Court of Appeal Upholds FTT Decision in ‘Exceptional Circumstances’ Statutory Residence Test Case

Court of Appeal Upholds FTT Decision in ‘Exceptional Circumstances’ Statutory Residence Test Case

Last month, HMRC lost a Court of Appeal (CoA) with the previous FTT ruling being restored in an ‘Exceptional Circumstances’ Statutory Residence Test (STR) case.

The Statutory Residence Test (SRT)

The Statutory Residence Test is the framework used by HMRC to determine an individual’s tax residency status, establishing clear criteria to assess whether a taxpayer is considered a UK resident for a given tax year. The SRT is based on a series of three tests which must be considered in a particular order in every case, these are – the Automatic Overseas Test (AOT), the Automatic Residence Test (ART) and the Sufficient Ties Test (STT).

Exceptional Circumstances Clause

The SRT allows for ‘exceptional circumstances’ to be considered when determining residency. This can include events beyond the individual’s control which may prevent them from leaving the UK. In such cases, certain days spent in the UK may be disregarded for residency calculations.

An Overview of the Case brought to FTT

In this case, HMRC argued that the taxpayer failed to meet the Statutory Residency Test for the 2015/16 tax year. Under the SRT rules for the 2015/16 tax year, an individual would be considered UK tax resident if they spent more than 45 days in the UK during that year. Based on the standard day-counting rules, the taxpayer was found to have spent 50 days in the UK, thereby exceeding the threshold.

The taxpayer argued that her stay in the UK beyond the 45-day threshold was due to conditions beyond her control, accrediting them to exceptional circumstances. It was presented that severe personal and family obligations in relation to her sister’s misuse of alcohol and state of mind at that time, prevented her from leaving the UK.

Additionally, during this period, she took on responsibility for her sister’s children, who were not receiving the necessary care and support. The taxpayer contended that her personal and moral obligations toward her family, combined with the welfare concerns for the children, constituted exceptional circumstances under the SRT.

FTT Ruling and UT Subsequent Appeal

The case was initially brought before the First Tier Tribunal (FTT), where HMRC argued that the taxpayer’s reasons did not meet the threshold for ‘exceptional circumstances’ under the SRT. As a result, HMRC deemed the dividend income from the 2015/16 tax year liable for UK taxation.

The FTT ruled that while her sister’s health challenges towards alcohol and depression alone did not qualify as ‘exceptional’, this combined with the welfare of the children did. Therefore, the FTT concluded that the taxpayer’s extended stay in the UK was justified by exceptional circumstances.

HMRC subsequently appealed the decision to the Upper Tribunal (UT), arguing that the FTT were flawed in its assessment of what constituted exceptional circumstances. The UT sided in HMRCs favour, overruling the FTT’s decision, concluding no exceptional circumstances were present in the case.

Court of Appeal (CoA)

Following the UT ruling, the taxpayer appealed to the Court of Appeal (CoA), seeking for this decision to be overturned. The CoA unanimously ruled in favour of the taxpayer, concluding that the combination of circumstances – including her moral and personal obligations – were compelling enough to be deemed exceptional, preventing her from leaving the UK.

As a result, the appeal was allowed, and the FTT’s original ruling was reinstated.

Applying the Statutory Residence Test

The CoA’s decision offers a key clarification on the application of the UK’s Statutory Residence Test (SRT). Furthermore, it provides important guidance for future cases, confirming that moral and conscientious obligations can be considered when assessing whether an individual was genuinely prevented from leaving the UK due to exceptional circumstances.