UK: UK Tax Residence Consultation Document - Fools Advisors

Last Updated: 29 June 2011
Article by Daniel Feingold

Just over a week ago, HMRC published a Consultation Paper proposing to introduce a statutory definition of "Tax Residence" in the UK to take effect from the tax year starting 6th April 2012.

I am amazed at the way it has been so warmly received by so many Tax Advisors. Most of them have issued circulars saying this is a positive step forward because the Laws on Tax Residence in the UK based on Case Law and practice were so confusing.

I beg to differ!

Although there has certainly been a lot of Case Law development in this area in the last six years, I do not believe that by understanding the HMRC position and the Case Law there was not (in reality) a very clear way to advise on the boundaries of UK Tax Residence in Law.

Sure, there were grey areas as in any other area of Law; but in my view there was always sufficient clarity to advise and plan accordingly.

What we have now is an immense tightening in certain areas which will overall be to the detriment of UK Tax Payers and lead not to certainty per se, but to higher tax bills.

The complex statutory definition being proposed is divided into a three part test. The first important element to note is that there are different test for those who are described as "Leavers" i.e. those leaving the UK to take up Residence elsewhere, and "Arrivers" i.e. those not surprisingly coming to the UK to take up Residence.

There is also a Part C where if someone cannot conclusively be determined to be Resident on the basis of the tests A and B, then the factors in Part C are assessed. However, the factors in Part C are different based on whether someone is a "Leaver" or an "Arriver". Before I go into more detail, let me make two initial comments.

Firstly, the Treasury Document takes no account of the many Double-Taxation treaties that the UK has signed which have tie-breaker clauses to determine the Tax Residence of an individual: Regardless of whether they are considered Tax Resident in both jurisdictions under their Domestic Laws.

The assumption must be they are confining themselves to those who go abroad to Countries which do not have a Double-Taxation treaty but they fail to mention this.

The second and most bizarre statement in the Document itself, on page 14 at Clause 3.38 – "the Government believes the framework outlined above will allow individuals to assess their Residence status simply and without the need to resort to specialist advice".

This clearly is an invitation for Tax Payers not to take professional advice. HMRC may then challenge their position on Residence and without advice the Tax Payer will be left exposed. This is a blatant attempt, in my view, not just to justify what HMRC believes is a Document which produces clarify and simplification, but also to dangerously mislead Tax Payers.

As such, it has no place in the Consultation and its inclusion is unwelcome!

There are as yet no proposed transitional provisions. The result of this is that because the tests outlined contain "look-back" provisions which seek to form a conclusion based on Residence in previous tax years (going back up to three previous tax years), but the issue of Residence will still have to be decided under the so-called "old-rules" and Case Law.

Accordingly as a matter of logic, the Document does not eliminate the need for deciding so-called difficult Residency issues under the "old-rules" and Case Law. Therefore, until April 2015 the new Rules do not offer greater simplicity or clarity as regards someone who has to assess their non-Residence status on the basis of their position in the previous three tax years.

Let us assume for a moment that they have been a non-Resident in the previous three tax years. If they are then present in the UK for fewer than 45 days in the current tax year, they will be conclusively non-Resident. That actually represents a shortening of the period that a person could spend in the UK in some circumstances and lengthening in others.

The previous test was an average of less than 90 days per year taken over four tax years. That allowed Tax Payers to go over the 90 days but under the 183 days in any particular tax year and then reduce their number of days in the following tax year to meet the average.

Similarly, if they had not been present in the UK for many days in some of the prior tax years, that would allow them to notch up a longer stay in the latest tax year. So, introducing the 45 day test will benefit a few but almost likely restrict the number of days from 90 to 45 days for many Tax Payers.

The next problem arises when someone has been UK Resident in one or more of the previous three tax years. If they notch up more than 10 days in the current tax year, then they could be Resident.

The next big shock is that those who go abroad to work full-time abroad can continue to spend up to 90 days a tax year in the UK but now there is a further restriction that no more than 20 of those days can be working days. For this purpose, a working day in the UK is calculated on spending three hours or more at work in the UK in any day!

The combination of these factors means that those who leave are severely restricted in the number of days they can spend in the UK potentially down to as low as 10. Those working full-time abroad (who could be several hundred thousand to over a million) will now be at risk of being assessed to UK tax if their Employer insists on them returning to their UK Office and working in the UK for more than 20 days a year.

This seems to be an unnecessary restriction and will be very unattractive.

There are obviously countless other further permutations which demonstrate that these Rules are actually a huge tightening.

The final sting in the tail relates to the anti-avoidance provisions proposed on page 50 in Clauses 3.47 – 3.54. The objective behind these anti-avoidance provisions is to prevent those who have gone non-Resident possibly for a short period of time (which is not actually defined) and they appear to be talking about the so-called "one year out"! This has been ineffective for Capital Gains since 1998. However, the proposal now is to align the position for Income Tax and in particular Income Tax for dividends from UK Companies. So if a person wants to avoid the 36.11% highest rate tax on dividends from a UK Company by spending a full tax year abroad, this will no longer be possible. The only way of achieving this would be to spend five full tax years abroad (just as they must do to avoid CGT) on the sale of UK assets that they have acquired before non-Residence.

In my experience with those who have gone abroad to avoid CGT is that (with some very rare exceptions) if they succeed in spending five full tax years abroad, they never return! I would imagine that this would have the same effect on those who want to take a dividend from their UK Company and will now be forced to spend five full tax years abroad. Overall therefore, in my view these anti-avoidance provisions (as proposed) will be disastrous and merely lead to more Tax Payers going non-Resident on a permanent basis.

One planning point that emerges from the anti-avoidance provisions is that any Tax Payer who wants to get involved a "one-year out" abroad taking a large dividend payment, needs to leave the UK before 5th April 2012.


Although this of course is only a Consultation Document, should HMRC not alter course and amend these Rules drastically, then in my view they will be severely detrimental to the UK economy and will lead to a further rapid exodus of High Net Worth Individuals from the UK.

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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