A statutory definition of tax residence is long overdue in the UK. Expatriates have had to rely on guidance rather than law to determine where the line between being resident for tax
A statutory definition of tax residence is long overdue in the UK. Expatriates have had to rely on guidance rather than law to determine where the line between being resident for tax purposes in the UK and being non resident is. A number of court cases demonstrate just how fine this line is. In October a Supreme Court judge, even while ruling in favour of HM Revenue & Customs in a tax residency appeal, criticised its guidance ?HMRC 6? for being ?unclear? and ?ambiguous?.
When the UK government announced in March that it would finally introduce a statutory residence test the news was welcomed by both expatriates and tax professionals. The test was due to come into effect next April, but the Treasury has surprised everyone by announcing that it has been postponed.
Expatriates will now have to wait another year, until April 2013 at the earliest, to have more certainty on their residence status.
In June the Treasury released a consultation paper ?Statutory Definition of Tax Residence: A Consultation? to seek the views of the industry. The much anticipated legislation was expected to be included in the draft Finance Bill released on 6th December, and we were waiting to see what changes, if any, had been made to the initial proposals.
However the residence test was missing from the Bill. Exchequer secretary David Gauke released a statement to explain that the consultation had raised a number of detailed issues which will ?require careful consideration to ensure the legislation achieves its important aim of providing certainty for individuals and businesses?.
The Treasury needs more time to ?consult thoroughly on the detail of these changes well in advance of implementation?. We now need to wait until the March 2012 Budget for any more information on what changes will be made to the original proposals. While there may not be changes, it is a fair assumption after Gauke?s comments that there will be, though this does not necessarily mean they will be for the worse. The Treasury did at least say that it is ?committed to the form of the statutory residence test outlined in the consultation?.
The government will publish its response to the consultation in March, together with a further consultation on policy detail and draft legislation. The draft legislation should then be published in December 2012 as part of the 2013 Finance Bill, with the test coming into effect in April 2013.
There has been mixed response to the delay. On the one hand expatriates have waited long enough already to have certainty regarding their tax residence position. The delay is also disappointing and frustrating for tax advisers who have been seeking clarity on the UK residence tax position. We have been calling for a statutory test for some time and had generally welcomed the proposals.
On other hand, some advisers say it would be better to wait and get a test which does not need to be changed after it has it come into effect. We can only speculate though as to which issues the government has not been able to resolve so far.
Under the proposals, there are different rules for ?leavers? (individuals who were resident in one or more of the previous tax years) and ?arrivers? (individuals who were not resident in all of the previous three tax years?).
In both categories, residence will be based on a combination of day counting and ?connecting factors?. In most cases it will not be a simple matter of counting the number of days you spend in the UK.
The five defined connecting factors are family in UK (spouses/civil partners and children under 18); UK accommodation; substantive employment in the UK; UK presence in previous years and more time in the UK than another single country.
A ?day in the UK? is any day where you are physically present at midnight. An individual falling into the arriver category will be able to spend up to 44 nights in the UK in a UK tax year without being UK tax resident, even if they have some connecting factors. In the case of leavers, they can only spend up to 9 nights in the UK without having to take other factors into account.
Anyone who spends over 182 nights in the UK in a UK tax year will always be resident for tax purposes. The same applies to anyone whose only home and family is in the UK or anyone working full time in the UK.
For those individuals who spend between 9/44 and 182 nights in the UK, residency will be determined by the combination of nights spent in the UK and the number of ?connecting factors? he has.
There are separate rules for those carrying out full time work abroad. Individuals who spend fewer than 20 days working in the UK and less than 89 nights a year there will be considered non-UK resident.
The proposed new rules, while still retaining some complexity for the non-tax specialist, would provide much more clarity than the current HMRC 6 guidance. However, until April 2013 UK tax residency will continue to be determined by current ambiguous guidance. Talk to an international tax advisory firm like Blevins Franks if you need advice on your situation.
By David Franks, Chief Executive, Blevins Franks
12th December 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.