Time to dwell on a residency test

TAX IS A FACT OF LIFE – to go back to Benjamin Franklin’s celebrated dictum it is one of life’s two certainties. But if that is the case, it seems a little odd that a key building block of tax – the question of who is caught by the system – has had so little legislative attention in the UK.

I am referring to the definition of residence for individuals. The CIoT has for many years been an advocate of creating a statutory test, so that an individual (and HMRC) can determine the taxpayer’s status with reasonable certainty. Without such a test, we are thrown back on cases such as Cooper v Cadwalader (1904), IRC v Brown (1926) and even IRC v Young, still cited after 135 years.

What has helped (?) has been the HMRC guidance. For many years IR20 was accepted as quasi-legislation, but its rewriting into HMRC 6 plus HMRC’s challenges of a variety of taxpayers (Shepherd, Grace, Gaines-Cooper, Genovese, Tuczka et al) shows how unsatisfactory the position has become. In short, we cannot have the taxability of individuals who work in an era of commuter jets and email governed by case law from the rail and steam age and guidance that can’t be relied on.

Accordingly, the CIOT has been working towards a statutory residence test (SRT) for some time and very much welcomes the current initiative as a significant step in the right direction. The ‘three stage’ test proposed (i.e. full-time work abroad – not resident, 183+ days here – resident, otherwise – a series of ‘ladder’ tests) seems workable and fair. Inevitably, the proposals raise concerns – perhaps best termed areas that need more work.

Some we have highlighted are:-
• Should ‘family’ and ‘available accommodation’ in the UK both be factors?
• The need to tie down definitions – a key one being ‘work’
• Making the proposals work for the self-employed as well as employees

It is good to see the willingness to contemplate abolishing ‘ordinary residence’, a term that has caused the courts – and taxpayers – a lot of difficulties. We really should be able to get by with only two guiding rules in this area (i.e. residence and domicile….let’s leave for another day arguments over domicile). Ordinary residence can be done away with; though with a specific Overseas Workdays Relief retained in some format.

Some guidance around the SRT will be needed, but this should focus on examples to clarify the expressions that are being introduced to help ordinary taxpayers. The legislation must be clear and unambiguous and contain all necessary definitions; the guidance should be just that and not supplementary legislation.

There will be a need to review the workings of the SRT after a year or so and probably to have some transitional arrangements. But we are well on the way to getting the tax law to a better place and the CIOT will continue to work actively with the Treasury and HMRC to resolve remaining issues ahead of the planned introduction in 2012.

Let us hope that the criticisms made in 1928 by Viscount Summer in the case of Levene v IRC can finally be laid to rest:

‘the legislature partially transfers to [the appellate commissioners] the function of imposing taxes on individuals, since it empowers them in terms so general that no one can be certainly advised in advance whether he must pay or can escape payment’.

John Whiting is tax policy director of the Chartered Institute of Taxation