On 1 April 2011, the Financial Times reported that HM
Revenue & Customs had indicated that it would challenge the non-residence
status of individuals who spend more than 10 working days in the UK in a tax year.
Despite the timing this was not a joke and it led to a flurry of phone calls
from worried Cayman clients who certainly do work in the UK for more than 10
days but thought that they were safely non-UK resident as they spend far fewer
than 90 days in the UK in any tax year.
Is this an area for concern? Well let us step back and
consider how an individual becomes non-UK resident in the first place.
Essentially, if you are UK resident you can lose your UK tax
residence status in one of two ways.
Leaving permanently or indefinitely
The first way is to leave the UK “permanently” or
“indefinitely”. HMRC will regard you as leaving “permanently” if you leave the
UK and are not going to return and regard you as leaving “indefinitely” if you leave
the UK to live abroad for more than 3 years and you might eventually return but
have no current plans to do so.
If you leave the UK under this “test” it seems clear that
you need to sever your UK ties and show that you have made a “distinct break” with
the UK. A clear change in the pattern of your life is required and a permanent
home must be acquired overseas. Any remaining ties to the UK must be consistent
with being not resident in the UK. Your non-UK residence under this “test” may
be jeopardised in certain circumstances, for example, if you continue to travel
in and out of the UK frequently, or the circumstances of your life change
gradually, or you do not have strong ties to another country, or you retain UK
connecting factors such as social, family or business ties. It is certainly
becoming increasingly difficult to lose tax residence status in this first way.
Full-time work overseas
The second way to become non-UK resident is to leave the UK
to work overseas under a full-time contract of employment (full time self
employment can also work). The recent HMRC statement seems to be aimed at this
method of becoming non-UK resident.
Recent case law indicates that you do not need to sever all
UK ties if leaving the UK under this “test”. Certain conditions must be met
a) The work
must be full time abroad – HMRC regard “full time” as a minimum of 35 hours a
b) The work
must continue over a period of at least one whole tax year.
c) You must
have physically left the UK when your employment begins.
have left, you must spend less than 183 days in the UK in any tax year of
absence or less than 91 days a tax year in the UK when averaged over the period
Can I still work in the UK?
HMRC do accept that if you are working overseas you may
still have to physically return to the UK, sometimes to do work (including
substantive work) in the UK. However, HMRC state that:
“You will be expected to show that the amount and nature of
any work carried out in the UK does not prevent the overseas work from
satisfying the criteria required for it to be considered full time”.
HMRC regard the following as some of the evidence that would
have to be presented to demonstrate that the work is indeed full time overseas:
- A description of the nature of your work and
- The results of your work
- Timetables of activities, including time spent and nature of
work done in the UK
- Reports that you made to your employer on your performance
- A record of your annual leave
How much work can actually be carried on in the UK depends
on the facts and circumstances of each individual case. HMRC state that they:
“Will generally accept that working in the UK for fewer than
10 days in a year will not by itself prevent an individual claiming that they
have made a break with the UK because they are working full time abroad. If
more days than this are worked in the UK, whether the individual is working
full time abroad will depend upon their particular circumstances” (underlining
Clearly this is
different to the report in the Financial Times but the HMRC statement still
leads to considerable uncertainty and there must be a real risk that an expat
working for over 10 days in the UK could have his or her non-UK residence
status challenged by HMRC. On the basis of the statement, even working for less
than 10 days in the UK could, if there are other relevant circumstances, lead
to a challenge. It is also not clear what constitutes “work” in the UK for
these purposes – for instance, would this include, for example, reviewing
emails on a blackberry or making a telephone call to a client while in the UK?
It is not clear.
There is also some uncertainty on day counting. The general
rule (since 2008) is that you must count any day spent in the UK if you are
here at midnight. You do not need to include days of transit, including if you
arrive one day and leave the next, so long as you do not “engage in any
activities unrelated to your journey” while in the UK. However, HMRC have in
their December 2010 update of HMRC6, their “guidance” on residence and
domicile, stated that this practice “will not necessarily be appropriate in all
What should I do if I still do some work in the UK?
HMRC do regard the views noted above as their current
practice, and not a new practice, and one that continues into the tax year
2011/12. It is therefore important for all expats who have historically
undertaken, or expect to undertake, some work in the UK this tax year to
consider their residence status and tax position with a specialist
What can expats do to obtain some certainty and to
strengthen their position? Case law has shown that accurate record keeping is
vitally important and we are currently working with many of our expat clients
to put together an appropriate “non-residence pack” – a collection of important
evidence to demonstrate non-residence status. This information enables us to
not only identify if there are any immediate or historic reporting obligations,
which can be dealt with, but is also crucial and contemporaneous evidence if
the residence status is challenged by HMRC in the future. Given that HMRC can
look back, in some cases, up to 20 years to determine historic UK tax exposure
and, if there is unpaid tax, impose substantial penalties of up to 200 per cent
of the tax and interest, this preparation in advance is absolutely
Is it really a problem?
The problem is a real one and we are currently seeing plenty
of challenges from HMRC and a flurry of residence cases in recent years. A
“bury your head in the sand” attitude is no longer a viable plan. However, our
experience is that with good advice and appropriate planning it is possible to
remove or reduce the threat of challenge and take away this unnecessary worry.
We expect that a new statutory test of residence
will be introduced from 6 April 2012, which will bring much needed clarity to a
complex set of “rules”. However, for the time being, expats are under a real
threat of challenge by HMRC on both their residence and domicile status and it
is important to act now.