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The UK Statutory Residence Test

Expat Briefing Editorial Team
16 July, 2013


This week we focus on the United Kingdom’s long-awaited clarification of the rules for determining whether an individual is resident in the country for tax purposes, which have been codified in a new statutory residence test.

 

The Existing Situation

An individual is deemed to be tax resident when he or she spends a total of more than 183 days of the tax year in the UK; this period includes days travelling to or from the UK. An individual who visits the UK on a regular basis and spends an average of 91 days per year in the UK, calculated over a four-year period, is also deemed to be resident in the UK for tax purposes.

Further, close ties to the UK, such as a permanent home there, or where a person’s lifestyle indicates, for example, business, family and/or social connections with the UK, can also be taken into account when deciding his or her tax residence status. This latter scenario is referred to as “ordinary residence” but it is notoriously difficult to define, and is to be abolished in determining UK residence for tax purposes under the incoming statutory residence test.

A person’s domicile (where he or she is born) may also affect tax liability where he or she receives foreign-source income or gains.

Individuals who are non-domiciled or non-ordinarily resident in the UK can opt to be taxed under the remittance basis, whereby only foreign income and gains remitted to the UK are liable for UK taxation, subject to certain conditions.

Further information on personal taxation, including rates of income tax, social security taxes, and capital gains, property, inheritance and pensions taxation in the UK can be viewed on the UK Personal Taxation page of our partner site, www.lowtax.net.

 

The Gaines-Cooper Case

The difficulties inherent in determining where an individual is resident for tax purposes under UK law were highlighted by a long running case which was eventually decided in favour of the tax authority by the Supreme Court in October 2011.

In the case in question, Gaines-Cooper v The Commissioners for Her Majesty’s Revenue and Customs, international businessman Robert Gaines-Cooper challenged HM Revenue and Customs’s (HMRC) interpretation and application of non-statutory residency guidance, notably, the phrases "residence" and "ordinary residence" for the purposes of an individual’s liability for UK income and capital gains tax.

The case hinged on the interpretation of guidance booklet IR20, which Gaines-Cooper argued contained a more "benevolent" interpretation of the circumstances in which an individual becomes non-resident and not ordinarily resident in the UK than did the ordinary law. In addition, they claimed that, prior to 2005, it was the settled practice of HMRC to adopt such a benevolent interpretation of IR20.

Explaining the reasoning behind its 4-1 majority decision the court said that while guidance on how to achieve non-residence "should have been much clearer", the guidance, when taken as a whole, informed taxpayers that one would need to leave the UK permanently, indefinitely or for full-time employment, and do more than to take up residence abroad and relinquish ‘usual residence’ in the UK. Information was also provided that subsequent returns to the UK had to be no more than ‘visits’ and that any ‘property’ retained in the UK by the taxpayer for their use could not be used as a place of residence.

The judgment followed a Court of Appeal judicial review hearing in February 2010 which also found in favor of HMRC, after it was found that Gaines-Cooper did not fully meet non-domiciled status requirements.

Gaines-Cooper migrated to the Seychelles in 1976, and spent less than 91 days each year in the UK in accordance with non-domicile residency rules. At the time of the case, he owned a house in England, which was occupied by his second wife and son, and kept classic cars and a collection of paintings at the property. He also sent his son to a British public school and had his will drawn up under English law.

It was Gaines-Cooper's links with England that led the Court of Appeal to find that the UK remained Gaines-Cooper’s “center of gravity of his life and interests” – a decision which prompted tax experts to accuse HMRC and the courts of “moving the goalposts.”

However, the case did have a positive outcome, and the ruling can be said to have increased pressure on the Government to modernise the UK’s tax residence rules. Not only were the existing rules way out of step with the modern world, where individuals are increasingly mobile in their professional lives, but they were thought to be acting as a deterrent to entreprenuers and wealth creators.

As Alex Henderson, partner at PwC, observed at the time of the Supreme Court’s ruling: "The case highlights that the century old tax code on residency has not kept pace with modern life. It rests on case law based on Edwardian lifestyles rather than internationally mobile individuals and businesses. Part of the problem is that it's an 'all or nothing' rule: once you're resident all your worldwide income can be taxed. There's room for debate on how to achieve the balancing act of enhancing tax contributions without scaring people off. The UK needs these wealth creators."

 

Background to the Residence Test

The government first announced its plans for a statutory residence test before the Gaines Cooper judgment, in Budget 2011, but the legislation has not had an easy birth.

The Statutory Definition of Tax Residence consultation was issued in June 2011. However, in December 2011, the government said that in response to the consultation it was to push back the planned introduction of the test, from April, 2012 to April, 2013.

Draft legislation was released in June 2012 that built on the responses received, alongside a summary of consultation responses. According to the summary of the 117 responses, almost all welcomed the aim of introducing a test and providing clarity for the taxpayer, seeing the format as a significant step forward. A significant number felt that some of the day counting thresholds should be reconsidered and nearly all sought further clarification of the definitions used for various terms and concepts in the test. Views were mixed on the main options proposed for ordinary residence reform, but a majority were in favour of abolishing it for tax purposes and felt this would represent a significant simplification of the tax system.

The Government then outlined its response to the issues raised during consultation, and asked further questions for consultation on the detail of the policy. The Government received around 57 responses from interested parties during this consultation, which concluded on September 13, 2012. Responses to this consultation were published in December, alongside revised draft legislation. Additional comments were then sought draft guidance to assist individuals on the application of the statutory residence test and on eligibility for overseas workday relief. Comments were invited on all parts of the guidance, in particular on its scope and coverage, by February 6, 2013.

The revised draft legislation now forms part of the 2013 Finance Bill. The test is supposed to be effective from April 6, 2013, but at the time of writing, the 2013 Finance Bill has yet to receive Royal Assent, and could yet be subject to additional changes.

 

Statutory Residence Test Guidance

Guidance for the new statutory residence tax was published in May 2013. This describes the three tests that will be used to determine whether an individual is a UK resident for tax purposes. These are as follows:

 

The Basic Rule

You will be resident in the UK for a tax year and at all times in that tax year (except under split year treatment), if you do not meet any of the automatic overseas tests and:

  •  you meet one of the automatic UK tests (see below), or
  •  the sufficient ties test.

 

Automatic Overseas Test

If you meet any of the automatic overseas tests for a tax year, you are automatically non-resident for that year. You should therefore consider these tests first, as if you meet any one of them, you will not need to consider any of the other parts of the test.

First Automatic Overseas Test

You were resident in the UK for one or more of the three tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year. If an individual dies in the tax year then this test does not apply.

Second Automatic Overseas Test

You were resident in the UK for none of the three tax years preceding the tax year, and you spend fewer than 46 days in the UK in the tax year.

Third Automatic Overseas Test

You work full-time overseas over the tax year, without any significant breaks during the tax year from overseas work, and:

  • you spend fewer than 91 days in the UK in the tax year,
  •  the number of days in the tax year on which you work for more than three hours in the UK is less than 31.

The third automatic overseas test does not apply to you if:

  • you have a relevant job on board a vehicle, aircraft or ship at any time in the relevant tax year, and
  • at least six of the trips you make in that year as part of that job are cross-border trips that:

o   begin in the UK

o   end in the UK, or

o   begin and end in the UK.

If you do not meet any of the automatic overseas tests, you should look at the automatic UK tests (see below). If you meet any of the automatic UK tests you are resident in the UK for the tax year. If you do not meet any of the automatic UK tests you will need to consider the sufficient ties test (also described below).

 

Automatic UK Test

First Automatic UK Test

You spend 183 days or more in the UK in the tax year.

Second Automatic UK Test

The second automatic UK test is relevant if you have or had a home in the UK during all or part of the tax year.

You will meet this test if there is at least one period of 91 consecutive days, at least 30 days of which fall in the tax year, when:

  • you have a home in the UK in which you spend a sufficient amount of time, and either you:

o   have no overseas home, or

o   have an overseas home or homes in each of which you spend no more than a permitted amount of time.

If you have more than one home in the UK, you should consider each of those homes separately to see if you meet the test. You need only meet this test in relation to one of your UK homes.

You spend a sufficient amount of time in a UK home if, during the tax year, you are present in that home on at least 30 days.

You spend no more than a permitted amount of time in an overseas home if, during the tax year, you are present in that home on fewer than 30 days.

The sufficient and permitted amounts of time tests operate in respect of the full tax year. The days when you are present in the home do not need to fall within the 91-day period, but they must fall within the tax year.

Third Automatic UK Test

You work full-time in the UK for any period of 365 days, with no significant break from UK work and:

  • all or part of that 365-day period falls within the tax year
  • more than 75% of the total number of days in the 365-day period when you do more than three hours of work are days when you do more than three hours of work in the UK
  • at least one day in the tax year is a day on which you do more than three hours of work in the UK.

If you meet these criteria, you will be resident under the third automatic UK test.

If you identify a period of 365 days when you have worked full-time in the UK, but you do not then meet the 75% test relating to that 365-day period, you must consider whether there is another 365-day period when you do meet the 75% test. If there is no such period, you do not meet the third automatic UK test.

If you don’t meet any of the automatic overseas tests or any of the automatic UK tests, you should use the sufficient ties test to determine your UK residence status for a tax year. You will need to consider your connections to the UK, called ties, and determine whether your ties, taken together with the number of days you spend in the UK, are sufficient for you to be considered UK resident for tax purposes for a particular tax year.

 

Sufficient Ties Test

If you were not UK resident for any of the three tax years before the tax year under consideration, you will need to consider if you have any of these UK ties:

  • a family tie
  • an accommodation tie
  • a work tie, and
  • a 90-day tie

If you were resident in the UK for one or more of the three tax years before the tax year under consideration, you will also need to consider if you have a country tie.

The number of days you spend in the UK in a tax year dictates the number of UK ties that are needed for you to be UK resident. This is set out in the tables below.

Table A: UK Ties needed if you were UK resident for one or more of the three tax years before the tax year under consideration:

Days spent in the UK in the tax

year under consideration

UK ties needed

16 - 45

At least 4

46 - 90

At least 3

91 - 120

At least 2

Over 120

At least 1

 

Table B: UK Ties needed if you were not UK resident in any of the three tax years before the tax year under consideration:

Days spent in the UK in the tax

year under consideration

UK ties needed

46 - 90

All 4

91 - 120

At least 3

Over 120

At least 2

 

It should be stressed that the above description is merely a basic outline of the main tests included in the new legislation. Even though this is supposed to represent a simplification of the tax residence rules, based as they are on various strands of case law, statute and existing HMRC guidance, the legislation itself is complex, and the new guidance document runs to 101 pages. The guidance document can be viewed on HMRC’s website.

HMRC has also launched a pilot version of its online Tax Residence Indicator (TRI), which allows individuals to check whether they are considered to be resident in the UK for tax year 2013-14 and later years for the purposes of income tax and capital gains tax.




 

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