The Upper Tribunal has overturned a First-tier Tribunal decision which allowed the use of the "exceptional circumstances" provision in relation to the application of the Statutory Residence Test.

Last year, we commented on the First-tier Tribunal (FTT) case, A Taxpayer v HMRC, in which the taxpayer successfully argued that a certain number of days they spent in the UK during a particular tax year should be ignored as a result of the application of the "exceptional circumstances" provision under the UK's Statutory Residence Test. However, in a recent ruling, the Upper Tribunal (the "Tribunal") has now overturned the FTT's decision. The Tribunal held that the taxpayer's circumstances were not, in fact, "exceptional", and so the days in question could not be discounted (meaning that they would be UK tax resident for the particular tax year).

"Exceptional circumstances" – a brief reminder

Since 2013, an individual's UK tax residence status has been determined by the Statutory Residence Test (SRT).

Broadly speaking, the SRT works by mechanically counting the number of days (meaning midnights in the UK) an individual is present in the UK in a particular tax year and applying that number against certain tests and conditions. The only flexibility in the otherwise prescriptive SRT is the concept of "exceptional circumstances".

Up to 60 days can be ignored when counting days for (most) purposes of the SRT if the taxpayer can show that:

  • there were circumstances that were exceptional;
  • the circumstances were beyond the taxpayer's control;
  • the circumstances prevented the taxpayer from leaving the UK;
  • the taxpayer would not have been in the UK at the end of the day but for the circumstances; and
  • the taxpayer intended to leave the UK as soon as circumstances permitted.

Examples of circumstances which may be "exceptional", set out in the relevant legislation for the SRT, are "(a) national or local emergencies such as war, civil unrest or natural disasters, and (b) a sudden or life-threatening illness or injury".

The case facts

The taxpayer in question was living in Dublin but, during the particular tax year, spent a number of days in the UK caring for her twin sister (who was alcoholic and suicidal) and the sister's two minor children. Faced with these facts, the FTT had concluded that "the combination of the need for the Taxpayer to care for her twin sister and, particularly, for her minor children at a time of crisis caused by the twin sister's alcoholism does constitute exceptional circumstances" in respect of the SRT.

HMRC raised four grounds of challenge to that decision, each of which was successful. Key points to note from the Tribunal's judgment are set out below.

1. An objective test

The Tribunal was clear that the test for exceptional circumstances is entirely objective, noting that the SRT had been introduced to add certainty and therefore reading the test as subjective would water down that certainty.

The focus for advisers will, therefore, not be on the client's view of their circumstances but instead on whether there is verifiable, objective evidence of exceptional circumstances.

2. "Prevent" cannot be watered down

Unlike the FTT, the Tribunal focused on the requirement that the exceptional circumstances must "prevent" the taxpayer from leaving the UK. The pre-SRT law did not have this requirement. Therefore, it must be read as being a material element of the test. The Tribunal determined that "prevent" means "stopping something from happening or making an intended act impossible"  and that it is "different from mere hindrance".

The practical consequence for taxpayers is that the exceptional circumstances cannot merely have made it difficult for them to leave the UK – those exceptional circumstances must have stopped or rendered impossible leaving the UK. This contradicts commentary by the FTT, where it was noted that although it would have been theoretically possible for the taxpayer to fly in and out of the UK each day to look after her twin sister because the taxpayer had use of a private jet, this was impracticable and so could meet the "prevent" test.

3. Moral or conscientious inhibitions do not constitute exceptional circumstances

The FTT had held that "moral obligations and obligations of conscience – including those arising by virtue of a close family relationship – can qualify as exceptional circumstances...". However, the Tribunal disagreed strongly with this view, stating that "moral obligations are not themselves exceptional circumstances; they are shaped by society and the subjective feelings of an individual. Where a person feels a moral obligation towards (say) a relative whose circumstances are exceptional, the moral obligation does not form part of those circumstances. Accordingly, the person is not prevented by exceptional circumstances from leaving the UK; he is instead prevented by his sense of moral obligation".

The Tribunal therefore held that the FTT was wrong in finding that the taxpayer's sense of moral obligation towards her sister and children were exceptional circumstances which prevented her from leaving the UK.

It should also be noted that, in considering the question of whether moral obligations could be relevant, the Tribunal suggested that "it is not correct to say that (a) because a person genuinely thinks it necessary to be in the UK because a relative is ill or dying, then (b) exceptional circumstances exist. Serious illness and death are, themselves, not 'exceptional'; the former is commonplace and the latter universal. It is also not 'out of the ordinary course, or unusual, or special, or uncommon' for a person to have a sense of moral obligation towards a relative in that position. Objectively commonplace circumstances, such as serious illness, cannot be converted into exceptional circumstances by adding a moral obligation". There is a tension here with the SRT legislation, which clearly states that "sudden" or "life-threatening" illness or injury may be exceptional circumstances. HMRC might seek to argue that an illness or injury can be an exceptional circumstance if it is sudden or life-threatening, but not otherwise; however, this is unclear.

A moral Pandora's box?

The Tribunal's judgment grapples with complex issues which arise, particularly, where a taxpayer spends time in the UK due to circumstances which affect someone other than themselves. A common example of this would be a situation where a taxpayer is present in the UK to be with a family member who is seriously unwell.

As noted, the Tribunal commented in detail on circumstances where a "moral obligation" of this nature is what causes the taxpayer to remain in the UK. At one end of the spectrum is a situation where the circumstances affecting the individual who is unwell are not themselves exceptional. In those circumstances, the Tribunal is clear that the fact the taxpayer feels a moral obligation to remain in the UK to be with a family member does not somehow convert that family member's circumstances into being exceptional, and the taxpayer will not be able to rely on the exceptional circumstances rule.

At the other end of the spectrum is a situation where a family member of the taxpayer suffers an illness or accident that is clearly exceptional, and the taxpayer feels they must be in the UK with their family member. 

As a starting point, this is likely to be a high bar, and the Tribunal strikes a somewhat unsympathetic note, noting that even death is "universal" (see above). In this area the Tribunal's judgment is arguably slightly difficult to follow, especially in light of HMRC's existing guidance, and many practitioners will find it surprising.

Is the Tribunal arguing, for example, that a father who is present in the UK to look after his (dependent) daughter, who broke a leg on a school trip to the UK, cannot claim his circumstances are exceptional? A very similar example is covered by HMRC's guidance. Perhaps the Tribunal would have held that in those circumstances the father could claim exceptional circumstances – for example, because his obligation to his daughter is a legal obligation as a parent.

How would the Tribunal approach a situation where a young married couple visits the UK, and one spouse is diagnosed, entirely unexpectedly with an advanced cancer and cannot leave – would the healthy spouse really not be able to claim exceptional circumstances? Before this judgment many practitioners would have expected the answer to this question to be that the healthy spouse clearly can rely on exceptional circumstances, and it might be possible to reconcile the Tribunal's approach with such a position, but that does not appear to be what the Tribunal's judgment says.

It remains to be seen how the tensions between the Tribunal's remarks and the SRT legislation/HMRC's guidance will be resolved. For the time being, however, advisors should warn clients that HMRC is likely to challenge exceptional circumstances claims which involve arguments based on moral obligations (unless there is some other legal or physical reason for the taxpayer being prevented from leaving the UK).

4.The exceptional circumstances must be evidenced for each day the taxpayer wants to discount

Illustrative of the burdensome and mechanical nature of the test, the Tribunal confirmed that each part of the test for exceptional circumstances must be applied to each day on which the taxpayer was in the UK.

This underlines the importance of record keeping and ensuring that clear, contemporaneous records are made at the time which show why the exceptional circumstances test is met on each day in the UK. Comments made by both the FTT and Tribunal make it clear that the taxpayer's inability to provide evidence of or specific reasons for some of her actions undermined her credibility and persuasiveness.

Points for taxpayers

In many ways, HMRC's success at the appeal is unsurprising. The evidence (or lack thereof) provided by the taxpayer at first instance had been heavily criticised. Furthermore, an approach that construes exceptions in legislation narrowly to avoid gutting a broader framework is, in general, a persuasive argument.

However, the tensions between some of the Tribunal's commentary and the SRT legislation/HMRC guidance are likely to engender further discussions and debate. In the meantime, taxpayers and their advisors should assume that any claim for exceptional circumstances will be scrutinised carefully by HMRC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.