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What constitutes “exceptional circumstances” under the Statutory Residence Test

The decision in HMRC v A Taxpayer [2023] UKUT 182 (TCC) was handed down on 28 July following an appeal by HMRC in response to the First-tier Tribunal (FTT) decision in May 2022. This is the first case of its kind to examine the meaning of “exceptional circumstances” for the purposes of the Statutory Residence Test (SRT) under paragraph 22(4) Schedule 45 Finance Act 2013. Whilst the FTT decision provided some hope for a broader meaning of exceptional circumstances, taxpayers will be concerned to note the much narrower construction adopted by the Upper Tribunal.

The facts of the case

The taxpayer left the UK to live in Dublin on 4 April 2015, following UK tax residency in at least one of the previous three tax years. She had received legal advice regarding the SRT and her move to Dublin was motivated by this. She was aware that to avoid being UK tax resident for the 2015/16 tax year, she could spend no more than 45 days in the UK. However, she visited the UK for a total of 50 days during the course of the tax year.

She filed her 2015/16 self-assessment tax return on the basis that she was non-resident and that five of the 50 days she was present in the UK was due to exceptional circumstances. The relevant stays in the UK were split over December 2015 and February 2016. HMRC subsequently opened an investigation into her return and rejected her claim of exceptional circumstances for the five days, issuing her with a tax bill of over £3 million. The taxpayer appealed the decision, and the case went to the FTT.

During the course of the FTT hearing, the taxpayer put forward the case that she had been in the UK due to her twin sister’s alcoholism, depression and threats of suicide. She also claimed that her sister’s two minor children had been neglected and the house was in an unliveable state. The taxpayer’s defence was made up of two prongs:

  1. Her sister had threatened suicide which constituted “exceptional circumstances beyond her control” and the taxpayer was unable to leave the UK until her sister was “in a place of safety”
  2. Her sister was unable to care for her children and the taxpayer was unable to leave the UK until care arrangements had been made for the children

Whilst the FTT rejected the first ground, it accepted the second on the basis that the combination of care requirements for the taxpayer’s sister and her children constituted exceptional circumstances with a heavy weight being placed on the taxpayer’s moral obligations towards the children.

The judgment

HMRC’s appeal was successful, and the decision made by the FTT was overturned by the Upper Tribunal (UT), with the taxpayer being found UK tax resident for 2015/16. The UT noted that the taxpayer was aware of her requirement to keep a clear record of her days in the UK following the legal advice she had taken and, also, that she would be considered UK tax resident if she stayed in the UK for more than 45 days, unless exceptional circumstances applied. The UT stated that the FTT had erred in law in deciding that moral obligations and obligations of conscience can qualify as exceptional circumstances.

The UT were particularly critical of the taxpayer’s vague record keeping and inability to account for her movements for the five days in question. This was compounded by the fact that the taxpayer did not stay overnight with her sister for all five days, but instead spent some nights at her family home with her husband who was still living just seven miles away from her sister.

The taxpayer’s case was further weakened by the fact that her sister had two very good friends that would check on her several times a day. Her brother also lived 20 miles away and the taxpayer admitted that he had promised to keep an eye on their sister.

Conditions required to satisfy exceptional circumstances

The key finding of this case was that a moral obligation and obligations of conscience in themselves do not constitute exceptional circumstances. Paragraph 22(4) contains five conditions, all of which must be satisfied for each of the days for which the taxpayer is claiming the exceptional circumstances exemption for it to apply:

  • the circumstances were exceptional;
  • the circumstances were beyond the person’s control;
  • the person would not be present in the UK at the end of the day but for those circumstances;
  • the circumstances prevented the person from leaving the UK; and
  • the person intended to leave the UK as soon as those circumstances permitted.

It was concluded that serious illness and death are not exceptional nor out of the ordinary. A moral obligation does not alter this position. The sister’s alcoholism and depression themselves and their consequences for family members, including children, are not uncommon or unusual. The definition of exceptional is not defined and its ordinary meaning is applied. The circumstances themselves did not stop the taxpayer from leaving the UK as alternative arrangements for the care of her sister and her children could have been made without the requirement for her to remain in the UK. Additionally, it was found that the taxpayer had made no care arrangements following either visit.

Take away points

It is crucial that individuals keep clear records of their day counting and their activities during their time in the UK, particularly if they are seeking to rely on the exceptional circumstances exemption for any of those days. Whilst an individual is not expected to produce “an itemised timeline for each day”, sufficient evidence must be provided to show that all five parts of the statutory test apply on each individual day.

HMRC give examples under paragraph 22(5) of what could be construed as exceptional circumstances, such as war, civil unrest or natural disasters or a sudden life-threatening illness or injury. The sister’s alcoholism and depression were not sudden and were documented as far back as 1996.

HMRC provide very prescriptive examples in their guidance such as explosion on a ship resulting in specialist hospital care or a parent staying in the UK to look after their minor child in hospital following a serious accident. The exceptional circumstances are limited to 60 days and if those circumstances surpass this amount, they will be included in the individual’s day count for the purposes of the SRT.

For exceptional circumstances to apply, it must be something out of the ordinary, outside of the individual’s control and but for those circumstances, they would not have been in the UK. Whilst certain circumstances may be upsetting and infer a moral obligation (such as the serious illness of a family member), this does not qualify these circumstances to become exceptional just by their underlying nature coupled with a moral obligation. Whilst quite blunt, the UT stipulated that serious illness is commonplace and death is universal and could not be considered exceptional circumstances.

If you have any questions regarding the SRT or what is considered exceptional circumstances, please contact a member of the Tax, Trusts & Succession team.