Summary of Responses to the Proposed Statutory Definition of Tax Residence
In its 2011 Budget, the Government announced plans to introduce a full statutory definition of tax residence for individuals and published a consultation paper on 17 June 2011. The paper was well received by professional advisers, the Government announced a welcome postponement of the proposed introduction of the rules, by a year to April 2013, to give HM Treasury more time to formulate a “clear and principled solution”. In June 2012, HM Treasury published a summary of the responses to the original consultation paper together with draft legislation. This memorandum updates our August 2011 memorandum on the proposals.
The proposals remain largely unchanged, although HM Treasury have taken into account a number of issues raised by respondents to the original consultation paper, which mainly benefit the taxpayer. 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.
3. 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. The description of the day count has been adjusted slightly, from the original consultation, to make it easier to understand and apply. In addition, the Government has acknowledged the need for a transitional rule for those parts of the test where the individual needs to know what his or her residence status was in one or more of the three years prior to the introduction of the test, for the purpose of determining their residence in future years. The transitional rule will apply on the making of a formal election to this effect.
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 46 days in the UK in the current tax year (originally the test was “fewer than 45 days” );
(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 16 days in the UK in the current tax year (this has been increased from 10 in response to observations that a standard two week holiday in the UK could make an individual resident here); 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.
HM Treasury are consulting further on whether to increase this to 25 days or alternatively whether to increase the number of hours which may be spent working in the UK from 3 hours to 5 hours per day, without it “counting” as a day’s presence in the UK).
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.
The original consultation paper proposed that an individual should be classed as working full time in the UK if they were employed or self-employed in the UK over a continuous period of nine months, with no more than 25% of their duties carried on outside the UK during the period. The Government is now seeking views on whether the requirement for a continuous period of 9 months with no more than 25% of duties carried on outside the UK during that period, should be extended to 12 months.
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 (the response to the consultation clarifies the position for children who are in education in the UK and additionally confirms that if the individual spends less than 60 days in the UK with his minor children (rather than the 60 days anywhere in the world, as originally proposed) this will not be a connecting factor. Furthermore, the Government acknowledges the potential circularity of the test where an individual’s residence could not be determined without reference to the residence of his or her spouse or partner whose residence is likewise dependent on the individual’s residence. In these circumstances, the family connection is to be ignored);
(ii) has accommodation in the UK available for use (for a continuous period of at least 91 days), and the individual does in fact make use of it at any time (for at least one night) 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 for leavers to relinquish residence than for arrivers to acquire it. The proposed scales are:
Days Arrivers Leavers
Less than 16 Not resident Not resident
16-45 Not resident Resident if 4+ connecting factors
46-90 Resident if 4 connecting factors Resident if 3+ connecting factors
91-120 Resident if 3+ connecting factors Resident if 2+ connecting factors
121-182 Resident if 2+ connecting factors Resident if 1+ connecting factors
183 or more Always resident Always resident
4. Split Tax Year concession
In the June 2011 consultation, the Government confirmed its intention to place the existing concessionary split year treatment on a statutory footing. Split year treatment will be available where the individual:
• Becomes resident by virtue of their only home being in the UK;
• Becomes resident by starting full time employment in the UK;
• Establishes their only home in a country outside the UK and becomes tax resident in that country and does not come back to the UK in that tax year;
• Loses UK residence by virtue of working full time abroad; or
• Returns to the UK following a period of working full time abroad (but only if one of the other conditions is satisfied i.e. starts full time work in the UK or has their only home in the UK).
However, in clarifying the position relating to those who are coming to the UK part way through the year, the proposed new rules appear more restrictive than the current concessionary treatment. Because of the requirement that the individual’s only home must be in the UK, split year treatment will not be available to those who retain a home abroad, or who own more than one home in the UK. So those who come to the UK part way through the year, as investors for example, and are neither conclusively resident or non resident from the outset, will be unable to avail themselves of the split year treatment and will have to ensure their day count remains below 121 days to avoid subjecting their worldwide income to UK tax.
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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