Liability to tax on income


Any analysis of liability to tax on income of taxpayers living and working abroad, particularly those engaged in a trading venture, is inevitably complex. . Whilst the law regarding residence, domicile and trading may be relatively settled, it will be seen that the settled law requires the court to undertake a detailed factual analysis in order to determine, for example, whether a tax payer is resident but not ordinarily resident in the UK, or whether the tax payer is engaged in a trading venture. The courts are often called upon to make decisions based on conflicting evidence, weighing competing factors against each other in order to reach a conclusion as to these matters. Hence, it is not “easy” for UK courts to determine complex international tax disputes. Moreover, UK domestic tax law is increasingly subject to controversial rulings in the European Court of Justice, which has used the “four freedoms” contained in EU law, including the freedom of movement of persons, as an indirect path into the domestic direct tax sphere. As various commentators have observed, ECJ jurisprudence on this subject is far from clear, adding a further element of complexity to an already difficult area. In this paper I describe the law regarding residence, domicile, trading and charitable gifts, apply that law to the facts as stated, and then consider whether those conclusions give rise to any issues concerning the free movement of persons in EU law.

Residence And Domicile

Residence is essential to any analysis of tax liability for foreign income because a resident of the UK is assessable to tax on their world-wide income, whereas a non-resident of the UK is assessable only on their UK income. Domicile, although a concept of the general law rather than tax law, is important in a tax context because a UK resident with a foreign domicile will generally only be taxed on income remitted to the UK. For a company, prior to March 1988 the UK approach was to look to the place where the company had its central management and control. This has now been supplemented by an additional test which treats companies as being resident in the jurisdiction in which they are incorporated. On both of these tests Styles and Kahn Limited is a resident of the UK.

In considering whether an individual taxpayer is resident in the UK, it is necessary to consider both whether the taxpayer is “ordinarily resident”, and whether the taxpayer is “resident”. It is possible to be both ordinarily resident and resident, resident but not ordinarily resident, and in rare cases, ordinarily resident but not resident, at any one time. . Although the concept of residence is used in sections 829 to 835 of Income Tax Act 2007 residence is nowhere defined in the UK tax legislation, and therefore must take its meaning from the common law. The courts have looked to the common meaning of the term “resident”, so that in the case of R v Barnet London Borough Council; ex parte Shah the Court looked at the place of abode voluntarily adopted by the tax payer and to the taxpayer's settled way of life to determine the jurisdiction in which the taxpayer was resident. The question is therefore one of fact to be considered on all the available evidence regarding the taxpayer's settled mode of life. Questions of residence therefore often involve matters of degree in the sense that the court will be required to balance competing factors to determine the residence status of a taxpayer.

A person maybe a resident in the UK for tax purposes even if the person is not ordinarily resident in the UK. Former section 336 Income and Corporations Tax 1988, now found in section 831 ITA 2007, provided that a person who was present in the UK for a “temporary purpose” and with no intention of making his residence in the UK was not to be treated as a resident for tax purposes. The effect of this section was considered in Revenue and Customs Commissioners v Grace. In that case a South African national who was employed by British Airways as a long-haul international pilot and who was formerly resident in the UK moved to South Africa, where he purchased a house and established a home. He retained his house in the UK and stayed there for short periods before and after long-haul flights over a period of some years. The Court of Appeal provided instructive discussion of the meaning of “temporary purpose”, holding that repeated visits to the UK for employment purposes over several years did not on the facts fall within the definition of a “temporary purpose”. The Court followed the decision of the House of Lords in Lysaght v IRC [1928] AC 234 in which it was held that residence could be established in cases where the taxpayer was present in the UK for the purposes of business only. In my opinion Ursula's repeated business trips to Bristol over several years are relevantly similar to the presence of Grace in the UK for the purposes of his employment, and therefore it cannot be said that her visits to the UK are for a “temporary purpose” only.

The Court observed in Grace that the fact that a taxpayer's presence in the UK is not “temporary” does not necessarily mean that the taxpayer is a resident within the common law tests for residence. Even if the Court finds that the taxpayer is present in the UK for a non-temporary purpose, it must still consider all of the available facts regarding the taxpayer's settled mode of life, the Court noting that it “would not be right to regard Mr Graces' presence in this country as a trump card which of itself concludes the issue in favour of residence.” Accepting that such presence was a strong pointer in favour of residence, it would still be necessary to weigh that fact against the taxpayer's continuing links to South Africa. The same exercise is required in respect of Ursula's links to Germany.

Section 829 ITA 2007 is also potentially relevant here.The section provides in full:

(1) This section applies if—

(a) an individual has left the United Kingdom for the purpose only of occasional residence abroad, and

(b) at the time of leaving the individual was both UK resident and ordinarily UK resident.

  1. Treat the individual as UK resident for the purpose of determining the individual's liability for income tax for any tax year during the whole or a part of which the individual remains outside the United Kingdom for the purpose only of occasional residence abroad.

The term “occasional residence” has been interpreted as meaning the converse of ordinary residence, with the effect that section 829 adds little to the existing law in the sense that if a person is found to be ordinarily resident abroad, they will not be “occasionally resident” within the meaning of the section.

Applying the law to the facts of this case, particularly the observations of the Court in Grace, Ursula's continuing visits to the UK for business purposes is a strong pointer in favour of residence in the UK. However, against this fact needs to be weighed Ursula's links to Germany. Ursula purchased a house in Germany in 2002 and has lived in that house since 2002, a period of nine years. Her usual place of abode is therefore in Germany. Further, Ursula has engaged in a trade in Germany in the field of residential property development (see discussion below). However in my opinion her situation is relevantly similar to the tax payer in Grace, and the fact of her continuing and settled trips to the UK to work in a business of which she is the co-owner, indicate that Ursula continues to be resident in the UK for income tax purposes.

The 183 day rule, which deems a taxpayer who has spent 183 days or more in the UK to be a resident of the UK, is not applicable in this case. However the 91 day rule may be relevant.The facts provided indicate that Ursula has made 2 or 3 visits to the UK per month at an average of 3 days per visit since she moved to Germany in 2002. On average, this equates to 90 days per year in the UK. However the facts provided do not include details of visits by Ursula to the UK for personal or domestic reasons. It seems reasonable to assume that Ursula would have made visits to the UK for weddings, birthdays and to visit friends of at least one day per year during this period, and if so, then Ursula will fall within the 91 day rule and will be regarded as a resident but not ordinarily resident for UK tax purposes in this period.

Domicile is a more permanent status than residence and is not easily lost or changed: “an individual's domicile is generally the country which he regards as his home. It is where he has his closest ties and when he is away, the place to which he intends to return – although maybe not for some time.” For legitimate children the domicile of origin is the domicile of his or her father, whilst illegitimate children have the same domicile as their mother. I assume that Ursula is born of English domiciled parents and that her domicile of origin is the UK, although this would need to be verified. A person may obtain a new domicile of choice by taking up residence in another country and forming an intention to make that country his or her permanent or indefinite home. A taxpayer's actions in severing their personal and business ties to the UK and developing new ties to the adopted country are evidence of an intention to permanently reside in the new country and for that country to be the taxpayer's domicile of choice.

Ursula has not done enough to sever her ties to the UK for her to be regarded as no longer domiciled there. She continues to own and work in a business located in Bristol, and visits the UK regularly for that purpose. Although further evidence would be needed to confirm this, it appears that Ursula's presence in Germany is linked to the continuing need for her to be in Germany for the purposes of her UK business. If that is so she has not formed an intention to make Germany her permanent home and remains domiciled in the UK.

As noted above, Styles and Kahn Limited, as a UK registered company operating principally in the UK, is a resident of the UK pursuant to section 66 of the Finance Act 1988. Accordingly, following the decision of the Gasque v Commissioners of Inland Revenue where the Court derived the domicile of the company from the provisions of the then companies legislation regarding residence, Styles and Kahn Limited is domiciled in the UK.

Conducting A Trade

Styles and Kahn Limited is evidently engaged in a trading venture which requires Ursula to purchase goods in Europe and for those goods to be sold through the company headquarters in Bristol. The profits of this trade are income of Styles and Kahn Limited and Styles and Kahn Limited is liable to tax on that income. However this does not include the profits made by Ursula on the sale of the properties in Germany. It appears from the facts provided that these transactions were entered into by Ursula in her personal capacity. The question is therefore whether the transactions amount to a trade, in which case the income of the enterprise will be income in the hands of Ursula under Part II of the Income Tax (Trading and Other Income) Act 2005. Alternatively Ursula will have made a capital gain on each of the transactions and capital gains tax may apply under section 1 of the Taxation of Chargeable Gains Act 1992 .

Whether an enterprise is a trading enterprise is a question of fact which can often prove difficult to determine. Lord Denning famously observed in JP Harrison (Watford Limited) v Griffiths 1962 that although he could not provide a precise definition of the word “trade” he would be able to identify a trade when he saw one. The ITA 2007 is no more helpful, defining “trade” as including “any venture in the nature of trade.” It is necessary therefore to look to the common law to understand the meaning of the word “trade”. The approach adopted by the courts in the UK has been to look at all of the facts to determine whether any or all of the six “badges” of trade are evident.

The facts provided all point in the direction of Ursula being engaged in a trading enterprise, with the subject of the enterprise being residential property development. Applying each of the badges of trade in turn, the subject matter of the transactions did not produce any income, and as Ursula did not live in the houses, they cannot be said to have provided her with any personal enjoyment. Second, Ursula held the properties long enough to improve them before selling them, indicating a short length of ownership for real property. Third, Ursula has engaged in a pattern of similar transactions. Fourth, Ursula has improved each property, and we can infer that this was for the purpose of improving the value of each property.; Fifth, there is no evidence of any forced sale. Lastly, the only reasonable interpretation of Ursula's motive in entering the transactions was to profit from them. On that basis, Ursula is engaged in a trading enterprise and the income of that enterprise would be income for the purposes of UK tax if Ursula is found to be a resident of the UK in the relevant tax years.

Double Taxation

As a UK resident Ursula will be taxed in the UK on her income in Germany, but will also likely be subject to tax in Germany on the same income. The UK -Germany Double Tax Agreementtakes precedence over domestic UK tax rules by force of section 788 of the Income and Corporations Tax Act 1988. Article 3 of the Treaty provides that the commercial profits of an “enterprise” of the first country will be taxed in that country unless carried on through a “permanent establishment” in the second country. “Permanent establishment” is defined in Article 2 to mean a fixed place of business in which the business of the enterprise is wholly or partly carried on”, and included “(aa) a place of management; (bb) a branch; (cc) an office;(dd) a factory; (ee) a workshop.” In this case Ursula's, although a resident of the UK for tax purposes, has conducted her property development trading venture through a permanent establishment in Germany. The business is conducted wholly in Germany, and is managed by Ursula from her home in Germany. On that basis, Article 3 of the UK – Germany Double Tax Treaty operates to exempt Ursula from tax in the UK from the profits of her trading venture in Germany. The position of the company is more complex. The company is engaged in a trading venture which is conducted mainly in the UK and Ursula is in Germany as a base for buying products in countries not limited to Germany. It does not appear to have an office in Germany, and is best characterised as merely having an employee located in that jurisdiction. In my opinion the Double Tax Treaty does not exempt the German trading income of Styles and Kahn Limited (from tax in the UK.

Deduction For Charitable Gift

Gifts by eligible tax payers to charities established in the UK qualify for Gift Aid under UK tax law. Gift Aid is a grossing up mechanism whereby that a taxpayer who makes a gift to an eligible charity is treated as having made a gift in the before tax amount of the gift, with the balance paid to the charity by HMRC. Where a resident tax-payer pays less tax in the tax year than the gift to the charity the difference will be added to his or her tax assessment at the end of the tax year. However not all taxpayers can use gift aid, and not all charities are eligible recipients of gift aid. HMRC indicates that since April 2000 non-resident taxpayers can make a gift aid donation only to the value of their taxable UK income. Hence, if Ursula is a non-resident she will only be entitled to make a gift aid donation to the value of her UK income. Ursula has UK income in the form of her salary from Styles and Kahn Limited.. However the children's charity in Dresden is not an eligible recipient of a gift aid donation because “charity” has been interpreted in UK tax law as meaning only charities established in the UK. Hence, assuming the children's home is not operated by a UK charity, the gift is not deductible against Ursula's UK income irrespective of whether Ursula is or is not a resident of the UK for tax purposes.

Freedom Of Movement Of Persons

The ECJ has no direct mandate to intervene in the domestic direct tax policy, but has exerted a strong and growing influence on this subject in an indirect manner by ruling against discriminatory domestic tax measures on the basis of the “four freedoms” enshrined in EU law regarding the freedom movement of persons and capital. As directly applicable EU law over-rides domestic UK law, the ECJ has been able to exert its jurisdiction in the domestic direct tax policy arena by this indirect route. The four freedoms are directed to promoting the internal market of the EU. The freedom of movement of persons includes protections for the freedom of movement of workers. However in the present cases where Ursula is a sole trader in Germany, but resident in the UK, the most important provision is Article 49 of the Treaty on the Functioning of the European Union regarding freedom of establishment.

The ECJ has ruled that a member state must treat a person resident abroad conducting a local business as though he or she were a local resident for the purposes of domestic tax law. Both direct and indirect forms of discrimination are covered by the Article, although a less severe test is applied in the case of indirect discrimination. The international accounting firm Deloitte has observed that “the concept of the right of establishment … is therefore a very broad one, allowing a Community national to participate, on a stable and continuing basis, in the economic life of a Member State other than his state of origin.”

The ECJ's interventions into domestic Member State direct tax policy have been controversial because “no state is willing to subject its income tax revenue stream, the very lifeblood of domestic policy, to external review.”

The ECJ made its first intervention into domestic tax policy in 1986, and since that date EU taxpayers have been overwhelmingly successful in tax discrimination suits brought in the ECJ. As Khokhar puts it, there has been “case after case being decided by the ECJ in favour of taxpayers on grounds of Treaty discrimination.”

Mason has argued that international tax cases are particularly challenging for the ECJ because international law, including EU law, recognises the rights of two different states to tax cross-border income. In the absence of EU harmonisation, tax differences between Member States will inevitably produce “negative disparities” or non-discriminatory tax advantages relating to different tax rates and definitions of taxable income. Mason argues that the ECJ has failed to develop a coherent test for determining when such negative disparities amount to discrimination within the meaning of EU law, suggesting, in effect, that the ECJ has over-reached in the domestic tax sphere.

Brauner has argued that the ECJ has interpreted the “four freedoms” expansively to strike down direct tax policies in member states, commenting that:

“a country that agrees to be subject to general standards (the European so-called freedoms …) without explicit caveats must be prepared for its laws to be diverted in directions not agreed upon, despite explicit agreements that domestic laws would not be so diverted.”

An example of a case in which the ECJ has struck down domestic tax rules on grounds of non-compliance with the freedom of movement of persons is Finanzamt Koln-Alstadt v Schumacker . In that case the ECJ held that German tax rules which did not extend tax concession relating to the personal and family circumstances of a non-resident taxpayer were unlawfully discriminatory within the meaning of EU law. The tax payer was a Belgium national who was employed in Germany. He worked in Belgium, had his family in Belgium, but received no income in Belgium. German tax rules did not permit the tax payer to obtain tax benefits which were available to German resident taxpayer who were in relevantly the same personal position of the taxpayer. This treatment was discriminatory in the sense that the Belgium taxpayer was treated differently to resident German taxpayers, despite their being no relevant difference in his personal situation. Unlawful discrimination can also arise where persons in relevantly different situations are treated in the same manner under domestic tax rules. This case is also authority for the proposition that discrimination can arise where non-residents are subject to different administrative or procedural mechanisms for accessing domestic tax concessions.

Tax laws which infringe the four freedoms will be allowed where the measure in question is (i) not directly discriminatory, (ii) directed towards an important public policy goal, (iii) suitable for achieving that goal, and (iv) proportional to that goal. Prevention of loss of tax revenue, in particular, has been held not to be a legitimate public policy objective for infringement of the four freedoms. The only ground which has succeeded is preservation of the cohesion of the domestic tax system. In Bachmann v Belgian State the ECJ held that tax rules which linked the deduction of insurance premiums to the liability to tax of income derived from those policies were acceptable.

In this case the non-allowance of a deduction for the charitable gift in Dresden is arguably unlawful discrimination in breach of the freedom of establishment in Article 49 of the Treaty. This is because UK domestic tax law does not treat a non-resident UK taxpayer in the same way as a UK resident tax payer in the sense that gift aid donations for non-residents are allowed only to the extent that non-residents have UK income, whilst residents can make donations in excess of their taxable income and will only be required to repay the difference at the end of the year. This appears to be a procedural advantage provided to residents but not to non-resident taxpayers. However in my opinion the effect of this administrative policy is so minor that it is unlikely to seriously infringe on the exercise of any persons freedom of establishment in the UK. The limitation of gifts to UK charities does not appear to involve any discrimination as in this respect residents and non-residents are treated in the same way.


The Uk courts analyse connection to the UK using by concepts of residence and domicile, and trading is analysed in terms of the six “badges” of trade. I have concluded that each of Styles and Kahn Limited and Ursula are UK tax residents and that each is engaged in a trading venture. The UK -Germany Double Tax Agreement provides relief for Ursula but not for Styles and Kahn Limited, with the result that Styles and Kahn Limited, but not Ursula, is liable to tax in the UK on its German profits.he gift to the children's home in Germany is not a charitable gift for the purposes of UK tax law, . As the above analysis has demonstrated, the settled UK law on residence, domicile and trading requires the court, when faced with a complex international tax case, to make a detailed investigation of the facts at each stage of the analysis. This will often involve a weighing exercise whereby conflicting evidence is weighed to determine, as a matter of fact or degree, the applicable answer. Further, the growing intrusion of the ECJ into the domestic direct tax sphere adds a further element of complexity to an international tax case. As various commentators have observed, ECJ jurisprudence is complex and difficult. All of these factors suggest that it is not “easy” for UK courts to apply UK tax law regarding residence, domicile and trading without breach of the principle of the freedom of movement of persons.


Books And Chapters In Books

Foster, H, “EC Law” in Browning, L, et al, Revenue Law: Principles and Practice, 22nd edition, Lexis Nexis, London, 2004

Paines, A, “Tax Treatment of Charities” in Browning, L, et at, Revenue Law: Principles and Practice, 22nd edition, Lexis Nexis, London, 2004

Ramjohn, M, Q & A: Revenue Law, Cavendish, London, 1999,

Rammeloo, S, Corporations in Private International Law, Oxford University Press, Oxford, 2001

Smith, and Keenan, D, Smith and Keenan's English Law, 14th edition, Pearson Education, Harlow, 2004

Government Publications

Her Majesty's Revenue and Customs, Guidance Note 6, Residence, Domicile and the Remittance Basis, 2009

Her Majesty's Revenue and Customs, Gift Aid for Individuals from April 2000,

Journal Articles And Papers

Deloitte and Touche LLP, Study on analysis of potential competition and discrimination issues relating to a pilot project for an EU tax consolidation scheme for the European Community statute, London, 18 August 2004

Mason, R, “Made in America for European Tax: The Internal Consistency Test”, Boston College Law Review, (2008) Vol 49, pp1277-1326

Vaines, P, “The Overseas Dimension” in Browning, L, et at, Revenue Law: Principles and Practice, 22nd edition, Lexis Nexis, London, 2004


Bachmann v Belgian State Case C-204/90 ECR I-249

Camille and Henry Dreyfus Foundation Inc v IRC [1956] AC 393

Cape Brandy Syndicate v IRC [1921] 1 KB 64

Finanzamt Koln-Alstadt v Schumacker Case C-279/93 [1995] ECR I-225

Gasque v Commissioners of Inland Revenue [1940] 2 KB 80.

Gebhard v Consiglio dell'Ordine degli Avvocati e Procuratori di Milano, Case C-55/94 [1995] ECR I-4165

IRC v Bullock (1976) 51 TC 522

Kirkham v William [1991] STC 342

Lysaght v IRC [1928] AC 234

Marson v. Morton (1986) 59 TC 381

Pickford v. Quirk (1927) 13 TC 251

Rv. Bamet London Borough Council, ex p. Shah [1983] 2 A.C 309

Revenue and Customs Commissioners v Grace [2009] STC 2707

Rutledge v. IRC (1929) 14 TC 490

West v Phillips (1958) 38 TC 203

Wielcox v Inspector der Directe Belastingen Case C-80/94 [1995] ECR I-2493