McDermott Will & Emery: The HMRC 91 day rule

Date: 06 Aug 2010


By Martyn Gowar and Clare McRoberts McDermott Will & Emery (pictured above)

Unless the case does go to a hearing in the Supreme Court, the Court of Appeal’s decision in the Gaines-Cooper case will concern many individuals who have based their international tax planning around the “91 day rule” originally set out in HMRC guidance IR20 and continued in the replacement guidance, HMRC6. In a somewhat odd judgment where the judges apply statutory construction techniques to a Revenue guidance note, it was at last confirmed that HMRC are bound by what they have written. In the light of the Wilkinson case which said that it was not possible for HMRC to apply concessions, this was by no means a foregone conclusion. The logic that binds the Revenue to an analysis of the law that is simply interpretation but not to a concession which formally acknowledges a clear injustice in the legislation is difficult to support.

The rules for those working in full time overseas employment are covered by a different rule but, for others, many took the view that, as long as an individual left the UK with a degree of permanence to remain aboard, that individual would be classed as no longer tax resident in the UK as long as they spent less than 91 days in the UK over an average of 3/4 years. Whether that individual continued to have ties with the UK was irrelevant. This was not the view taken by the Court of Appeal.

Their ruling stated that it is a precondition of becoming non-resident that an individual must establish that they have permanently (or indefinitely) left the UK, at which point they can no longer be considered tax resident in the UK. An individual can leave the UK, ensure that they are present in the UK for less than 91 days a year and still be considered resident in the UK if their original departure is not considered to be sufficiently permanent.

The key question is how does an individual ensure that they are considered to have left the UK permanently. The Court of Appeal consider retention of strong links with the UK as an aspect of tax residence along with time physically spent in the UK. HMRC will look at an individuals family, property, business and social connections with the UK when making a decision along with the individual’s individual lifestyle pattern.

Ideally, an individual would leave the UK for at least a full tax year before making any return visits and would file form P85 to alert HMRC to their departure. They would establish a permanent home in another country and would become tax resident there. The individual’s spouse and any dependant children would move to the other country as family is a particularly strong linking factor. They would also give up any social or political affiliations in the UK and close any UK bank accounts. If all of these actions were taken it would be very difficult for HMRC to argue that the individual had remained tax resident.

Until a statutory residence rule is enacted, which will not now happen until well after the general election, residence will always be a question of fact and degree. It will always be necessary to weigh up each individuals circumstances before their residence status can be decided.

However, if an individual does discover that they are tax resident in the UK after moving to another country, they should consider whether there is a tax treaty between the UK and that country. Treaty residence is different from the domestic position. Most tax treaties use the residence test developed by the OECD which has a much clearer definition of residence. It may be that when the criteria for treaty residence is applied to the facts, the individual can be reasonably confident that they are at least non-UK resident for treaty purposes and can take advantage of any tax relief available under the treaty.

Authors – Martyn Gowar and Clare McRoberts. Martyn Gowar leads the International Private Client team at McDermott Will & Emery and Clare McRoberts is an associate in the team.

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