The Curious Case of Lyle Dicker Grace and the Factors for Determining UK Tax Residency

Originally published in the January 2010 issue

Managers of hedge funds with operations based in the UK are increasingly concerned changes to the UK tax rules for high earners (50% tax band will be with us from April 2010), combined with EEA restrictions on pay, will make it harder to retain and attract the best talent. Switzerland in particular is gaining popularity as a possible destination for the emigration or part-relocation of resources.

As a result of these trends, becoming non-resident for UK tax purposes is entering the conscience of mobile senior employees and other high net worth individuals. Achieving this where employment and other ties remain here is more difficult than ever but not impossible with the right “fact pattern” and good advice.

Just how difficult it can be to interpret the rules on loss of UK tax residency was most recently illustrated in the case of Grace v The Commissioners for HM Revenue and Customs, 28 October 2009. The case concerned whether Lyle Dicker Grace was resident in the UK for tax purposes and has once again highlighted that there is no statutory definition of residence for tax purposes.

In the absence of a statutory residence test, there is an increasing need for greater clarity and certainty around the non-statutory residence tests used by the courts to develop a series of guiding factors when considering tax residence. The Revenue’s practice notes have been reinterpreted by them with a succession of cases seeking to challenge any established understanding.

The background to this particular case makes for curious reading and illustrates the challenges. At the heart of the case is the question of in what circumstances (when a long-standing UK tax resident moves abroad) can they be certain they have in effect achieved a clean break from being resident for UK tax purposes?

In examples that can be traced back over the last 100 years, the courts have discouraged us from trying to find specific pointers such as “the right fact pattern” that might drive careful legitimate planning instead insisting that there is a need to take into account, weigh-up, and balance all relevant factors in each case.

Mr Grace is a long-haul pilot for British Airways who claimed, after a period of living in the UK, that he had relocated to his native South Africa and was now commuting to the UK for his work. He claims that he only visited the UK in this way because each of his long-haul flights started and ended here. A closer look at the facts of the case quickly reveals that matters were complicated because Mr Grace had lived in the UK for ten years until 1997 when he moved back to Cape Town. Therefore the enquiry had to assess the nature of the visits to this country, including: the duration of his presence in the UK and, the regularity and frequency of his visits.

Equally, the enquiry had to take into account his continuing links to this country and his connection with South Africa, including his ownership and use of a house there, and his activities, ties and other connections there. His ownership and use of a house in South Africa was not considered conclusive that he did not reside in the UK, but it was a relevant factor to be taken into account along with, in this case, the following list of factors about his UK ties:

• he retained a house in the UK;
• he was on the electoral roll in the UK as a resident;
• post was sent to him at his UK address;
• he kept a car in the UK;
• he had a bank account in the UK into which his salary from British Airways was paid;
• he was registered with a dentist in the UK;
• he had no relatives in the UK;
• his ex-wife and daughters lived in the UK but he had no contact with his children for over 30 years; and
• he was a member of the professional body of the British Airline Pilots Association.

HM Revenue & Customs (HMRC) have argued that Mr Grace did not break his UK residency at any stage given the extent of his visits to the UK and the nature of his continuing links to this country. Indeed the many volumes of case law support the idea that a UK tax resident is unlikely to have left the UK unless there has been a definite break in his pattern of life. In the absence of a statutory residence test (along the lines of the USA and Ireland) planning to make a definite break requires careful consideration of non-statutory residence factors as outlined above.

This all started back in 2001 when HMRC first had concerns regarding mobile workers and where established case law and their own practice guidance fitted with the modern age. A further recent case is illustrative of this when Gaines-Cooper returned to the Court of Appeal last month for a judicial review hearing.

The concerns were again that HMRC had moved the goal posts with the challenge made that new vagaries between whether there was a clean break (severing all ties) with the UK, and the question of a distinct break were sufficient. HMRC have said that the latter would do but they may look to “other” evidence.

Since then the rules have changed and we have new practice. This certainly does impact, if nothing else, on the way that the count of days is made – now including all days where you are here at midnight – for helping determine residence. HMRC have said that their replacement guidance issued following changes to the rules on non-domiciled individuals from 6 April 2008 is not a direct replacement for the old guidance. It represents a guide to the unrepresented taxpayer and that there is further guidance for the advisor scheduled, but has not been forthcoming to-date. What has clearly been reliable guidance for the last 25 years has now been swept away by uncertainty.

There is no such lack of focus in HMRC’s attempts to systematically raise enquiries and coordinate their approach in relation to dealing with high net worth and international mobile people as evidenced by the full consolidation of work into expatriate and high net worth units. HMRC are pooling resources and experiences, and entering into exchanges of information with various tax havens and a real sign of greater co-operation on sharing information with other foreign revenue jurisdictions.

In the case of an individual who has been resident in the UK, the making of a “distinct break” in his pattern of life, including establishing a residence elsewhere, may mean that even lengthy or regular visits to this country may not amount to continued or resumed residence. What is clear in this case, and one or two others, is that established practice is no longer as clear and distinct as it may have appeared for many years. The lack of a statutory residence test makes planning for non-residency status more challenging.

It is an open secret that HMRC practitioners and individuals impacted are desperately keen to see a full statutory residence test as the current system, with a backlog of cases, threatens to continue growing. The backlog of cases, to cover a multitude of different circumstances, is where a change/move to a new location may or may not represent enough of a change along the spectrum to fit with the guidance and the world that we live in today.

Mark Walters is managing director of the tax practice of Frank Hirth Plc’s London office. He specializes in US/UK individual tax planning and compliance. Walters trained with PwC in individual taxation and financial planning and has over 20 years experience of US international tax matters.