In J Charman v HMRC [2018] TC06899 a taxpayer was found to still be UK resident when he received a founders fee of £1.7m; he had started to cut ties with the UK but not yet made a decisive break.
Individuals who are UK tax resident are taxable in the UK on their worldwide income and gains.
From 2001, Mr Charman, who had taken a job with a Bermudan company, spent 3 days a week working in Bermuda and up to 2 days working in the US, returning to the UK at weekends to join his wife and children at the family home.
- In March 2003 he filed a P85 stating he had left the UK in January 2003.
- In February 2003 he received the fee for advisory services for setting up the Bermudan employing company.
- He finally moved out of the family home in November 2003, telling his wife he wanted a divorce.
The First Tier tribunal (FTT) found that he did not make a decisive break from the UK until November 2003. His actions in early 2003 showed his intention to make the break but did not yet make him non-resident. He remained UK resident until November 2003 so the founders fee was fully taxable in the UK.
The tribunal also had to consider:
- How the fee was to be taxed; was it an emolument of employment or other income taxable under schedule DVI, and was it taxable on a paid basis or when Mr Charman became entitled to it?
- The FTT found it was DVI income and was taxable when paid.
- Whether a Discovery assessment for a bonus paid in 2003/04 and issued in 2010 was valid:
- They found that it was not, the “discovery” had been made in 2006 but no assessment issued until 2010, this was a lengthy gap due to HMRC error and HMRC “should not be allowed to rely on the draconian rules in s29” to correct such an error.
- When the tax point arose on unapproved employee share options which were conditional upon his continued employment by the issuing company.
- The FTT ruled that it was the date of exercise and not grant which was the relevant date.
The facts here took place before the introduction of the Statutory residence test in 2012, but it emphasises the need to keep detailed records to allow all relevant facts to be considered in establishing a person’s tax residency. For Mr Charman when his UK residency ceased determined what, if any, of the income and benefits he received were taxable or not and such were the amounts at stake that he spent three days giving evidence to the tribunal.
Links to our guides:
Residence v non-residence: tax treatment
SRT: Statutory residence test toolkit
External link: