UK Consults On Definition Of Tax Residence

By Editorial 25 June, 2012

The UK government has unveiled the outline of its statutory definition of tax residence, issuing draft legislation that aims at replacing the current uncertain and complicated residence rules with a clear test that makes it simple for the taxpayer to use.

The government first announced its plans for a statutory residence test in Budget 2011 and issued the Statutory Definition of Tax Residence consultation that June. 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 has now been released that builds on the responses received, alongside a summary of consultation responses.

The legislation includes the Budget 2012 proposal to abolish ordinary residence and to retain Overseas Workdays Relief. It is to be included in Finance Bill 2013.

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 test would be split into three parts. Part A would contain conclusive non-residence factors that would be sufficient in themselves to make an individual not resident. Part B would set out conclusive residence factors that would be sufficient in themselves to make an individual resident. Lastly, Part C would contain connection factors and day counting rules which will only need to be considered by those whose residence status is not determined by Part A or Part B.

The government says that it remains committed to the structure it proposed in its consultation. It believes the structure provides a fair way of determining residence status and will prevent situations where individuals can become and remain non-resident despite retaining strong connections to the UK. At the same time it will not cause people to become resident if they have little connection to the UK.

The government argues that using a specific number of hours to define a working day is the best approach to achieve a clear and objective definition for the purposes of the test. It is, however, open to raising the limit of working days permitted in the UK from 20 to 25 working days, and is interested in opinions on increasing the limit constituting a working day from three hours to five hours.

Reacting to the draft legislation Francesca Lagerberg, head of tax at leading business and financial adviser Grant Thornton UK LLP, said: "HM Revenue and Customs (HMRC) has now launched its outline of a statutory residence test for the UK. This is meant to answer all the questions raised by cases such as Robert Gaines-Cooper, which raised such important issues as how can you prove when you're resident in the UK for tax purposes. The test has been consulted on but is now available for more discussion leading to change in the Finance Bill 2013. It is not without its challenges running to over 50 pages of draft legislation, but with consultation it could provide the clarity that many internationally mobile individuals have been seeking."

The legislation was also welcomed by MHA MacIntyre Hudson. Katharine Arthur, Tax Partner, said: “We have long called for the introduction of a statutory residence test. The current law and practice of determining an individual’s residence is too complex and subjective, and does not give individuals the certainty they need. We hope the proposed statutory tests will give that certainty. We particularly welcome the inclusion of transitional provisions to allow the new statutory rules to be applied to previous tax years only where the individual needs to know what their residence status was in a year prior to the introduction of the test to determine their residence in future years."

Tags: Individuals | Expatriates | Tax | Investment | Business | Revenue Guidance | Law | Entrepreneurs | United Kingdom | Legislation | Tax Reform |


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