Present and correct

HMRC’s consultation on the statutory definition of tax residence ran for 12 weeks to September 2011 and the draft legislation is due to be released on 6 December. So what is in it? Will it bring any more certainty on which individuals are UK resident and are there any new opportunities?

Opportunity knocks

There is currently no statutory definition of residence, such that the present rules are perceived to be subjective and do not provide certainty as to whether an individual is UK resident or not. Everyone would agree that certainty of residence is desired, certainly by taxpayers, so that individuals can work out their liability to taxation in the UK.

The consultation also makes the fair point that the introduction of the test should increase the attractiveness of the UK for the internationally mobile. It should also ensure that those who have close connections with the UK pay their fair share of tax and that the test does not give rise to unfair outcomes or opportunities for tax avoidance. The test will apply for income, capital gains and inheritance taxes and will supersede all statute, case law and guidance following its introduction.

The current rules include treating individuals ?as being UK resident for income and capital gains taxes if they:?

• spend 183 days or more in the UK in any one ?tax year;

• come to the UK with the intention of living here permanently or to work here for a longer period with no fixed end-date;

• come to the UK on a temporary basis and spend 91 days or more on average over a four-year period;

• come to the UK for employment or other purpose that means they remain in the UK for at least two years, irrespective of whether they spend 183 days or more in the UK; or

• usually live in the UK and just go abroad for business or holidays for short periods.

It can already be seen that there is some subjectivity in the rules; for example, what does temporary mean? There are numerous examples of individuals who have come to the UK on a temporary basis but have stayed longer and have subsequently become UK resident with the associated tax consequences. The actual point at which the individual became resident may be debatable and that element should be reduced to a minimum by any new rules.

HMRC seems to be particularly concerned about the ‘connections’ that an individual can make and retain yet be considered as non-resident, particularly for those who visit the UK and build up their connections such as employment, business, accommodation and social ties.

Connect four

The proposed framework for a residence test is designed to provide a simple process and a clear outcome for the majority of individuals. In most cases it will probably achieve that and individuals will easily determine if they are UK resident or not.

The difficulty lies, as ever, with those individuals who have more complicated circumstances, perhaps they have connections with more than one country ?or have a lifestyle of working in a number of countries and spend time living in them accordingly.

In order to be fair, the government is proposing that, for those with more complicated affairs, the test should take account of the amount of time that the individual spends in the UK and their connections with the UK. In these cases, the test should not take account of a wide range of connections, the connections taken into account should be simply and clearly defined and the weight assigned to each connection should be clear.

The government has also recognised the benefits of having individuals come to the UK to spend a limited amount of time here without becoming UK resident, so the residence test has been designed to make it harder to become non-UK resident when leaving the UK having been UK resident, than it is to become UK resident when an individual arrives in the UK. Once an individual has become UK resident by building up UK connections, then, in order to achieve non-UK residence status, the individual should reduce their UK connections or spend less time in the UK before losing their UK tax residence status.

The proposed test will have three parts, A to C (see box). If an individual satisfies any of the conditions in Part A, then the individual will be non-UK resident for that tax year. If an individual satisfies any of the conditions in Part B, then the individual will be resident in the UK for that tax year. If none of the conditions in Parts A or B apply, then Part C is considered to try to determine residence.
While the rules will make it clearer to determine residence or otherwise, the government is concerned that it will also help those who wish to gain a tax advantage. This could be by being non-UK resident and resident elsewhere for a relatively short period of time to evaluate their residence with greater clarity. Therefore, there will be anti-avoidance rules included for some investment income and the rules are likely to be based on the current CGT rules. This seems to be a sensible proposal, but there may well be uncertainty where an individual is dual resident, for example, and there is a double taxation agreement between the UK and the other country. For that type of case it is hoped that it will be possible to obtain advanced clearance on a transaction, thereby obtaining certainty.

Satisfying needs

The introduction of a statutory residence test is an important step to ensure that the new rules are commercially sound and to reflect the reality of current working practices and needs. The only true objective test would be based on matters of fact, such as a day-count test. However, there are other factors which the government wishes to take into account, so for some complex cases there will still be some doubt. One way around this might be for HMRC to provide a ruling service – even if it is paid for by taxpayers who wish to obtain certainty in complex cases.

There could still be some areas of doubt, perhaps a couple who divorce and one decides to return to their home country abroad, yet temporarily retains part ownership of the family home which is in the UK. ?It is hoped that there will be sufficient flexibility on the part of HMRC to deal with this type of situation.

The new rules should also cater for the situation which is covered in the current guidance where an individual is unexpectedly present in the UK, perhaps due to illness. If exceptional circumstances are to be included, then perhaps there should be more guidance on what work can be done in the UK and the evidence that the individual will need to provide to show that their circumstances are exceptional.

Overall, the proposed new rules will be a welcome introduction. In most cases, an individual’s residence is certain - probably for around 99 per cent of cases. The real question is whether the proposed rules will reduce the remaining one per cent. n