UK: Statutory Definition Of Tax Residence

Consultation - June 2011

In his March 2011 Budget statement the Chancellor of the Exchequer announced consultation on the introduction of a statutory definition of tax residence, and the Government has now published this consultation detailing its plans for a statutory residence test (SRT). Comments are required by 9 September with draft legislation to be published later in the year with a view to becoming effective from 6 April 2012.

Residence is a fundamental concept as it defines the scope of an individual's UK tax liability. There is currently no full legal definition of tax residence, meaning that the rules are unclear, complicated and seen as subjective. This creates uncertainty for individuals regarding their residence status and is a deterrent to businesses and individuals considering investing in the UK. The consultation proposes a framework for the SRT and seeks views on its design and implementation, in order to address these issues.

This is extremely welcome as there are very few existing legislative rules regarding UK residence. Case law on residence dates back to the 1920s and there have been a number of high profile court cases in recent years on the subject which have only proved to highlight how complex the current position is. In addition taxpayers who sought to rely on the guidance given on the subject by HMRC in the booklet IR 20 (now replaced by HMRC6) have found that this did not give them any protection when their case came to court. This has created a great deal of uncertainty.

As part of the consultation, the Government is also seeking views on options to reform the concept of ordinary residence.

Proposed Statutory Residence Test (SRT)

The SRT is designed to provide a fair and clear way of determining residence, taking into account both the amount of time the individual spends in the UK and the connections that they have with the UK. There is a distinction between leavers (those who were resident in one or more of the previous three tax years) and arrivers (those who were not UK resident in all of the previous three tax years)

The test has been designed such that it is harder for leavers to relinquish residence than it is for new arrivers to acquire it, following the principle that residence should have an adhesive nature.

The proposed test consists of three parts.

Part A – If any of the conditions in Part A are met, the individual is non-resident for the year and there is no need to refer to the further tests. If Part A does not apply, you move on to Part B.

Part B – If any of the conditions in Part B are met, the individual is resident for the year and there is no need to refer to the further tests. If no conditions are met, you move on to Part C.

Part C – Day counts and various connection factors are considered to determine residency status.

Part A: conclusive non-residence

This test aims to provide certainty to taxpayers as to their non-residence status without the need to take into account any connections they have with the UK. This conclusively determines that an individual is non-resident in the UK for a tax year if they meet any of the following conditions, namely 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
  • 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
  • leave the UK to carry out full-time work abroad (employment or self-employment), provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B: conclusive residence

Many individuals spend the majority of their time in the UK or have their home and family life here. This test conclusively determines residence if the individual meets any of the following conditions, namely they:

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

Part C: other connection factors and day counting

Part C will generally apply to individuals whose circumstances are more complex. Its aim is to reflect the position that the more time an individual spends in the UK, the less UK connections they can have to remain non-resident. The following connections are taken into account:

  • UK resident family;
  • accessible accommodation in the UK;
  • substantive work in the UK (employment or self-employment);
  • UK presence in the previous tax years (spending 90 days or more in the UK in either of the previous two tax years);
  • more time in the UK than in any other single country (this connection is not applicable to arrivers).

The connections are linked with the day count.

Arrivers

Days spent in UK

Impact of connection factors on residence status

Fewer than 45 days

Always non-resident

45-89 days

Resident if 4 factors (otherwise not resident)

90 – 119 days

Resident if 3 or more factors (otherwise not resident)

120 – 182 days

Resident if 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 4 or more factors (otherwise not resident)

45 - 89 days

Resident if 3 or more factors (otherwise not resident)

90 – 119 days

Resident if 2 or more factors (otherwise not resident)

120 – 182 days

Resident if 1 or more factors (otherwise not resident)

183 days or more

Always resident

Whilst these tests do appear to provide far more clarity as to an individual's residence position, there remain numerous factors to consider and it appears that further terms would need to be defined to clarify the position. It is still unclear exactly how these tests would work in the year of arrival or when leaving the UK and some further uncertainties remain. By way of an example, a working day is defined as any day in which three hours or more work are carried out but it would appear to be the individual's responsibility to keep sufficient records to demonstrate this fact.

The Government believes that the clarity of the SRT rules will encourage abuse. It therefore proposes to introduce anti-avoidance legislation to counteract the risk of individuals creating artificial short periods of non-residence, during which they receive a large amount of income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Richard Mannion
 
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