Statutory Definition of Tax Residence: A consultation

 In Tax

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At present there is no full statutory definition of tax residence and the Government believes there is a strong case for introducing one for individuals. Most practitioners would heartily agree, given the definition largely rests on conflicting case law.

Tax residence is an essential pre-requisite for determining an individual’s tax liability so should be clear in order to be fair. To this end HMRC and HM Treasury issued a consultation document:

http://www.hm-treasury.gov.uk/consult_statutory_residence_test.htm

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on 17 June 2011 in the hope that the responses will inform the draft legislation for the Finance Bill 2012. Comments are requested by 9 September 2011.

Principles

The proposal reflects the fact that residence should be harder to dislodge than acquire once someone has built up connections with the UK as well as simply spending time here.

Distinctions are therefore made between:

  • Arrivers – i.e. those not UK resident in all of the previous three tax years; and
  • Leavers – i.e. those who were resident in one or more of the previous three tax years.

Proposed test

It has three parts:

Part A – conclusive non-residence factors that would be sufficient in themselves to make an individual non-resident. If a person meets the following criteria they will be conclusively non-resident in the UK for the tax year:

  • They were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 45 days in the current tax year; or
  • They were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current tax year; or
  • They leave the UK to carry out full-time work abroad, provided they are present in the UK for fewer than 90 days in the UK and no more than 20 days are spent working in the UK in the tax year.

An example from the consultation document says:

Mrs A owns businesses in several countries. She has never previously been resident in the UK but she owns a flat in London. In 2012-13 she identifies a possible opportunity to expand one of her businesses into the UK. She visits the UK several times to assess the opportunity and to recruit personnel to manage the business. She is present in the UK for only 40 days in the tax year.

Mrs A will not be resident in 2012-13 under Part A because she was not resident in all of the previous three years and she spends fewer than 45 days in the UK during that tax year. If she had spent 45 days or more in the UK she would need to consider Part B or Part C of the test.

Part B – Conclusive residence factors that would be sufficient in themselves to make an individual resident. Provided Part A does not apply an individual will be conclusively resident if any of the following conditions apply:

  • They are present in the UK for 183 days or more in a tax year; or
  • They have only one home and that home is in the UK (or they have two or more homes and all of these are in the UK); or
  • They carry out full-time work in the UK

An individual who does not meet any of the conditions in Part B would not necessarily be non-resident; instead it would be necessary to consider Part C of the test.

An example from the consultation paper says:

Mrs C is married and lives in New York with her husband and young children. She works for an international company with offices in London, Paris and Madrid. In 2012-13 she is asked to work on a project in the London Office and spends 200 days in the UK. The project lasts for fewer than 9 months. She stays in a hotel and is joined by her husband and family during the summer. She retains her home in the US.

Mrs C is resident in the UK under Part B of the test because she spends 183 days or more in the UK. If she spent fewer than 183 days in the UK she would need to consider Part C of the test. None of the other criteria in Part B apply to her.

Part C – Other connection factors and day counting rules which will only be necessary to consider by those whose resident status is not determined by Parts A or B because their circumstances are more complex. It reflects the fact that the more time someone spends in the UK, the fewer connections they can have with the UK to avoid being resident here.

Connection factors

The following are proposed:

Family – the individual’s spouse or civil partner or common law equivalent (provided the individual is not separated from them) or minor children are resident in the UK;

Accommodation – the individual has accessible accommodation in the UK and makes use of it during the tax year (subject to exclusions for some types of accommodation);

Substantive work in the UK – the individual does substantive work in the UK (but does not work in the UK full-time);

UK presence in previous year – the individual spent 90 days or more in the UK in either of the previous two tax years;

More time in the UK than in other countries – the individual spends more days in the UK in the tax year than in any other single country.

These factors are trying to address a common problem from the cases where the individual leaves the UK but their family remain. They are intended to be combined with the number of days spent in the UK to determine whether an individual is resident or not. There are different scales proposed depending on whether someone is arriving here or leaving:

Arrivers

Days spent in UK Impact of connection factors on residence status
Fewer than 45 days Always non-resident
45-89 days Resident if individual has 4 factors (otherwise not resident)
90-119 days Resident if individual has 3 or more factors (otherwise not resident)
120-182 days Resident if individual has 2 or more factors (otherwise not resident)
183 days or more Always resident

Leavers

Days spent in UK Impact of connection factors on residence status
Fewer than 10 days Always non-resident
10-44 days Resident if individual has 4 factors or more (otherwise not resident)
45-89 days Resident if individual has 3 factors or more (otherwise not resident)
90-119 days Resident if individual has 2 factors or more (otherwise not resident)
120-182 days Resident if individual has 1 factor or more (otherwise not resident)
183 days or more Always resident

A prototype of a self-assessment tool is available on HM Treasury’s website at www.hm-treasury.gov.uk/consult_statutory_residence_test.htm – why not try it out and see what you think.

There will be further anti-avoidance rules introduced to limit the ability of individuals to realize capital gains or receive substantial income during short periods of non-residence since the clarity of the new test might encourage this type of avoidance.

The new proposed test is not intended to apply retrospectively.

Definitions

Part four of the consultation considers various definitions:

‘Full-time work abroad/UK’ – roughly 35 hours or more a week

‘Working day’ – any day when 3 hours or more work is carried out

‘Days of presence in the UK’ – any day where they are in the UK at midnight at the end of that day.

‘Only home’ – one home or more than one when in the UK – does not include accommodation which is advertised for sale or to let and the individual lives elsewhere.

‘Family’ – spouse, civil partner, common law partner or children under the age of 18 with whom they live or spend 60 days or more during the tax year. Child will not be regarded as resident in UK if their residence is caused by time spent at a UK educational establishment.

‘Accommodation’ – residential property accessible for use by them and is used by them or their family in the year as a place of residence.

‘Substantive employment (including self-employment)’ – work in the UK for 40 days or more in the tax year.

The consultation also considers whether the concept ‘ordinary residence’ should be abolished and if not, then asks whether there should be a statutory definition of that too.

7 July 2011

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