‘Residence’ for the purpose of UK taxation is not currently defined by law and its interpretations are largely based on judicial pronouncements. Normally a person is regarded as resident in the UK if s/he is physically present in the country for 183 days or more in a tax year, which runs from 6 April to 5 April the next year. When the physical presence in a tax year is for less than 183 days, ‘residence’ is determined on the basis of a host of factors including the location of individual’s home, family, business and social connections to name a few. Often interpretations of residence would create uncertainty for people arriving and leaving the UK with regard to their tax residence.
As a welcome and timely step the Government has now proposed a new statutory residence test, to be effective from 6 April 2012, making the system simpler and in the process allowing a some degree of flexibility to non-residents in managing the number of days’ they live in the UK.
The new statutory residence test
The government proposes the new test in three parts to determine the tax residence of an individual. The first two parts determine conclusively whether or not an individual is tax resident in the UK and the third part deals with inconclusive situations.
Part A
- An individual will be conclusively non-resident in the UK for tax purposesin a particular tax year if;
- s/he was non-resident in the UK in all of the previous three tax years and he is present in the UK for fewer than 45 days in the current tax year; Or,
- s/he was resident in the UK in one or more of the previous three tax years and was present in the UK for fewer than ten days in the current tax year; Or,
- s/he leaves the UK to carry out full-time work abroad, is present in the UK for fewer than 90 days during the tax year and works for no more than 20 days in the UK in the current tax year. (‘Full time work abroad’ and ‘working day’ have been separately defined)
Part B
An individual will be conclusively tax-resident in the UK for tax purposes in a particular tax year if;
- s/he is present in the UK for 183 days or more in the tax year;
- s/his has home or homes all located in the UK; OR
- s/he carries out full-time work in the UK (At least 35 hours per week for a continuous period of more than nine months generally constitutes full time work).
Where an individual does not satisfy the conditions in Part A (conclusively non-resident) or in Part B (conclusively resident), then Part C applies.
Part C
Where an individual is neither conclusively resident nor non-resident then s/he must consider (a) the “connecting factors” that apply and (b) the number of days s/he spends in the UK in the tax year. Again, the key to applying this test is dependent on whether the individual is an ‘arriver’ or a ‘leaver’ in the UK. An individual is categorised as either an “arriver” or a “leaver” depending on s/he has been tax-resident in the UK in any of the three tax years immediately preceding the current tax year. The rules seem to make it difficult for leavers to be non-residents than “arrivers”.
‘Arrivers’
An individual is an “arriver” if he has not been tax resident in the UK in each of the last three tax years preceding the current tax year. To determine the residence of the arriver, the following connecting factors are to be taken into account:
- Has a UK resident family
- Has accessible accommodation in the UK
- Has substantive UK employment (including self-employment) for at least 40 days in the tax year; a day of work must involve more than three hours of work
- Spends 90 days or more in the UK in either of the two previous tax years
These connecting factors are then combined with the number of days spent in the UK to determine the residence status as given in the following table:
| No of days spent in the UK in a tax year | Number of connecting factors | |||
|---|---|---|---|---|
| Any one | Any two | Any three | All four | |
| Less than 45 | Non-resident | Non-resident | Non-resident | Non-resident |
| 45–89 | Non-resident | Non-resident | Non-resident | Resident |
| 90–119 | Non-resident | Non-resident | Resident | Resident |
| 120–182 | Non-resident | Resident | Resident | Resident |
| 183 or more | Resident | Resident | Resident | Resident |
‘Leavers’
A person is a “leaver” if he has been resident in the UK in one or more of the previous three tax years. For leavers the following connecting factors are to be taken in to account:
1) A UK resident family
2) Accessible accommodation in the UK
3) Substantive UK employment (including self-employment) for at least 40 days in the tax year
4) Spends 90 days or more in the UK in either of the two previous tax years
5) Spends more time in the UK than in any other single country
These connecting factors are then combined with the number of days spent in the UK to determine the residence status as given in the following table:
| No of days spent in the UK in a tax year | Number of connecting factors | ||||
|---|---|---|---|---|---|
| Any one | Any two | Any three | Any Four | All five | |
| Less than 10 | Non-resident | Non-resident | Non-resident | Non-resident | Non-resident |
| 10–44 | Non-resident | Non-resident | Non-resident | Resident | Resident |
| 45–89 | Non-resident | Non-resident | Resident | Resident | Resident |
| 90–119 | Non-resident | Resident | Resident | Resident | Resident |
| 120–182 | Resident | Resident | Resident | Resident | Resident |
| 183 or more | Resident | Resident | Resident | Resident | Resident |
Family means the individual’s spouse, civil partner or common law equivalent are resident in the UK or any part of it (but ignore a spouse, civil partner or common law equivalent if the individual in question is separated under a court order or separation agreement or where the separation is likely to be permanent) or if the individual’s children under 18 are resident in the UK and the individual spends time with them or lives with them for all or part of 60 days or more during the tax year. However, children will not be treated as UK resident if their UK residence is mainly caused by them being at an educational establishment in the UK; this will be the case when the children spend under 60 days in the UK outside school and his/her main home is not in the UK.
Accommodation is onethat is accessible and the individual must use it during the tax year (exclusions include hotels, staying with relatives on a temporary basis or non-consecutive leases of six months or less).
‘Days present in the UK’ means being in the UK on any day(s) when an individual is in the UK at midnight at the end of the day. The exceptions apply for persons transiting through the UK who are present here at the end of the day but do not undertake activities such as business meetings.
Anti-avoidance provisions
To prevent artificial creation of short periods of non-residence anti-avoidance rules are proposed, which are similar to the existing ones for capital gains tax. These apply where an individual has been resident in four of the seven tax years prior to the tax year in which they became non-resident; and then becomes resident again in any of the following five tax years. In that case, subject to some exceptions, chargeable gains and allowable losses that arose during the years of non-residence are treated as arising instead in the tax year in which the individual becomes UK resident again. They will thus be taxable as if the person had been UK resident throughout.
Ordinary residence
Under the Government’s proposed definition individuals who are resident in the UK will also be treated as ordinarily resident unless they have been non-UK resident for all of the previous five tax years. If they have been non-UK resident for the previous five tax years, they might not be ordinarily resident unless their only home or homes are in the UK. The status of being non-UK ordinarily resident should be available for a maximum of two years following the end of the year of arrival.
The document published on 17 June 2011 is for consultation purposes until 09 September 2011. We believe that the proposed test provides the much needed clarity in determining complex residency cases and hope that the proposals do become law.
