The Government has recently concluded a consultation exercise on the introduction of a statutory definition of UK tax residence for individuals. It is intended that the new rules will be included in Finance Bill 2012 and will take effect from 6 April 2012.
Why is this important?
The concept of residence plays a significant part in determining an individual’s liability to pay tax in the UK. Typically, a UK resident individual is subject to income tax on his or her worldwide income and capital gains, while a non-resident may have to pay UK tax on any sources of income derived in the UK.
Until now there has been no statutory test of residence in UK law, which has arguably led to a degree of uncertainty and subjectivity. The case of Mr Gaines-Cooper, which has received widespread press coverage in recent weeks, is just one in a long line that has contributed to a set of principles that are broadly given effect in the draft residence test.
Who needs to know?
Potentially any individual who comes to live or work in the UK, or who leaves the UK to live or work overseas.
These new rules are likely to be of particular relevance to private client lawyers advising high net worth individuals, and those advising corporate clients with internationally mobile workforces.
Summary of the new test
The draft test proposed in the consultation document breaks down into three parts:
- Part A: circumstances in which an individual is conclusively non-UK resident;
- Part B: circumstances in which an individual is conclusively UK resident; and
- Part C: this applies where an individual’s status is not determined under Parts A or B of the test.
Part A: conclusive non-residence
An individual will be conclusively non-UK resident if 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, provided they are present in the UK for fewer than 90 days in the tax year and spend no more than 20 days working in the UK in the tax year.
Part B: conclusive residence
If none of the three tests in Part A are satisfied, then an individual will be conclusively resident in the UK if any of the following tests are satisfied:
- They are present in the UK for 183 days or more in a tax year; or
- They have only one home and that home is in the UK (or they have two or more homes and all of these are in the UK); or
- They carry out full-time work in the UK.
Part C: other connection factors and day counting
Part C only applies where an individual’s residence has not been determined by either Part A or Part B. It considers concepts with which you may be familiar, such as counting the number of days spent in the UK and other “connection factors” which the courts have held to have a bearing on residence, such as family commitments, the location of the individual’s home and their place of work.
The test works by comparing the number of connection factors that an individual has with the UK and the number of days that can be spent in the UK: effectively, the fewer connection factors that apply, the longer an individual may spend in the UK without becoming resident. The connection factors are:
- Family - broadly, the individual’s spouse, civil partner or minor children;
- If the individual has accessible accommodation in the UK;
- The individual carries out substantive work in the UK, but does not work here full-time;
- The individual spent 90 days or more in the UK in either of the previous two tax years;
- The individual spends more days in the UK in the tax year than in any other single country.
The consultation paper then sets out sliding scales of the number of days which can be spent in the UK for a given number of connection factors: two scales apply, one for people leaving the UK and one for people coming to the UK.
Will it work?
The principles underlying the new residence test are, broadly, the correct ones although the number of days and relative importance of the connection factors in any given case is always open for debate. The new test will undoubtedly give greater certainty, and while the Government’s stated intention is that the new rules will not change the residence of the vast majority of taxpayers, there will inevitably be some for whom the new rules lead to a crucial change in tax status.
Author
This summary was written by George Lovell, Tax Partner at DTE Business Advisory Services. He is contactable on 0161 767 1200 or glovell@dtegroup.com. It is based on the Treasury’s consultation paper issued in June 2011: the draft legislation to be included in Finance Bill 2012 is not yet available and the rules may change materially before Royal Assent.
