Clarity on UK tax residence?
Friday, June 17, 2011 | Posted by: Mike Hyland
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The Government has today released its consultation on the long awaited statutory definition of residence which they are seeking to introduce from 6 April 2012.
Current position
Taxpayers are generally held to be resident in the UK if they are physically present in the UK for 183 days in any one tax year, or more than 90 days on average per tax year over a period of four years.
In an increasingly globalised world, it is essential that all taxpayers have certainty as to their tax position. Not being sure whether you are resident or not in the UK has become an increasingly difficult issue due to changing guidance and court decisions. In particular the recent high profile Gaines- Cooper case has highlighted how the absence of clear rules in the UK can lead to years of uncertainty for taxpayers.
Changes proposed
The Government has recognised this and are now seeking to provide the clarity that taxpayers need. The new rules are thankfully a mixture of objective tests (day-counting) and more subjective rules, albeit with an objective outcome, looking at a sliding scale of how closely a taxpayer is linked to the UK. It will now be a case of running through a checklist to understand whether a person’s residence status can be determined with certainty.
Along with this, the time a person can spend in the UK before gaining UK resident status is significantly limited with the biggest losers being those individuals who have previously lived in the UK and now spend more than 45 days working in UK employment and whose family live in the UK, who will now always be deemed resident.
Another sting in the tail of the proposed rules is the intention to introduce a temporary non-residence test, much like the current capital gains tax rules. This would cover the situation where a person leaves the UK for a short period (less than five tax years) and pay themselves dividends from UK companies in respect of profits which had been generated whilst the person was UK resident.
Summary
Although the proposed rules are complex they would, in most circumstances, give a taxpayer greater certainty on their residency position, which is what taxpayers and advisors alike have been calling for. This consultation is therefore certainly a step forward and provides a more objective platform for considering a person’s residency position.
Following the consultation which is to close on 9 September, draft legislation will be released and changes are set to apply from April 2012. As ever, we will be keeping you up to date with details of any confirmed changes as and when they are announced
Want to talk to a Grant Thornton tax specialist? Contact your local office or read more about our services on our International Private Client page.
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* Changes to non-dom taxation
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* Singalonga taxman as HNWIs targeted to boost tax take
Reader Comments (2)
Thanks for your comment. It will be interesting to see what responses HMRC receives to the consultation on this point and whether it includes transitional provisions when bringing the rules into force, although I note that it is not intending to at present.
It is clear that there will be winners and losers from the introduction of the new rules as proposed, and I can certainly envisage circumstances (as you have pointed out) where an individual may consider themselves to be non-UK resident under the current rules and guidance but may be UK resident under the proposed new rules, and vice versa.
However it is also worth noting that, in the circumstances of a person such as you have described, the 90 day test is only one factor to take into account as part of determining residence under the proposed new rules. For example, assuming that person has not been UK resident for the three years to 5 April 2012, they could still spend up to 89 days in the UK in 2012/13 without becoming UK resident unless their family live in the UK, they have accessible accommodation in the UK, and they have substantive UK employment or self-employment.
Given the attitude of the courts in recent years, such an individual’s residence status may have been in doubt even under the current rules given the extent of their connections with the UK, regardless of the fact that they may have spent no more than 90 days in the UK on average over a four year rolling period.
There will doubtless be areas such as this where there is uncertainty for taxpayers, and I would suggest that taxpayers who have doubts as to their residence position, and particularly those currently self-assessing non-UK residence on the basis of the 90 day test, should seek professional advice in relation to their specific circumstances.
Added Tue Jun 2011 at 09:06:46
The absence of transitional provisions could lead to harsh penalties. If the proposed period of 2 years looking back to see how long a person spent in the U.K. includes a period that exceeds 90 days, this can trigger a tax liability.
However, since the current law in the 2 years before the new law comes in, if it does in its present form, relates to a permitted average period of not more than 90 days over 4 years, a person could legitimately now spend, for example, respectively, 30 days and 120 days in the U.K. without becoming taxable in the 2 years before the new law comes into effect.
However, that 120 day period would, now, if there are no transitional provisions, mean that the 120 day period makes the person potentially resident and taxable under the new law.
There need to be transitional provisions that mean that in the 4 years prior to the legislation coming into force, the test is that the average of 90 days was not exceeded.
If there are no such transitional provisions, the new law will have retrospective effect and penalise legitimate actions taken prior to the new law coming into effect.
Added Mon Jun 2011 at 05:06:12