The latest decision in the saga of Grace v HMRC was published on 1 February, and regrettably the clarification for which we all yearn is as far away as ever.
It may be remembered that (in very broad terms) Mr Grace was a South African pilot who came to the UK in 1986 and was employed by British Caledonian. He had a house near Gatwick. In 1997 his marriage was dissolved and he went back to South Africa. He retained his UK house which he used in order to rest, before or after carrying out his duties as a long haul pilot. In the following three years he visited the UK for 41, 71 and 70 days. HMRC claimed that he remained UK resident. Mr Grace appealed to the Special Commissioners, representing himself, and demonstrated to the Tribunal that he had made a distinct break from the UK and had become non-resident in 1997. A rare and highly commendable success.
After an appeal to the High Court and the Court of Appeal, the case was remitted to the Special Commissioners because the Court of Appeal thought there was a misdirection which may have affected the outcome. Unfortunately the Special Commissioner had retired, and after all this time, Mr Grace found himself back to square one. The new Tribunal judge decided not just to deal with the points which required clarification from the Court of Appeal but to start all over again without regard to the previous findings of fact – and concluded that Mr Grace was UK resident after all.
However irritating that may have been for Mr Grace, we might have all taken comfort from this new decision if it had set out a clear approach both from HMRC and the court. Unfortunately, however, the confusions have only multiplied. I will not dwell too much on all this, but it is important to see how the decision was arrived at and how other important aspects were dealt with.
HMRC argued that you cannot be ordinarily resident but not resident. This was odd because this view is directly contrary to the Revenue Manuals. It is also contrary to HMRC 6, it is contrary to the Special Commissioner’s decision in Gaines-Cooper and it is contrary to the capital gains tax legislation which is expressly drafted on this basis. It is not clear why or how HMRC felt able to advance this argument at all. It is perhaps a blessing that the Tribunal did not deal with it anyway.
A significant part of the decision related to the issue of a distinct break. The Tribunal judge thought that the Court of Appeal decision in Gaines-Cooper did not determine that a distinct break was essential for someone shedding residence under the common law. She concluded that it was not essential to show that a distinct break had occurred for UK residence to be lost. (I think the Court of Appeal may have a rather different view on that, but nevermind.)
Having come to this conclusion, the Tribunal judge said that Mr Grace’s move to Cape Town did not demonstrate a sufficient break. It was not enough to amount to a definite break with the UK; he did not sever his main ties (employment and house) with the UK. I thought she said it was not essential to have a distinct break … but maybe it was essential after all.
What is particularly galling for Mr Grace is that the original Special Commissioner found as a question of fact that he had made a distinct break from the UK. Unfortunately the new Tribunal judge did not find that relevant and decided to consider the matter again herself. She found the change in Mr Grace’s life in September 1997 was a distinct decrease in the amount of time spent in the UK and the creation of new ties in South Africa but wondered whether this was a sufficient break with the UK. (I hope everybody is following this reasoning OK.)
A key issue before the High Court, and the basis of the judgment that Mr Grace had retained his UK residence, was that he was working in the UK. Mr Grace could not be regarded as in the UK for some temporary purpose only – he was here for work. That was not a temporary purpose, and therefore he was resident despite the comparatively short periods he spent in the UK. The Court of Appeal did not support that view, and the Tribunal judge concluded that:
So (largely) the question before me is not whether Mr Grace was resident in the UK because of his presence here when he was working but whether he was resident in the UK because of his residence here when he was not working.
It is difficult to draw any conclusions from all this. We were moving towards a position where a distinct break was essential, and although nobody was quite clear what a distinct break was (apart from severing social and family ties – which must be too strict a test), that was at least progress. However, it is now said that a distinct break is unnecessary.
We thought we knew that working in the UK was important, but now we are told it is presence in the UK when not working which is important. I am afraid that the general principles which were being developed in the earlier cases are now up in the air all over again. Let us hope that Mr Grace will appeal – but I would think he is completely fed up with all this now.