07.

Ms Yates claimed she was resident in Spain following her decision to move there in 2000 predominantly for health reasons. During this time her husband remained in the UK. In the period 2003/04 to 2006/07 Ms Yates made sizeable share disposals amounting to over £3 million which HM Revenue & Customs deemed to be taxable in the UK.

The first tier tribunal understood that Mrs Yates had moved abroad due to her health problems and that she had spent less than 180 days in the UK in each of the years. However, it was decided that Ms Yates had not made a sufficient break from the UK in order to be no longer deemed resident or ordinarily resident and hence her appeal was dismissed.

The tribunal cited a number of reasons as to why there was a insufficient breaking of ties, such as, when she returned to the UK she stayed with her husband in their marital home, she still received disability living allowance from the Department for Work and Pensions and that correspondence was still being sent to the marital home in the UK.

This is an interesting case following on from that of Mr Gains-Cooper and Eaves & Co would be glad to help with any residency advice that you require.

HMRC Guidance – Working Abroad & UK Duties

HM Revenue and Customs (HMRC) issued guidance in March 2011 confirming
that where a person works full time abroad, UK duties of fewer than 11 days per
annum will not usually be considered in determining a taxpayer’s residency
status.

HMRC have now issued a statement confirming the treatment of those
taxpayers working abroad that have returned to the UK due to the ongoing
conflict in the Middle East.

The advice applies to those countries that HMRC have confirmed where
exceptional circumstances apply (Tunisia, Libya, Egypt, Syria, Bahrain and
Yemen).

2010/11

The exceptional circumstances arose towards the end of the 2010/11 tax
year, therefore HMRC have confirmed that the residency status of taxpayers that returned to the UK temporarily and intending to return to work abroad will not be affected by the number of days of UK duties undertaken in this period.

2011/12

The exceptional circumstances may potentially apply for a much longer
period in the 2011/12 tax year.

With this in mind, HMRC have confirmed that in line with previous
advice UK duties of less than 11 days per annum will not usually be considered
in determining a taxpayer’s residency status.
Cases whereby taxpayers have spent more than 10 days on UK duties will
be considered in light of individual circumstances.

Eaves & Co have extensive experience in providing residency
advice.  Please contact Paul Davison on
0113 2443502 if you have any queries.