In Issue 24 I looked at whether expats could work in the UK without becoming UK tax resident. Things have moved on since then and we are currently in a consultation period to consider the form of a long awaited statutory UK tax residence test which will apply from 6 April 2012.
Readers of previous articles on this topic will appreciate that the current residence rules are uncertain and have caused real difficulties for expats and for those coming to and leaving the UK. As a result more certain rules are welcome but do the proposed rules achieve this?
The rules are still in draft form but the proposed test comprises three Parts.
Part A – Definitely not UK resident
You will definitely not be resident in the UK if:
- You were not resident in the UK in all of the previous three tax years and are present in the UK for fewer than 45 days in the current tax year; or
- You were resident in the UK in one or more of the previous three tax years and you are present in the UK for fewer than 10 days in the current tax year; or
- You leave the UK to work abroad full time over at least one full tax year and spend fewer than 90 days in the UK in each tax year of absence and no more than 20 of those days are spent working in the UK in each tax year (a “working day” is one where you spend more than three hours working and can include a day of departure which is currently ignored in day counting tests).
Part B – Definitely UK resident
You will definitely be resident in the UK if:
- You are present in the UK for 183 days or more in a tax year; or
- You only have one home and that is in the UK (or have two or more homes all of which are in the UK); or
- You carry out full time work in the UK, ie 35 hours a week or more carried out over a continuous period of more than 9 months and not more than 25 per cent of the duties are undertaken outside of the UK within that period.
Part C – You may be UK resident
If neither Part A or Part B applies you need to consider Part C. The test in this part depends on whether you have been non-UK resident in all the three previous tax years (an “arriver”) or have been resident in the UK in one or more of the three previous tax years (a “leaver”).
Days spent in the UK
Impact of connecting factors on
Fewer than 45 days
45 – 89 days
Resident if individual has 4
90 – 119 days
Resident if individual has 3 or
120 – 182 days
Resident if individual has 2 or
183 days or more
Days spent in the
Fewer than 10 days
10 – 44 days
45 – 89 days
Resident if individual has 3 or more
90 – 119 days
120 – 182 days
Resident if individual has 1 or more
183 days or more
Whether you are resident in the given tax year will depend on (1) your connecting factors and (2) the number of days you are present in the UK.
The connecting factors are:
- The presence of family in the UK, ie spouse, civil partner, common law spouse (unless formally or permanently separated) or minor children are UK resident (in the case of minor children they will not be regarded as UK resident if they are at school in the UK and (1) they spend less than 60 days outside of school in the UK and (2) their main home is outside of the UK);
- The availability of accommodation in the UK which is used during the tax year;
- Substantive (but not full time) work in the UK, ie more than 40 working days in the UK;
- Presence in the UK for more than 90 days in either of the previous two years;
- More time spent in the UK than in any other single country (applicable to leavers only).
- The following tables then apply to determine residence:
- A couple of examples
- An “arriver” (not having spent 90 days in the UK in the previous two tax years and not intending to do any substantive work in the UK) who has family and available accommodation in the UK (ie two connecting factors) could spend up to 119 days in the UK in the first tax year without becoming UK tax resident. This is probably more than they could hope to spend in the UK at the moment without an HMRC challenge.
- A “leaver” who has been present in the UK for more than 90 days in either of the previous two years and who retains a property in the UK and whose family remains in the UK must spend 44 days or less in the UK in each of the next two tax years to lose UK tax residence status.
Is there greater certainty?
The proposed rules are subject to consultation so may still change. Although the proposed rules do not offer simplicity they do appear to add greater certainty and it should therefore be possible, from 6 April 2012, to determine if you are resident in the UK or not. However, there are a couple of issues:
- It is not yet clear if there will be any transitional provisions to move from the current rules. As noted above, whether you were resident in a tax year before 2012/13 tax year will remain relevant until the 2015/16 year for both Parts A and C. As it may be difficult to conclude if you are resident or not in the relevant years preceding the new test it may still be difficult to conclusively identify whether you will or will not be resident under the new test.
- There is no definition of “work” – we only know at this stage that if you do more than three hours of it then that is a “working day”. Many professional expats living in Cayman will be performing some business in the UK, from having formal meetings to checking blackberries. To what extent will certain activities be caught?
It is anticipated that there will be a new rule to ensure that certain types of income received during an absence will continue to be taxable unless you are non-UK resident for at least five years (in line with the current capital gains tax rules) so the scope for tax planning may be less than otherwise thought.
There are likely to be some individuals who can stay longer in the UK and some who must reduce their current day count in the UK to maintain their non-UK resident status when compared to the existing “rules”, so great care will be needed following the introduction of the new rules.
There will also be some who must seriously consider what “work” they do in the UK and the records they need to keep to demonstrate that. In order to reduce UK connecting factors careful consideration will need to be given to the ownership and availability of homes and other accommodation both in the UK and overseas and the time spent in other countries.
It is possible that the proposed rules set out above could be changed before the rules are finalised so it is important for individuals who may be affected to monitor any changes to the proposed rules. An update on the new rules will be available in a future issue of CFR.