It is the most supreme irony that the only reported case in recent years in which a taxpayer has succeeded in a claim to have become nonresident is the case of Grace v HMRC – in which the taxpayer represented himself. This is an outstanding achievement for which Mr Grace must have been justly proud. Regrettably, his success was short-lived, because HMRC appealed and the High Court has reversed the Special Commissioner’s decision.
Mr Grace was a pilot, domiciled in South Africa, but who had been living in the United Kingdom for some time. He had come to the United Kingdom in 1986 to qualify as a commercial pilot and was then employed by British Caledonian and living near Gatwick Airport. In 1997, his marriage was dissolved and he returned to South Africa, setting up home in Cape Town while continuing his employment with the airline. He retained his house in the United Kingdom, which he used as a resting place before or after carrying out his flying duties. It was fully furnished, with all the normal electronic facilities such as Sky, broadband and DVD. He was on the electoral roll and post was sent there. He kept a car in the United Kingdom, had a UK bank account and was registered with a doctor and dentist near Gatwick.
HMRC argued that he had not really left the United Kingdom. There had been no distinct break and he remained resident here. He was only occasionally resident abroad, and therefore remained chargeable to tax as a resident by reason of Section 334, Taxes Act 1988. Mr Grace said that in August 1997, he left the country to live outside the United Kingdom permanently, and thereafter he was not resident in the United Kingdom. He had moved the centre of his life to South Africa and he had kept his visits to the United Kingdom to a minimum. The Special Commissioner agreed and decided that he was not resident in the United Kingdom.
The Special Commissioner did not deal with the Section 334 point in detail, merely saying that Mr Grace was not outside the United Kingdom for the purposes only of occasional residence because he was abroad for the purpose of continuous and settled residence in his house in Cape Town, punctuated only by the need to visit the United Kingdom for the purposes of his work.
It seems to me that HMRC have a serious difficulty with Section 334, in any event. They like to claim that the taxpayer has not “left the UK” because, for example, he has not made a distinct break. However, if they want to regard somebody as occasionally resident abroad so as to keep him within the scope of UK tax under Section 334, they have to acknowledge that he has left the United Kingdom. Section 334 applies only if he has “left the UK for the purpose only of occasional residence abroad”. They cannot have it both ways. Interestingly, they did in Gaines-Cooper v HMRC, because in that case the Special Commissioners held that Section 334 applied to Mr Gaines-Cooper. So he had left the United Kingdom – but at the same time, they said that Mr Gaines-Cooper had not left the United Kingdom, but continued to reside in the United Kingdom as well as the Seychelles. Um.
The key issue in the Grace appeal was that the Special Commissioner made errors of law, and this was enough for HMRC to succeed in their appeal and for Mr Grace to be regarded as resident for the relevant periods.
The first error was that the Special Commissioner failed to appreciate that presence in the United Kingdom for work still counted as a settled purpose rather than a temporary purpose. Section 336 provides that a person shall not be treated as resident in the United Kingdom if he or she is in the United Kingdom for some temporary purpose only.
The Special Commissioner treated presence in the United Kingdom performing the duties of employment as a temporary purpose, but the court said that was wrong. Presence in the United Kingdom to perform duties under a permanent contract of employment was not casual or transitory. Mr Grace’s presence simply could not be described as a temporary purpose. Section 336 did not, therefore, assist Mr Grace – although if Section 336 did not apply because Mr Grace did not fulfil the condition on which it depends, it did not help HMRC, either.
The second error was that the Special Commissioner proceeded on the basis that a person cannot have more than one permanent residence or more than one settled and usual abode. The Special Commissioner concluded that Mr Grace’s house in the United Kingdom was not a home but merely a substitute for hotels; however, His Lordship felt this was neither correct nor relevant. Mr Grace’s visits to his UK house were attributable to the performance of the duties of his employment; they were regular and predictable and, unlike a hotel room, the house actually belonged to him and no one else used it. Accordingly, the Special Commissioner was wrong to disregard the existence of the UK house on those grounds.
HMRC also suggested that the Special Commissioner was wrong in concluding that Mr Grace had made a distinct break from the United Kingdom when he set up home in Cape Town. All that happened was that he acquired another home in Cape Town and, instead of residing in one place, he resided in two.
The judge noted that the phrase “distinct break” does not feature in the legislation, but it is an idea that has been developed in determining whether the taxpayer has left the United Kingdom and, if so, whether he has left for occasional residence abroad. He did not think it profitable to define it, but anyway, he felt that Mr Grace’s facts fell short of those that in other cases have represented a distinct break. Importantly, the judge stated that he did not rest his decision on that ground.
Boiling all this down, whether or not Mr Grace was in the United Kingdom for a temporary purpose was irrelevant, so the Special Commissioner’s error of law on that point did not matter. Nor did the issue of distinct break, because this was specifically not a basis for his decision. So, the only error of law on which the decision was based was the fact that the Special Commissioner was wrong to conclude that because Mr Grace had a permanent dwelling and settled place of abode in South Africa, he could not have had one in the United Kingdom. Some may think that is a bit flimsy.
Of perhaps wider importance, the Special Commissioner said that “after 1997 the UK was not where he dwelt permanently nor where he had his settled or usual place of abode, which was in South Africa”.
In the following three years he spent 41, 71 and 70 days in the United Kingdom (ignoring days of arrival and departure). The case was not dealing with IR20, but with the strict legal position – but I would suggest that in 1998, every tax adviser would have concluded that Mr Grace would have become nonresident under the long-established practice enshrined in IR20.
Quite apart from whether Mr Grace succeeds on a further appeal, the flurry of activity in the Administrative Court in other cases regarding HMRC’s approach to IR20 is bound to be relevant here.