The concept of ordinary residence is an important one in tax law, especially the law relating to Income Tax as it applies to people coming to live in the UK.
The general principles were originally set out in booklet IR20, published by HM Revenue and Customs (HMRC). This has recently been replaced by HMRC6. Traditionally, HMRC have regarded anyone who intended to reside in the UK for three years as ‘ordinarily resident’ from the date of their arrival. This has affected thousands of people who arrived on secondments, etc., that were intended to last more than three years. However, a recent case has moved the goalposts.
It concerned an Italian banker, Mr Genovese, who argued that he should not be treated as ordinarily resident in the UK from the date of his arrival because he had not at that time formed the intention of being resident here. HMRC’s approach to ordinary residence as outlined in IR20 is based, in effect, on intention. His argument was that he formed the intention of being ordinarily resident some time after his arrival.
The Special Commissioners of Tax (who decide tax cases depending on the interpretation of legal points) took a different view, applying a ‘common law test’. This was based on the evidence of the man’s habitual actions during the relevant period, not his intentions. They found this test inconsistent with HMRC’s approach under IR20.
In the summary, Commissioner John Clark said, “Comparison of the various factors comprising the common law test with the factors considered relevant under HMRC’s practice shows in particular that IR20 is concerned with matters of ‘intention’ and what the individual ‘decides’. The difference appears to stem from a fundamental difference of approach. The common law test is applied retrospectively to determine whether the individual coming to the UK has or has not become ordinarily resident. Booklet IR20 is concerned with a provisional decision whether or not, on the basis of information available at a much earlier stage, the individual appears to have become ordinarily resident. For this purpose, the individual’s intentions and decisions need to be taken into account in order to arrive at an appropriate taxation treatment for the initial stages of his period in the UK.
“The differing results of applying the respective tests to the same set of factual circumstances raise concerns for the position of all individuals in a similar position. As already indicated, they will have acted on the assumption that their position is governed by the practice set out in IR20, and in particular will have submitted returns on that basis. An individual who discovers that his or her tax position is not as it had been assumed to be is placed in a difficult position, as nothing can be done after the event to rearrange matters. That individual may well feel at a disadvantage compared with other taxpayers in a similar position whose returns have been accepted without enquiry. Questions of legitimate expectation may arise, although these are outside the present Tribunal’s jurisdiction. The question of the treatment of individuals coming to live and work in the UK in circumstances similar to those of Mr Genovese is of considerable importance and needs to be resolved in some practical way if the flow of workers to and from the UK is not to be distorted by concerns as to the tax considerations.”
HMRC will clearly be hoping that taxpayers who have paid additional tax as a result of being deemed ordinarily resident from the date of arrival will not claim refunds.