A special commissioner upheld an amendment to the taxpayer's tax return which included a bonus of £2,800,000 and interest received of £161,219 as taxable income for the year of assessment 1998–99 where the taxpayer had failed to show that he had been out of the UK on 6 April 1998 and so could not be treated as non-resident for the relevant year. Consequently, the payment related to a period when the taxpayer was within the charge to UK tax and was taxable as the taxpayer was resident and ordinarily resident in the UK in the 1998-99 tax year and the periods on either side, which was the year in which he received the payment and to which it should be attributed for the purposes of ICTA 1988, s. 19(1).

Facts

The taxpayer was born in Canada in 1957 but was a British subject and so a Commonwealth citizen. He was resident and ordinarily in the UK for many years before 1998-99. He came to the UK when he was two years old and was at school and university in the UK. He was the director and major shareholder of a close company.

The taxpayer entered into a contract of employment with the company ‘with effect from 5th day of March 1986’ as a manager to popular music groups in all parts of the world outside the UK. This was ‘. .. for a period of five years and thereafter unless determined by either party giving to the other not less than three months notice in writing’. The contract had not been determined and it had not been terminated and was still in force. The taxpayer had worked all over the world for the company, including in Spain, France, the US and Japan. The contract of employment provided for a salary which was to be payable in equal monthly instalments and for a bonus. The salary and bonus were to be recoupable against the commission payable to the taxpayer provided for in the contract of employment.

The contract included a resolution that the company would award a £2,800,000 bonus to the taxpayer in respect of services to the company for the year ended 31 August 1998 to be paid with the April salary. The resolution was passed sometime after late 1998 when the auditors noticed the payment of £2.8m and wanted to treat it as a director's loan. The company told the auditors that it was not a loan but a bonus payment of salary. A minute was drafted and the August 1998 date was used as that was the year end.

The taxpayer appealed against an amendment to his tax return for the year ended 5 April 1999 to include the bonus payment and interest received of £161,219 as taxable income for the 1998-99 year of assessment. He argued that he was not resident or ordinarily resident in the UK at the relevant time and so was outside the charge to UK income tax, although he accepted that he had been UK-resident and ordinarily resident before 1998-99 and that he was a Commonwealth citizen. Further, there was a ‘distinct break’ as the taxpayer was out of the UK for more than 12 months and more than a full tax year. The taxpayer said that his intention when he left was to be out of the UK for more than 12 months and he was. He resolved to live in Spain and France for a whole tax year and he carried his intention through.

Accordingly, on general principles he was not resident in the UK. Nothing had happened to change that. The Income and Corporation Taxes Act 1988, s. 334–336 were not applicable as the taxpayer was not UK resident on general principles and not abroad for a temporary purpose only. That he did not in fact settle in a single country for a whole year was immaterial. The company resolution confirming his bonus payment did not mean what it seemed to, since the real intention was that it should be a bonus for future work to be done. Therefore it could not be attributable to any earlier year as it was for work to be done in the future.

Issue

Whether the taxpayer was resident and/or ordinarily resident in the UK in the relevant tax year; and, if he was, to which year the payment in question should be attributed for the purposes of ICTA 1988, s. 19(1).

Decision

The special commissioner (Adrian Shipwright) (dismissing the appeal) said that the taxpayer's going abroad to reduce his tax bill did not of itself prevent residence abroad being residence abroad if the facts established residence abroad. However, all the circumstances had to be considered. It had not been shown on the balance of probabilities that the taxpayer was not in the UK on 6 April 1998 and so it was presumed that he was in the UK then. Moreover, the evidence did not show that there was residence abroad for a carefully chosen limited period of work.

In all the circumstances, this was not a ‘distinct break’ case (Reed (HMIT) v Clark [1985] BTC 224 considered). The taxpayer continued to be employed by the company under the contract of employment. No fulltime employment or business abroad was involved and the taxpayer seemed to have been doing much what he was doing before. He was looking for an act or acts to manage through his employer. His work did not change. He had worked abroad before for the company. Further, the taxpayer did not establish a permanent home abroad and he had not established an ‘HQ’ abroad. His partner and family continued to be in the UK in the family home where they still lived. He paid the UK bills from his UK accounts. He did not make special financial arrangement for his time abroad (such as bank account, credit card, medical insurance, etc.). He maintained and used his UK bank accounts and credit cards. No special arrangements seemed to have been made as to his car, driving licence, residence permits, foreign identity card or similar matters. His ‘centre of vital interests’ remained in the UK and there was no evidence to show that that had changed.

There was also a lack of certainty as to when he went abroad which was surprising if it was a distinct break in the pattern of his life. If he went abroad for tax reasons to escape the UK tax net having taken advice from well known advisers one would have expected him to have been advised of the importance of objective evidence to show that. The taxpayer had shown none of the attributes that one would expect of a non-resident or of a person in the pattern of whose life there had been a distinct break. He was a Commonwealth citizen who had been resident and ordinarily in the UK in the preceding years. He went abroad for an occasional purpose only such that s. 334 of ICTA 1988 applied. Neither party to the contract had terminated the contract of employment in accordance with its terms nor had it been repudiated. The contract required three months’ written notice to terminate it. The contact of employment provided for a substantial salary to be paid in equal monthly instalments and for a bonus. The contact of employment gave power for the company to suspend the payment of the salary if written notice had been given. However, the suspension was only to continue during the period of the contingency giving rise to the suspension. After which it ‘shall forthwith resume payment’. There was no evidence of written notice having been given. The payment was made in the first half of 1998 and, on the evidence, the taxpayer was resident and ordinarily resident in both 1997–98 and 1998-99. Accordingly, even if the payment was made after 5 April 1998 the taxpayer was within the charge to UK tax in respect of the payment whether one took the resolution literally assuming it to have been properly passed or whether it was to be ignored either as a payment of suspended salary or for future work.

(2007) Sp C 639.
Decision released 27 September 2007.