Summary of Proposed Statutory Definition of Tax Residence
In its 2011 Budget, the UK government announced plans to introduce a full statutory definition of tax residence for individuals. The aim is to replace the current rules (which are complicated and uncertain) with a clear test which will be easy for taxpayers to understand and apply.
A consultation paper on the proposed new statutory test was published on 17 June 2011. Although consultation will last until mid-September and there is therefore scope for the proposals to alter before a statutory test is enacted, the paper gives UK resident non domiciled individuals and their advisers the first insight into how the new test might work. It is anticipated that draft legislation will be published for further consultation before the 2012 Budget.
The new test attempts to take into account both the amount of time spent in the UK and any other connections with the UK. One aim is to ensure that people cannot cease to be resident in the UK without significantly reducing the extent of their connection with the UK. Further, those whose life is (as a matter of fact) connected more with the UK than any other country will find it more difficult to remain non-resident. On the other hand, individuals will not be held to be resident in the UK if they have little connection to the UK.
Three Part Test
The test is structured in three parts: the first part dictates when an individual is conclusively non-UK resident; the second part identifies when an individual will be conclusively resident; and the third part attempts to deal with individuals with more complicated residence situations.
Part A: conclusive non residence
An individual will be conclusively non-UK resident if he:
(i) is an “arriver” (i.e. has not been resident in the UK in any of the last three tax years), and spends fewer than 45 days in the UK in the current tax year;
(ii) is a “leaver” (i.e. has been resident in the UK in at least one of the last three tax years) and spends fewer than 10 days in the UK in the current tax year; or
(iii) is a “full-time worker abroad” (i.e. he leaves the UK to carry out full-time work abroad) and spends under 90 days in the UK (fewer than 20 of them working) in the current tax year.
Part B: conclusive residence
Individuals will be conclusively UK resident if they:
(i) are present in the UK for 183 days or more in a tax year;
(ii) have their only home or all of their homes in the UK; or
(iii) carry out full-time work in the UK.
Part C: other connecting factors and day counting
The third test is based on the principle that, in more complex situations, an individual’s residence should reflect not only the time he spends in the UK, but also the other connecting factors he has to the UK. This has the effect that individuals who are (or have been) resident in the UK are more likely to be considered resident than those who have not previously been UK resident.
The test identifies a list of connecting factors which, when linked to the amount of time spent in the UK by an individual, will be relevant to that individual’s residence status. The connecting factors are that the individual:
(i) has a spouse, common law partner or minor children who are resident in the UK;
(ii) has accommodation in the UK available for use, and the individual does in fact make use of it at any time during the relevant tax year;
(iii) does substantive work in the UK for 40 days or more in a tax year;
(iv) spent 90 days or more in the UK in either of the last two tax years; and
(v) (for leavers only) spends more days in the UK in a tax year than in any other single country.
The connecting factors outlined above will be combined with days spent in the UK into a scale to determine whether or not the individual is resident in the UK. There are separate day-count scales for arrivers and for leavers to reflect the fact that residence is adhesive – in other words, it should be harder to leavers to relinquish residence than for arrivers to acquire it. The proposed scales are:
Days Arrivers Leavers
0-10 Not resident Not resident
10-44 Not resident Resident if 4+ connecting factors
45-89 Resident if 4+ connecting factors Resident if 3 connecting factors
90-119 Resident if 3 connecting factors Resident if 2 connecting factors
120-182 Resident if 2 connecting factors Resident if 1 connecting factors
183 Always resident Always resident
For further information on the proposed changes to the meaning of residence and the implications of the proposed changes please get in touch with your usual contact at Maurice Turnor Gardner or Emma-Jane Weider.
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