We advise a lot of clients on their UK tax resident status and also, in cases where they are dual resident, we assist them in determining the country they are tax treaty resident in.
We were therefore interested in the ruling at the Upper-tier Tribunal (Tax and Chancery Chamber) (UTT) in respect of McCabe v Revenue and Customs Commissioners which has been published this month.
The case involves an appeal by Mr. McCabe against the decision of the First-tier Tribunal (Tax Chamber) (FTT) which dismissed his appeal against closure notices issued by HM Revenue & Customs (HMRC) for the tax years 2006/7 and 2007/8. The closure notices amended Mr. McCabe's self-assessment tax returns, charging him to income tax and capital gains tax on the basis that he was resident in the UK for tax purposes during the relevant period.
Mr McCabe argued that he ceased to be UK resident on 4 April 2006 and was non-resident in the UK (and resident only in Belgium) throughout the relevant period under the UK/Belgium Double Tax Convention (DTC). He moved to Brussels as part of a tax planning strategy and to develop his European business.
The FTT made detailed factual findings about Mr. McCabe's relocation to Brussels, his activities, and his presence in the UK during the relevant period. The FTT concluded that Mr. McCabe remained UK resident throughout the relevant period, as the changes in his life were not significant enough to constitute a distinct break from his UK residence.
The FTT also applied the Double Tax Treaty tie-breaker provisions which are used to determine the country of tax residence in dual residence situations. The FTT found that Mr. McCabe had a permanent home available to him in both the UK and Belgium. However, his centre of vital interests remained in the UK due to his ongoing business relationships, family ties, and social activities in the UK.
Mr. McCabe appealed on four grounds, including the FTT's failure to find that his full-time work abroad indicated a distinct break in his UK residence and errors in applying the common law test of residence and the DTC tie-breaker provisions.
The FTT decision in the case was upheld by the UTT and stated several reasons:
- Residence Test: The UTT agreed with the First-tier Tribunal (FTT) that Mr. McCabe remained a UK resident throughout the relevant period. Although Mr. McCabe's life had changed significantly after moving to Brussels, these changes were not enough to constitute a significant loosening of his ties with the UK. The UTT emphasized that the amount of time Mr. McCabe spent in the UK, his ongoing business relationships, and his family and social activities in the UK indicated continued UK residence.
- Permanent Home: The UTT upheld the FTT's finding that Mr. McCabe had a permanent home available to him in both the UK and Belgium. In the UK, this was in the form of Deepdale, his family house in Scarborough. Although the house was solely owned by Mrs. McCabe, it was available for Mr. McCabe to use whenever he wanted.
- Centre of Vital Interests (COVI): The UTT agreed with the FTT that Mr. McCabe's COVI remained in the UK. This conclusion was based on Mr. McCabe's time spent with family and friends in the UK, his attendance at Sheffield United matches, his business activities in the UK, and the fact that all his employment income through his Belgian service company came from UK companies.
- Tie-Breaker Provisions: Since Mr. McCabe was deemed to have a permanent home in both the UK and Belgium, the tie-breaker provisions of the UK/Belgium Double Tax Convention (DTC) were applied. The UTT upheld the FTT's conclusion that Mr. McCabe's COVI was in the UK, making him a UK resident for tax purposes.
These factors led the UTT to uphold the FTT's decision and dismiss Mr. McCabe's appeal.
Our Comments
This case relates to tax years prior to the introduction of the UK’s Statutory Residence Test (SRT) on 6 April 2013, prior to the SRT residency tests and outcomes were often subjective and based on case law. Therefore, the conclusion reached in respect of the taxpayer’s tax resident status is of less interest. If the taxpayer was planning to become non-resident now the rules and parameters set by SRT would have allowed him to carefully plan his departure and ensure he became and remained non-resident.
The case also highlights the subjective nature of the tax treaty tie breaker tests which are used to determine in which country an individual is tax resident. It is extremely difficult to argue that you are treaty non-resident in a country if your spouse has remained resident there and continues to have a home there, for example, as was the case for the taxpayer here. If a taxpayer anticipates being dual resident then it is important to consider each tie-breaker test carefully and to take steps to ensure they can make a robust treaty claim.
We are experts in the application of the SRT and Double Tax Treaties and the tie-breaker tests which determine a dual resident taxpayer’s tax resident status. We can help you or your clients manage their tax residency carefully in order to achieve a desired outcome, offering practical advice.
Please do not hesitate to contact us for an introductory call to discuss how we can help you.
