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Saturday, 01 October 2011
Article on what statutory residence testing in the UK means for ex-pats

HMRC published a consultation paper on 17 June about a statutory residence test to replace the present confused mix of revenue guidance, legislation and case law. HMRC believes that for most people there will be no change and the new test largely reflects its interpretation of the present law. It also hopes the new test will be transparent, objective and simple, so that from the tax year beginning 6 April 2012, individuals and their advisors will have more certainty than at present. The UK tax year runs from 6 April to the following 5 April.

There are three parts to the test: A, B and C. Under parts A and B, individuals in simple cases will be able to know conclusively, for any given tax year, whether they are non-resident or resident. Part C covers more complex cases, i.e. individuals who are internationally mobile and do business around the world. It combines a presence test based on day counts and a UK-connections test based on a number of specified factors. If an individual comes within any of the criteria for part A, that is conclusive, and there is no need to consider parts B or C.

Under the proposed test, individuals who wish to give up UK residence and who have connections there must reduce ties significantly and/or spend less time in the UK. Conversely, internationally mobile businesspeople who are not already resident should be able to enjoy extensive periods of presence without the danger of becoming UK-resident for tax purposes.

A benefit of the new tests should be certainty – those wishing to leave the UK will know what changes they must make to give up residence, and members of the international community will know the extent to which they can safely travel to the UK, without liability to UK tax.

Under the proposed new tests, day counting is key. Each midnight spent in the UK is treated as a day of residence, single day visits and days of departure will not be counted and, generally, there are no special circumstances for those in the UK on personal matters. Every midnight spent on UK soil will be counted, with the exception of individuals travelling through the UK as passengers who are effectively in transit at midnight and do not undertake any activity that is ‘substantially unrelated to passage’ through the UK.

Further, from 6 April 2012, anyone spending fewer than ten midnights in the UK will be conclusively non-resident, irrespective of anything else. Those not resident in any of the previous three tax years will be conclusively non-resident for the tax year in question if they spend fewer than 45 midnights in the UK during that tax year. Finally, individuals in the UK for more than 183 midnights in a tax year will be conclusively resident.

 
According to part A (conclusive non-residence) individuals will conclusively prove non-residence for a given tax year on satisfying any of the following criteria, irrespective of other connections with the UK:

  • the individual is in the UK for fewer than 45 days and was not UK-resident in any of the previous three tax years
  • the individual has been UK-resident in one or more of the three previous tax years, but is present in the UK for fewer than ten days in the current tax year, or
  • the individual left the UK to work abroad full-time for a full tax year and UK visits in that tax year totalled fewer than 90 days, of which no more than 20 were working days.

It will be interesting to see what falls within the definition of ‘work’ and what evidence will be required to prove ‘non-work’. It may be prudent to be cautious when considering what is work or a work-related activity. According to part B (conclusive residence), individuals will not automatically be resident simply by not coming within part A. However, if none of part A applies, an individual will be conclusively tax resident for the year if one or more of the part B conditions apply in that tax year – namely the individual is present in the UK for 183 days or more, has their ‘only home(s)’ in the UK, or carries out full-time work in the UK. A home, for these purposes, is a residence used as such by the individual or their family during the tax year and which is accessible to them as a place of residence.

There are exclusions for some types of accommodation. It does not matter if the individual does not own the property. If it can be accessed by them and is used as a residence at any time in the tax year it is counted. Presumably, a hotel room available to the public in general will not count unless kept for the individual’s own use. For more mobile individuals, who do not sit within one of the conclusive categories, a different test of residency applies. Part C (complex cases) combines a number of specified connecting ‘factors’ with days in the UK. Both factors and days are counted.

The part c test

Arrivers

Days in the UK

Test

Fewer than 10

Always non-resident

10–44

Resident if individual has four factors (otherwise not resident)

45–89

Resident if individual has three factors or more (otherwise not resident)

90–119

Resident if individual has two factors or more (otherwise not resident)

120–182

Resident if individual has one factor or more (otherwise not resident)

183 or more

Always resident

Leavers

Days in the UK

Test

Fewer than 45

Always non-resident

45–89

Resident if individual has four factors (otherwise not resident)

90–119

Resident if individual has three factors or more (otherwise not resident)

120–182

Resident if individual has two factors or more (otherwise not resident)

183 or more

Always resident

The part C test distinguishes between ‘arrivers’ and ‘leavers’. Arrivers are individuals who have not been tax-resident in any of the three previous tax years. Leavers are individuals who have been resident in any one or more of the three previous tax years.

There are five connecting factors:

  • Where (except if separated) an individual’s spouse, civil partner

(or common-law equivalent, which is not defined) or minor children is or are resident in the UK in any part of the tax year. Minor children are ignored if with the individual for fewer than 60 days in the year or if only in the UK to attend school and spend fewer than 60 days of holidays in the UK.

  • Having accessible accommodation in the UK, as noted above. Temporary short-term visits with relatives are disregarded, as is short-term accommodation in hotels and single leases of six months or fewer. There is also an exception where the property is advertised for sale, provided the individual lives in another residence.
  • Where the individual has substantive work in the UK for more than 40 days in a tax year and with more than three hours’ work being undertaken during the day.
  • The individual has been present in the UK for more than 90 days in either of the previous two tax years.
  • The individual spends more days in the UK in the tax year than in any other single country.

This fifth factor is only relevant for leavers, and could be an issue for those who move between countries but spend time in the UK.

If the new test is brought in, individuals could plan with greater certainty

Using these factors, a sliding scale, shown in the adjacent table, decides when arrivers and leavers will be tax-resident, based on their day counts and the number of connecting factors that apply to them for each tax year. Each year needs to be analysed separately.

No transitional rules are proposed; the current rules will apply for tax years up to and including 2011/2012. New statutory rules would replace the current concessions enabling a tax year to be split into periods of residence and non-residence when individuals come to or leave the UK during a tax year. There is an anti-avoidance proposal in relation to some types of investment income and dividends from close companies.

If the proposed test is brought in as drafted, individuals could plan with greater certainty but would need to consider their residence position for the three tax years prior to the year in question and review their evolving situations year by year. It should become relatively easy for wealthy foreigners to buy UK residential property and to occupy it for up to 90 or 120 days in a tax year without becoming resident, depending on the number of other connecting factors. Swiss residents may wish to use their strong currency to buy second homes in the UK without concerns of UK tax implications provided they keep an eye on other connecting factors.

The proposals offer planning opportunities. For individuals for whom the part C test is relevant, their residence status in the two tax years beginning 6 April 2012 will depend partly on the number of days spent in the UK in one or both of the two tax years beginning 6 April 2010. Individuals may therefore wish to ensure they limit their UK presence in the year beginning 6 April 2011 to 89 days or fewer.

Also, arrivers could preserve their non-resident status by spending fewer than 90 days in the UK in every tax year. Effectively, they could have a pure presence test but averaging would no longer be relevant. The day count for each tax year would stand alone. Individuals must keep evidence of their time in or out of the UK and in relation to work may have to prove a negative.

The new certainty is welcome. However, there are potential disadvantages in that the time limits for part A are tight and there is imprecision, for example, about what duties are considered work. The best advice may be to assume that activities such as making phone calls, enjoying corporate hospitality and going to seminars all constitute work.

Overall, the consultations as to residence and the taxation of non-domiciliaries seem to be clear evidence of a policy for encouraging internationally mobile people to come to, work and invest in the UK, without prejudicing their tax position.

 

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Julian Hayden

Julian Hayden TEP is a Director at Hawksford.

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