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What is an Exceptional Day for the purposes of the Statutory Residence Test (SRT)?

Since the UK introduced a fixed, formal, statutory test – the so-called Statutory Residence Test (SRT) – for assessing whether someone was or wasn’t a UK tax resident in a specific tax year, accountants and tax advisors have been waiting for some definitive court guidance as to how one should assess the 'exceptional days' rules, which are part of the overall SRT.

As such, it is good to see that the Upper Tribunal has now provided some formal, binding clarity in this regard. However, from an overall perspective, it would be fair to say that the ruling ‘favours’ HMRC rather than the taxpayer. For example:

  • As a general principle, it will be much more difficult for a taxpayer to argue a day is ‘exceptional’ for the purposes of the SRT than appeared to be the case before this Upper Tribunal ruling was published.
  • One now clearly needs to consider whether the ‘exceptional’ definition is met for each individual day for which this status is claimed (rather than treating any days as a ‘group’, which could be assessed together).

Moreover, factors which should now be considered when looking at whether something is exceptional include:

  • Were the circumstances actually exceptional?
  • Are they beyond the control of the taxpayer?
  • If so, is it clear that they would not have been in the UK at the end of that day if it wasn’t for the exceptional situation?
  •  Is it clear that they planned to leave ASAP, and
  • Did these circumstances genuinely prohibit the person leaving (rather than just making it more difficult / painful for them to leave the UK).
  1. Examples of events which could appear to satisfy all of the above criteria would appear to include:Natural disasters or civil war (presume Covid would qualify as a natural disaster)
  2. Life threatening sudden illnesses which meant you couldn’t fly from the UK.

While one can absolutely understand why HMRC took the taxpayer to court in this case (otherwise a significant dividend payment from a UK company would have largely fallen out of UK tax), the cynic in me cannot help but wonder whether the Upper Tribunal’s definition of exceptional in this case could result in the Revenue pushing decisions in future which are, from a common-sense perspective, deemed ‘unfair’?

For example, one factor in this case which the Upper Tribunal held undermined the claim for days to be treated as exceptional was that there was some ‘pre-planning’ about one of the taxpayer’s trips to the UK (to visit a sister who was ill with alcoholism). So, taking that comment to its logical conclusion, could one see HMRC argue that a taxpayer visiting the UK to see a terminally ill parent on their death bed is not exceptional? After all, such trips will often have some planned element to them. Hopefully I am wrong and HMRC Inspectors will show some common sense and sensitivity in such cases.

So, what does this mean in the aftermath of Covid?

Realistically, the Upper Tribunal ruling – which can be held to be ‘binding precedent’ under UK case law principles – could be said to provide HMRC with a UK supporting case for them to review and challenge some of the exceptional days claims that taxpayers have made in their 2020/21 and 2021/22 UK tax returns. That is, the years where travel was heavily disrupted by Covid-related issues (e.g., travel bans).

While any challenges by HMRC in respect of Covid-related exceptional days should, we hope, be considered on a case-by-case basis, it would appear sensible for taxpayers who have claimed such days in their UK Self-Assessment Tax Return to ensure that they retain their records in this regard so that the information is readily available in case of an HMRC review.

It may also be sensible for taxpayers who are ‘dual resident’ (i.e. between the UK and Ireland or the UK and Germany), to consider whether it is necessary to keep any foreign (non-UK) tax returns as ‘open initially’, so that in the case of a UK tax audit – that is, something which could impact the tax liability in the other jurisdiction – it is possible to amend any home country assessment accordingly. This is on the basis that, for example, if a German tax declaration is published by the German Revenue and not formally ‘appealed against’ on a timely basis, it can become a fixed liability which cannot (typically), be amended or altered. Therefore, if one is unlikely, this type of ‘timing and appeal difference’, could, in the worst cases, end up with someone facing double Income Tax liabilities without any clear ability to get the taxes offset in the other jurisdiction.

Would you like to know more?

If you would like to discuss any of the above in more detail, please get in touch with your usual Blick Rothenberg contact, or Robert Salter using the form below.

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