UK Tax Residence test announced
Whilst an individual taxpayer’s residence status is fundamental to determining his/her UK income tax liability, there has never been a proper definition of residence in UK tax legislation. HMRC have now unveiled their consultation on the statutory definition of tax residence and once the consultation period is over, this new test is expected to become effective from 6 April 2012. James Cowper recommends that all individuals who are looking to come to the UK or leave the UK review their tax position now in light of the new proposals.
There are three parts to the proposed residence test, as follows:
Part A – covers factors which are sufficiently conclusive to make an individual non-resident, such as those spending very little time in the UK in a tax year (in conjunction with a review of their UK residence status for the previous three tax years). This category also includes those leaving the UK to carry out full time work abroad; thankfully the number of days an individual can work in the UK has been doubled from recent announcements of 10 to 20 days, and the “less than 90 day” count remains intact.
Part B - covers conclusive residence factors such as presence in the UK for more than 183 days in a tax year and full- time work in the UK. It also includes those individuals who have only one home where that home is in the UK.
Interestingly, where an individual satisfies one of the conditions in both Part A and Part B, Part A takes precedence.
Part C – is headed “other connection factors and day counting” and is considered where Parts A and B have not provided a conclusive residence position. This lists factors connecting an individual to the UK such as family, accommodation and UK presence in the previous tax year and combines them with the number of days spent in the UK, so that the fewer days a person spends in the UK, the more connection factors are allowed and conversely, the more days spent in the UK the fewer connection factors allowable before triggering UK residence. The trigger points in the day counting range from 45, 90, 120 and 183 days.
There is a different test in Part C for arrivers and leavers, which aims to reflect the principle that “residence status should adhere more to those who are already resident than to those who are not currently resident”. This reduces the number of days allowed for leavers compared to arrivers in conjunction with their connection factors and introduces a further connection factor of having spent more time in the UK than in any other countries.
Sarah Robert, senior manager at accountants James Cowper comments: “HMRC’s objective is to introduce a test that is “transparent, objective and simple to use”. They have even introduced an interactive online tool for individuals to use in order to get an immediate answer to their residence status, and believe that overall the test is straightforward for individuals to follow without the need for specialist advice.”
“Whilst Parts A and B of the test are relatively straightforward – because they reflect the cases which were always straightforward in determining an individual’s residence, the complexity inevitably comes with Part C. For example, what happens if an individual has available accommodation in more than one country? Is the definition of family sufficient?”
“The only truly objective way of assessing residence would be on a day count basis, as other countries have done, but the UK is not ready to let go of its connection factors.”
Sarah Robert, Senior Manager, James Cowper LLP +44(0)118 9590261 or email srobert@jamescowper.co.uk
22.06.11