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10th May 2013
Posted in Articles, Expatriate Tax, Featured Articles, International Tax, Private Client by Laura Hutchinson
Laura Hutchinson discusses the new rules
For the purpose of calculating income tax and capital gains tax liabilities, it is important for an individual to understand their tax residence, which at present is largely decided by case law. Unfortunately case law can only act as guidance, as no two individuals’ circumstances will ever be the same and an individual’s affairs are not normally on ‘all fours’ with the cases.
In 2011, a consultation was launched to introduce a statutory definition of tax residence and to reform the concept of ordinary residence. The new legislation will be implemented on 6 April 2013.
The new rules will not affect the residence status of most people, but it is welcomed by those entering or leaving the UK, as they can plan their tax affairs with certainty. The reaction to the new rules has been positive, however, the new test is not quite as simple and easy to understand as was expected.
We set out below a guide to the new rules. Please also refer to our ‘Statutory Residence Flowchart‘.
The test is divided into three parts – Part A, B and C.
If Parts A or B are not satisfied the individual is tested on Part C, which determines the individual’s UK residence status by taking into account the time spent in the UK and the number of connections the individual has with the UK. The test distinguishes between two types of tax payer; “arrivers” and “leavers”. Leavers are those who have been resident in the UK in any of the three previous tax years and arrivers are those who have not.
[box] Summary
PART A Always non-resident
PART B – Always UK resident
As is expected, the rules to attain non-residence rely on a limited number of days being spent in the UK. Where there is limited historical connection to the UK, the number of days that can be spent here (without any days being treated as non-resident) is greater than where the individual has been previously UK resident.
An individual will automatically be non-resident if they satisfy any of the following four circumstances:
To qualify for full time work abroad, an average working week of 35 hours or more is necessary. The definition of a working day in the UK has been simplified to, ‘any day in which more than three hours of work is carried out’.
An individual will be automatically resident if they satisfy any of the following conditions:
Part C is less straightforward than parts A and B. The number of connection factors impacts the number of days an individual may spend in the UK without classification as a UK resident. The connection factors are as follows:
If an individual is in the UK at midnight at the end of a day, they are classed as present in the UK on that day except where they arrive as a passenger and leave the UK the next day, or there are exceptional circumstances (e.g. war or illness). A distinct break from the UK will not be required under the new rules in order for the midnight rule to be applicable. We suggest that individuals, where practical, should leave before midnight to decrease the number of days present, whilst remaining non-resident.
This relationship is outlined in the tables below, highlighting how many connection factors are required to be UK resident, compared to the number of days spent in the UK.
|
Days spent in the UK |
Number of factors for leavers |
|||||||
|
5 factors |
4 factors |
3 factors |
2 factors |
1 factor |
||||
|
Fewer than 16 |
Always non-resident |
|||||||
|
More than 15 but fewer than 46 |
Resident |
Non-resident |
||||||
|
More than 45 but fewer than 91 |
Resident |
Non-resident |
||||||
|
More than 90 but fewer than 121 |
Resident |
Non-resident |
||||||
|
121 or more |
Always resident |
|||||||
|
Days spent in the UK |
Number of factors for arrivers |
|||||||
|
4 factors |
3 factors |
2 factors |
1 factor |
|||||
|
Fewer than 46 |
Always non-resident |
|||||||
|
More than 45 but fewer than 91 |
Resident |
Non-resident |
||||||
|
More than 90 but fewer than 121 |
Resident |
Non-resident |
||||||
|
More than 120 but fewer than 183 |
Resident |
Non-resident |
||||||
|
183 or more |
Always resident |
|||||||
This effectively splits the tax year into periods of residence and non-residence. An individual’s tax liabilities are calculated on income during their actual residence in the UK during that tax year.
A ‘split year’ can apply by concession if an individual would otherwise be resident in the UK during that year and their circumstances for leaving the UK fall under one of the following cases:
In respect of people arriving into the UK a split year treatment may apply in the following circumstances:
Mr X, a single man, leaves the UK to work abroad, (he has not worked in the UK in the tax year). He has a contract of employment starting on 1st June 2013, working a 30 hour week. He has spent all three of the previous tax years in the UK and he plans to return to the UK during the tax year 2013/14 for a one month holiday. He sells his house before he leaves and does not have any dependent children in the UK.
Under the new rules we could not conclude he is non UK resident under part A. To be classed as non-resident under part A, he would need to increase his work contract to at least 35 hours a week. Alternatively he could leave the UK before the 21st April 2013 and not return for his one month holiday; therefore spending less than 16 days in the UK in that tax year.
However, once part B and C are taken into account it is clear this is not necessary, as he would be classed as non-resident under part C, based on day count and connections.
Mr X will be connected to the UK by virtue of the ’90 day tie’ rule only as he has not worked in the UK. Therefore he can be present in the UK for up to 120 days in the tax year and be non-resident.
Mr Y and his family are considering moving to Israel (he does not yet have full time work there). He decides to travel to Israel alone before the permanent move. Both the husband and wife work in the UK until they leave. He travels on 30th June 2013 and his wife follows shortly afterwards with the children (after selling the house). Unfortunately Mr Y’s mother becomes ill and he has to return to the UK for two weeks.
Under the new rules he would be classed as UK resident under part C, as he will spend 99 days in the UK and has two connecting factors – ‘work’ and ’90 day tie’. His wife should not be treated as resident for the tax year. HMRC have said that they will not invoke circular residence tests i.e. that in this instance could bring the wife back in as resident just because she has a family connection at Part C (increasing her connecting factors to three). HMRC may accept his mother’s illness as exceptional circumstances and allow classification as non-resident for that tax year (as the day count would then be only 85, and under the required 91 days).
In order to be classed as non-resident without relying on HMRC’s compassion, he could reduce his connecting factors by working less than 40 days in the UK in that tax year before going to Israel or he could leave the UK earlier i.e. before the 21st June.
An anti-avoidance rule has been introduced to stop individuals receiving tax-free income by leaving the UK for short periods of non-residence. This is similar to the existing rule for capital gains tax. This new rule applies where the individual has been resident in the UK for four out of the seven previous tax years and becomes resident again within five years of leaving the UK. Certain income which arises in a non-resident year is treated as though it has arisen in the year of return to the UK.
This is usually known as “habitually resident” and is typically very complicated with limited application, so the Government has decided to abolish these rules.
The new statutory residence test is expected to make tax residence more clear, allowing the tax payer to plan and structure their affairs with knowledge of their position. The new test is an improvement on the current rules, however it is not as simple to use as was expected, leaving some ambiguity in definitions such as ‘accommodation’ that may still require court intervention.
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