Navigating Tax Compliance Challenges: A Case Study of the UK’s Statutory Residence Test

In the complex world of tax compliance, the UK’s Statutory Residence Test (SRT) presents a significant challenge, particularly for globally mobile individuals. This case study explores the intricacies of the SRT and illustrates the tax compliance challenges individuals need to navigate to guarantee compliance. We’ll examine a specific case involving day counting and outline the key challenges you could overcome with Daysium’s innovative day counting solution.

Since its introduction in the 2013/14 tax year, the UK’s Statutory Residence Test (SRT) has become a cornerstone in determining an individual’s tax residence status. Key provisions of the SRT state:

“(1) A person is resident in the UK for a year if either the automatic residence test or the sufficient ties test is met.

(2) The automatic residence test requires a person to meet none of the automatic overseas tests, and at least one of the automatic UK tests (para 5).

(3) Many of the automatic overseas tests (paras 12, 13 and 14), and the automatic UK tests (paras 7 and 8) depend on the number of days the person spends in the UK.

(4) If the automatic residence test is not met, the “sufficient ties” test applies.

(5) Under the sufficient ties test, a person’s residence is determined by a combination of (a) the number of UK ties and (b) the number of days the person spends in the UK.

(6) The number of ties sufficient to make a person UK resident depends on (a) whether the person was resident in the UK for any of the previous three tax years, and (b) the number of days the person spends in the UK in the tax year in question (para 17(3)).

(7) The combinations of days spent in the UK and the number of ties are set out in Tables at paras 18 and 19.”

Day counting is essential to the tests, both for the automatic residence test and the sufficient ties test. Para 22 of SRT determines how many days a person spends in the UK.

Generally, a person is present in the UK for day-counting purposes if they are present at the end of a day.

The exceptions to the general rule are:

• • Transit Exception: A day does not count if the person only arrives in the UK as a passenger, leaves the next day, and engages only in transit-related activities.

• • Exceptional Circumstances Exception: A day does not count if the person would have left the UK but was unable to due to exceptional circumstances beyond their control, intending to leave as soon as possible. Exceptional circumstances might include emergencies like war, natural disasters, or severe health issues.

There are also limitations on the number of days a person can spend in the UK for exceptional circumstances each tax year, which are capped at 60 days.

However, the case we’ll discuss shows that what counts as ‘exceptional’ is ambiguous at best.

The Appellant in the case was a taxpayer who moved from the UK to Ireland on April 4, 2015. In her self-assessment tax return for the year 2015/16, she claimed non-UK residency.

HMRC challenged this decision because she had spent more than the permissible number of days in the UK, which led the taxpayer to appeal to the First-tier Tribunal (FTT).

Both the Appellant and the authorities agreed that the Appellant had spent 50 nights in the UK during the tax year. This was more than the 45-day limit set by SRT.

However, the issue became the exceptional circumstances clause, which allows some leeway in the day count. The test allows certain days to be disregarded in the SRT day count when a person (P):

“(a) P would not be present in the UK at the end of that day but for exceptional circumstances beyond P’s control that prevent P from leaving the UK, and

(b) P intends to leave the UK as soon as those circumstances permit.” 

The Appellant argued that her presence in the UK was beyond the allowed 45-day limit due to such exceptional circumstances. Her twin sister suffered from severe alcoholism and depression, which led to suicidal threats that forced her to be present in the UK for those extra five days. She further argued that she had a duty of care towards her sister’s young children and had to stay in the country for these additional days.

HMRC argued that her account wasn’t warranted by exceptional circumstances, and as such, she was to pay income tax in the UK as a tax resident. The additional tax due would amount to £3,142,550.58 — a considerable sum to pay.

The Appellant’s Challenge — A Taxpayer v HMRC (2022) UKFTT 00133 (TC)

The FTT heard the case in 2022, ruling initially that the exceptional circumstances cited, specifically her sister’s alcoholism and depression, did not exempt the Appellant’s days spent in the UK. However, the FTT justified her secondary argument that she needed to care for her dependent minor children. Thus, her appeal was approved and the Appellant was deemed non-resident for tax purposes.

Initial Decision and Repeal — The Commissioners for HMRC v A Taxpayer (2023) UKUT 00182 (TCC)

HMRC appealed the FTT’s decision. This led to reconsidering whether the exceptional circumstances were valid and met by the taxpayer.

Ultimately, the higher tribunal allowed HMRC’s appeal, agreeing with their position and dismissing the taxpayer’s appeal. Consequently, she was deemed a UK tax resident for 2015/16.

The historic case highlights several important lessons on day counting and record-keeping to ensure tax compliance.

Location accuracy

While the accuracy of the day count wasn’t at the heart of the appeals, location accuracy was considered to determine the status of the exceptional circumstances. During the appeal process, it was evident that the Appellant didn’t always provide the most accurate representation of her location. This led to HMRC initially questioning whether these days were spent for exceptional circumstances and care for the twin sister.

The issue is that the proof of evidence relies on the Appellant. However, these investigations, initially and primarily the subsequent appeal to repeal the original decision, happened years after the events under scrutiny.

Proof of activity

The second consideration is linked to location accuracy. The evidence of activity during the Appellant’s time in the UK was intensely scrutinised. The Appellant produced credit card transaction data to show where she was but often couldn’t provide any further evidence as to why she was there.

For example, the judge points out that the Appellant’s card was used at a children’s hospital in Manchester. But the Appellant couldn’t provide details about what that visit was for. As such, it was considered part of an evidence trail showing that her appearance in the UK wasn’t exceptional.

The prolonged process

The above are two core issues at the heart of the case. However, there are a few broader lessons to be learned from it.

First, the lack of robust evidence and accurate day counting can prolong tax investigations. An inaccurate day count without robust evidence can launch an investigation. The investigation can drag on if the evidence isn’t solid and ready.

Furthermore, HMRC isn’t afraid to further push its side of the story. The administration was unhappy with the first ruling and continued interpreting the rules around SRT differently, making this case go to the upper court.

The case dealt with a tax return for the year 2015/16, with the first tribunal taking place in 2022. The second appeal case occurred a year later, in 2023. The timeline shows how long these investigations can take, meaning the Appellant had to live in uncertainty for almost seven years.

Planning the day count

The Appellant admitted that her tax advisory team told her of the day count limits before the move. She was advised to keep an accurate day count and was aware of the limits she was under.

While she clearly argued that her stays resulted from unexceptional circumstances, it is worth noting the importance of keeping track of the day count. Speculation on how the Appellant counted her days in the UK is not the intention.

However, many traditional day-counting methods generally lack a few crucial elements. They:

• • Don’t keep accurate real-time records of your travel days. Entering your travel dates after travelling can result in inaccuracies or delayed counting. You might be close to your limit or accidentally step over it sooner than you thought.

• • Don’t allow you to plan ahead. These tools don’t always make it easy to plan ahead and know how close you are to reaching your limit.

The historic ruling laid some concerning precedents regarding exceptional circumstances. Having an upper court overrule an earlier decision shows that there remains much ambiguity in the world of tax compliance. Many HNWIs must understand the risk of an inquiry when navigating tax compliance challenges.

As the challenges of accurate day counting and proof of exceptional circumstances emerge from this case, Daysium’s capabilities could offer substantial relief. By automatically logging location data and providing real-time day count updates, Daysium helps ensure compliance and simplifies the management of residency requirements.

Daysium’s role as a tax compliance tool would:

• • Create evidence to prove location. Daysium automates evidence collection, logging your location data automatically into a timeline. You will have a centralised digital location record, and the system will update your day count in real time.

• • Attach proof of activity to your location data. Supplementary evidence, such as geo-tagged photographs and receipts, can strengthen your location logging and fortify the authenticity and reliability of your claim. In exceptional circumstances, you can generate a more substantial case by including additional notes to create a more compelling narrative of your day count.

• • Reduce enquiry times. The robust evidence you’ve generated can make the enquiry process smoother and faster. The data will help the tax advisory team to build a stronger case and deal with any enquiries by the authorities faster.

• • Stay aware of your day count. Real-time calculation of day count enables you to proactively manage your situation. The information isn’t inaccessible and hard to find—everything is available in the palm of your hand. Therefore, you can better plan and manage your day counting even in exceptional circumstances.

• • Count based on your individual situation. Daysium’s day counting is always personalised around your specific needs. We’ve encoded the SRT ruleset to our platform, amongst many other global tax rulesets, meaning your day counting is specific to you, and you can configure it if your situation changes.

Tax authorities worldwide are focusing on the tax affairs of globally mobile individuals. They are increasingly using sophisticated methods, including AI tools. Interpretation of the existing rules is putting many individuals under the microscope. At the same time, the length of enquiries is increasing, leading to longer and more complex processes. The prolonged investigations can be taxing, not just financially but also emotionally.

With Daysium’s platform, you can:

• • Enhance your compliance. The robust record-keeping capabilities enable you to navigate recency requirements precisely and confidently.

• • Reduce your risk of investigation. Improved compliance reduces the risk of time-consuming investigation. Real-time access to day counting and reports will help individuals identify potential issues immediately, guaranteeing that tax advisory teams can help improve compliance.

• • Strengthen your defence. The comprehensive data repository you’re creating will expedite the resolution process. You’ll save time and resources not only for yourself but also for the tax authorities. You can more confidently show what your day count is and what evidence you have to prove it, especially in exceptional circumstances.

In conclusion, as tax authorities globally enhance their scrutiny using sophisticated technologies, solving tax compliance challenges becomes increasingly complex. Daysium stands at the forefront of this landscape, offering a robust, innovative solution that ensures compliance and transforms it into a strategic advantage for globally mobile individuals. Your records are robust, and if you face an investigation, you can expedite the process by confidently saying, “There’s nothing to see here, everything is in order”.