USUAL RESIDENCE
An article by Robert Maas - 11.01.06

Occasionally one reads something from HMRC that seems to make sense in the context in which it is written but does not do so in a wider context. This creates potential problems where the HMRC view is not expressed as an exception to a broader principle.

A case in point is VAT Information Sheet 7/05, which "clarifies the VAT treatment in relation to the supply of legal services, in particular legal services provided to individuals who do not have a right or permission to remain in the UK such as asylum seekers". It is written following discussions with the Law Society and the Legal Services Commission, so it may be presumptuous for an accountant to criticise it. Nevertheless it seems wrong to me.

Furthermore although legal services to asylum seekers may be a somewhat esoteric area to most of us, legal services are a Schedule 5 service so the place of supply of such services must be the same as that for all other Schedule 5 services. That makes it an extremely important statement. Because, of course, what it seeks to do is to clarify the place where an individual has his "usual place of residence" (or, in the words of Article 9(1) of the Sixth Directive, where "he had his permanent address or usually resides)", which determines the country in which he belongs.

IS7/05 states that for VAT purposes "individuals can only have one usual place of residence at any point in time and are normally resident in the country where they have set up home with their family and are in full time employment/education." Leaving aside the incorrect assumption that everyone either works full time or is being educated, that makes sense; your usual residence is where you normally live albeit that where one leads a peripatetic lifestyle that may not always be easy to determine.

The controversial bit is paragraph 3. This states that "persons who have not been granted a right or permission to remain in the UK should be treated as belonging in their country of origin…Belonging in this context involves something more than mere presence. In these circumstances, the country in which individuals have their usual or permanent place of residence can only reasonably be seen to be their country of origin unless and until they are granted the right to remain in the UK".

Obviously I am an unreasonable person. It seems to me that it could also (if not more so) reasonably be seen to be the country in which in fact they live. There seems to me to be an immediate problem with the HMRC interpretation. If I take on a client living in the UK (accounting services, like legal service, are Schedule 5 services) how am I to know if he is here legally? I can find no guidance on this in the Customs manuals. Yet it is crucial to my decision as to whether or not to charge him VAT. Surely it would be unreasonable for me to charge him VAT if it is not legally exigible . But surely also it would be in breach of his human rights (and probably in some cases in breach of the UK racial discrimination legislation) for me to quiz the client as to whether, although he may have been living here for the last 20 years, he is entitled to do so - as if not, I cannot charge VAT if I believe his country of origin to be overseas (and of course I will have to report him to NCIS under my money laundering obligations).

For me to have to quiz everybody with whom I deal on his legal status seems to me to be such a disproportionate requirement that I find it hard to believe that is actually what the Sixth Directive requires.

As far as I can see the ECJ has not had to consider the meaning of the place where an individual usually resides in a VAT context. It has however done so on a number of occasions in relation to Council Directives 83/182 and 83/183 in relation to the importation of motor vehicles from one Member State to another. The expression used in those directives is "normal residence" rather than "usual residence", although it is difficult to envisage that making a difference. What might make a difference is that the Directives define normal residence as the place where a person usually lives, that is to say for at least 185 days in each calendar year, because of personal and occupational ties, or, in the case of a person with no occupational ties, because of personal ties which show close links between that person and the place where he is living. In EC Commission v Greece (1997 STC 601) the Court commented that "normal residence" is a Community concept the scope of which may not be altered by the Member States". Accordingly it is not readily apparent why the above EC meaning should not be equally applicable to VAT, particularly as it has the merit of conforming with the everyday meaning of the phrase "usual residence".

In Finanzamt Koln-Alstadt v Schumacker (a direct tax case) (1995 STC 306) the Court said that in most cases a person's income is concentrated at his place of residence…the place where his personal and financial interests are centred. In general, that is the place where he has his usual abode." Again that is applying a factual test, not looking at whether a person is legally entitled to reside at the place where he in fact resides.

Indeed if illegality does not prevent a supply being VATable (see for example the ECJ decision in Staatssecretaris van Financien Coffeeshop Siberie vof - 1999 STC 742) it is hard to see why illegality should affect the place of a supply.

The expression "usual" place of residence was considered by the VAT tribunal in S A Razzak & M A Mishari (VTD 15240). In that case Mrs Haseena, who was Indian, came to the UK under the Domestic Worker's concession. She left her employment two months later (she alleged she was assaulted and beaten) and was accommodated in Asian Women's Refuges while she sued her former employer. The taxpayer sought to adopt the direct tax test of ordinary residence but Customs relied on Mrs Haseena being "physically present in the UK throughout the period when the services [to her] were performed". They pointed out that "a test based on mental state would be impossible to administer. The supplier must be able to know whether to charge or not". That seems to me to be a very sensible test. As such it is odd that HMRC should now have decided to change its mind and replace it by one that is impossible to administer - a state of affairs that Customs thought unreasonable in 1997.

In that case the tribunal (Theodore Wallace) decided that "the words in section 9(3) must be construed as encompassing "the place where he has his permanent address" and in particular the word "permanent", not necessarily in the literal sense but at least as the antithesis of purely temporary and as having a sufficient degree of permanence. Viewed in that way it seems to me that the presence of Mrs Haseena in the United Kingdom was not such as to make this "the country of her normal place of residence". When she arrived in August 1992 she only expected to stay for a month; even if she had remained in the Appellants' service and they had remained for the maximum permitted period, her visa was only for six months; I do not consider that the UK could have properly been described as "the country where she had her usual place of residence". When she left the Appellants she was prohibited by immigration law from working and her entitlement to stay was initially not accepted by the Home Office. When she was allowed to stay it was for a limited period and a limited purpose with no guarantee of extension even to pursue the litigation. During the period from November 1992 Mrs Haseena stayed in a series of different hostels which of their very nature were temporary places of abode. It is clear from the correspondence with the Home Office as early as March 1993 that if the visa had not been extended she would have returned to India. In my judgement throughout the relevant period India was the country where she had her usual place of residence although she was temporarily and effectively involuntarily present in the UK."

It will be seen that during part of her time in the UK Mrs Haseena was here legally and during part she was here illegally, but Mr Wallace drew no distinction between the two categories. He looked only at whether her stay here had a sufficient degree of permanence. The Customs manuals indicate that they consider the decision wrong in law and that "section 9(3) of VAT 1994 is to be construed as giving effect to "the place where he has his permanent address or usually resides" in Article 9.2(e)".

In USAA Ltd (VTD 10369). The tribunal held that US servicemen in the UK on a three year tour had their usual place of residence in the UK.

The Customs VAT Manual states "the usual place of residence of a private individual is not defined in the law. We interpret the phrase according to the ordinary usage of the words as meaning the one country where the individual spends most of his time for the period in question. It is likely to be the country where the individual has set up his home, lives with his family and is in full time employment. As far as possible, this should coincide with the actual economic situation."

That is a logical interpretation. It not only has the merit of conforming with commonsense, but is also easy for a supplier to apply. In the vast majority of cases it will be clear to a supplier whether a person is living here as a normal part of his lifestyle or is temporarily visiting the UK. Sadly, this interpretation presumably now needs to be modified in the light of IS7/2005 to add a second leg that the person must be legally in the UK as well.

It is unclear how HMRC has derived this additional test. I can find nothing in the decided cases to suggest that either the ECJ or the VAT tribunals has ever considered it relevant. On the contrary, in the 83/183 Directive cases the ECJ has said that "a residence permit is not a measure giving rise to a right for a national of a member state to reside in another member state in order to exercise a fundamental freedom…but simply proof of such right of residence (see for example 1997 STC 601 at 624). This seems to be saying that legality is not the test and that a legal right of residence does no more than provide one means of evidencing the individual's place of residence.

I accordingly very much hope that IS 7/2005 is misconceived. I can see that in the context of an asylum seeker who claims asylum immediately he arrives in the UK the lack of a right to be in the UK may well be a good indication of a normal place of abode elsewhere. But in the case of other illegal immigrants, where the person may live in the UK (undetected as being illegally here) for 10 or 20 years it seems ridiculous to regard him as resident or belonging in his country of origin. "Belonging" is purely a UK concept. Whilst I can see that an illegal immigrant may in one sense "belong" in his country of origin, belonging is defined by VAT 1994, s 9(3) as the country in which an individual has his usual place of residence, so in the context of place of supply falls to be interpreted in line with that definition. In that context it must surely mean the country in which the person normally lives, not the country in which he might be forced to live if his presence in the UK were to be detected by the immigration authorities and his appeals against removal were then to fail.

We are continually being told that HMRC do not seek to collect the maximum amount that they can extract from taxpayers, regardless of what is due, but that they want to collect the right amount of tax at the right time. If they really believe that usual place of residence is dependent on legality surely they have a responsibility to give guidance to traders as to how they are to ascertain in which cases they need to charge VAT. With the possible exception of asylum seekers, there is no obvious way for a supplier of a Schedule 5 service to ascertain his customer's right to be in the UK. The customer is highly unlikely to volunteer the information. Perhaps HMRC could create and publish a register of which of those non-UK citizens who are living here are entitled to be in the UK, and thus must be charged VAT, and which are not, and accordingly have no need to pay VAT. Or perhaps not! HMRC can no more identify such people than you or I can! Accordingly their definition of itself ensures that they will collect more tax than is legally due as traders are likely to continue to assume that for VAT purposes usual place of residence has its everyday meaning, not the odd meaning that HMRC now attach to the phrase.