tax implications of leaving the UK to live and work abroad

About a year ago publicity aroused by the cases of Davies, James and Gaines-Cooper against the Revenue caused concern for those who may be considering leaving the UK to live and work overseas.

The final appeals in the cases have now been decided, in the Supreme Court.  HMRC won the cases (by a majority), so it is possible to try to state a final outcome, and describe the law.  Unfortunately, the outcome leaves the law unclear, as before, with every taxpayer's individual circumstances being different, and 'resident or non-resident' depending upon a “multifactorial” assessment.

The taxpayers had asserted that assessments to tax should be set aside, arguing that it would be unfair for the Revenue to publish guidance and then not stick to it, or for it to change its interpretation of the rules after the taxpayer had begun periods abroad. The Supreme Court agreed with this assertion but the Guidance in question has now been withdrawn by HMRC and replaced by a leaflet entitled HMRC6, so there is not much point in looking at what the Supreme Court said about the old guidance (in leaflet IR20).

Almost certainly, HMRC6 does not say anything that is more favourable for a taxpayer who is going to work abroad than the underlying law.  It is worth reading HMRC6 because it is more accessible than the underlying law, and more attractively expressed, with examples; but in the end it cannot be read to produce a more favourable result for a taxpayer.

So what is the law?  Liability to income tax and Capital Gains Tax generally falls upon those who are “resident” or “ordinarily resident” in the UK.  A person who has been resident in the UK does not cease to be resident in the UK for tax purposes just because he goes and lives abroad for a while.  He must effect a distinct break in the pattern of his life in the UK.  This can only be achieved if there is a distinct break with the UK having regard to many factors.  Taking a full-time job abroad is one factor, and usually an important one, but not necessarily a conclusive one.  A distinct break will involve a loosening of social and family ties in the UK (even if not a break in all of them), so that a person whose family stays behind will have more of  a struggle to say he has ceased to be resident in the UK than one who takes his family with him.  A person who retains active directorships of clubs or companies in the UK will have more difficulty establishing the distinct break.

There are well-known rules about 'day-counting'.  A person who spends 183 days in the UK in a tax year is resident for that tax year.  A person who spends an average of 91 days in the UK over a period of four years will not be non-resident.  But it is possible to be in the UK for less days and still be resident: days spent in the UK must be days spent as a visitor, not as a person whose connection to the UK has been diluted but not broken.

The details of the cases are not really important any more.  One or two points provide good illustrations. Mr Davies and Mr James had left the UK in March 2001 to take up employment in Belgium.  They left the UK in tax year 2001-02 but their work did not actually start until after April 2001, although their contracts were made before this.  In fact, they treated themselves to holidays in Italy before getting down to the job in Belgium, so they did not quite work for the full tax year 2001-02, and so their distinct breaks did not start until after this tax year began.

Paragraph 2.2 of IR20 provided, under the heading "Working Abroad" (and paragraph 8.5 of HMRC6 is similar):

"If you leavet he United Kingdom to work full-time abroad under a contract of employment,you are treated as not resident and not ordinarily resident if you meet allt he following conditions:

• Your absence from the UK and your employment abroad both last for atleast a whole tax year;
• DuringyourabsenceanyvisitsyoumaketotheUK:
• Total less than 183 days in any tax year,and
• Average less than 91 days per tax year..."

This has to be read as a whole and it clearly means that the employee must have worked full-time throughout the relevant tax year. Absence of itself is not sufficient.

This has to be read as a whole and it clearly means that the employee must have worked full-time throughout the relevant tax year. Absence of itself is not sufficient.

The result was success for the Revenue, but it does not really change anything.  In particular, the case does not directly deal with claims to be non-UK resident for part of a tax year, in the context of several years of non-residency. 

The third appellant, Mr Gaines-Cooper, contended that in 1976 he had left the UK permanently or for at least three years, for the purpose of establishing himself as an international businessman, based in the Seychelles.  He was absent for at least a whole tax year, and his return visits to the UK never exceeded the number of days specified in IR20.

Paragraph 2.8 of IR20 provided:

"If you claim that you are no longer resident and ordinarily resident, we may ask you to give some evidence that you have left the UK permanently, or to live outside the UK for three years or more. This evidence might be, for example, that you have taken steps to acquire accommodation abroad to live in as a permanent home, and if you continue to have property in the UK for your use, there as on is consistent with your stated aim of living abroad permanently orf or three years or more. If you have left the UK permanently or for atleast three years, you will be treated as not resident and not ordinarily resident from the day after the date of your departure providing:

a) Your absence from the UK has covered atleast a whole tax year, and;

b) Your visits to the UK since leaving:

• have totalled less than 183 days in any tax year and;
• have averaged less than 91 days a tax year."

The new HMRC6 is less precise.  It provides:

"If  you  still  have  property  in  the  UK  which  you  can  use  after  you  leave, we  might  want  you  to  explain  how  retaining  that  property  is  consistent  with leaving  the  UK."

During the time in question, whilst Mr Gaines-Cooper had never exceeded the number of days he was 'allowed' to be in the UK in any tax year, but he had many ties in Berkshire and Oxfordshire, he retained a house in the UK and sent his son to school here. The Court of Appeal found that Mr Gaines-Cooper had not demonstrated a distinct break from social and family ties, and so he did not attain non-resident status, England remaining "the centre of gravity of his life and interests". 

These cases underline the fact that anyone intending to leave the UK should take advice on their own individual circumstances.  The very terms of guidance issued by the Revenue demonstrate that consideration of particular facts is necessary.

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