Where are we on tax residence?
UK residence status is crucial in determining a client’s liability to UK taxation. Although UK tax legislation also looks at domicile and location of assets, residence is the primary basis for many UK taxes.
For something that is so important, most clients are surprised to learn that there is no single statutory definition of residence. What is worse, the recent HMRC guidance may actually have made matters less clear.
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Why residence is important
A UK resident client will usually pay UK tax on:
- World-wide income as it arises; and
- Capital gains, as they accrue, on the disposal of assets in any part of the world.
This is known as the ‘arising basis of taxation’.
A resident client who is not domiciled may be entitled to pay tax on the remittance basis, subject in some cases to paying the remittance basis charge. This will be the subject of a separate article.
A non-resident client will only have to pay UK tax on certain UK source income and will generally avoid paying tax on any capital gains, even those made on the disposal of assets located in the UK.
But what is actually meant by ‘resident’?
Unfortunately, there is no single statutory definition of residence in UK tax legislation. Due to the UK’s Self-Assessment system, a client has to declare whether or not s/he is tax resident. HM Revenue & Customs (‘HMRC’) then have the right to make enquiries into the tax return and can challenge the client’s residence status.
It is important, therefore, to be aware of the factors HMRC consider when determining a client’s tax residence. New guidance has been issued by HMRC for this purpose: HMRC6. This replaced, from 6 April 2009, the previously long-standing guidance set out in booklet IR20.
New guidance is most welcome. Since the now well-known case of Gaines-Cooper v HMRC SpC 568 there was a great deal of uncertainty as to when a client would be treated as UK tax resident. At the time of writing this article, it is understood that Mr Gaines-Cooper has obtained leave to apply for judicial review of HMRC’s decision to depart from the statements made in IR20.
Readers may recall that Mr Gaines-Cooper believed he was not UK resident because he ensured his number of days in the UK (not counting days of arrival or departure) were less than 91 days on average over a four year period. He argued that he was entitled to rely on HMRC’s statements, in IR20, that if he didn’t breach this threshold he would not be UK tax resident.
The outcome of this judicial review is awaited with interest. Mr Gaines-Cooper’s appeals against the actual decision, that he was both resident and domiciled in the UK in the years in question, have so far been unsuccessful.
So enter the new guidance, HMRC6. This contains some predictable and non-contentious statements. It confirms that if a client is physically present in the UK for 183 days or more in any tax year, s/he will be tax resident for that whole year. There are no exceptions to this. It also confirms that we can no longer ignore days of arrival and departure. Now, HMRC will count any day in which the client is present in the UK at midnight.
There are rumours of an elite helicopter service in London offering to take clients just outside UK airspace at midnight, before returning to the UK. Sadly, as we will see, this is unlikely to be of much assistance to clients (other than helicopter pilots!).
Not just a day counting exercise?
The second test for residence, for those people who spend less than 183 days here per tax year, is still mentioned in HMRC6. This threshold is for clients who visit the UK regularly and was the one Mr Gaines-Cooper was trying to ensure he didn’t breach. If the average number of days in the UK is 91 or more per tax year, the client will be tax resident. This average is usually taken over 4 years although HMRC6 refers to the ‘relevant period’ and gives an example of a calculation of an average over a 3-year period. The client will normally only be resident from the start of the next tax year.
However HMRC6 also makes it clear that the number of days that someone is present in the country is only one of the factors to take into account when deciding their residence. Presumably this is as a direct result of the Gaines-Cooper case.
According to HMRC6, factors such as family, property, business and social connections will also be considered. This indicates that HMRC may be less likely to accept a client’s non-resident status if his/her family remain in the UK. Practitioners may recall the old ‘available accommodation’ test for residence, which was abolished in 1994. Now it seems we may have a new ‘available family’ test instead!
This may well indicate that HMRC will use these factors to determine that a client is tax resident when s/he has deliberately ensured the number of days spent in the UK is just below the 91-day threshold. This is effectively what happened to Mr Gaines-Cooper.
What does HMRC6 say about ‘ordinary residence’?
Ordinary residence is a separate concept to residence or domicile. Ordinary residence connotes some degree of regularity of residence. Usually HM Revenue & Customs (‘HMRC’) will consider someone to be ordinarily resident after 3 or more years of tax residence. HMRC6 states that a client will now be treated as ordinarily resident from the beginning of the tax year in which the third anniversary of his/her arrival in the UK falls. This is a departure from the previous guidance in the booklet IR20, which provided that the client would be treated as ordinarily resident from the beginning of the tax year after the third anniversary.
The client’s intentions on moving to the UK are also important. If the client arrives with the intention of being resident for more than 3 tax years, s/he will be both resident and ordinarily resident from the date of arrival in the UK. The client can show such intention by signing a lease or a contract of employment lasting 3 years or more.
The new guidance in HMRC6 explains that the pattern of the client’s presence, both in the UK and abroad, is an important factor when deciding if s/he is ordinarily resident. HMRC will look at the client’s reasons for being in the UK, his/her intentions, lifestyle and habits. For example, if the client’s business or family is based in the UK, this may indicate the client is ordinarily resident here. Also, if the client’s presence here forms part of the regular and habitual mode of his/her life then it is likely that s/he is ordinarily resident.
Ordinary residence is important for those clients who are UK tax resident but have foreign income or work part of their time overseas. Further detail will be set out in the forthcoming article on the remittance basis.
A client’s residence status is crucial for determining liability to UK taxation. This is a complicated area, made more so by the fact that there is no statutory definition of ‘ordinary residence’. It is clear that a client’s personal circumstances play a larger part than ever in determining whether s/he is ordinarily resident in the UK. It is important for clients to seek professional advice, particularly if their circumstances are complex.
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