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11 / 19
November 2011

The proposals to introduce a statutory residence test, issued in June, were intended to form the basis of legislation which will apply from 6 April 2012. It was hoped the proposals would clear the confusion which surrounds the current mixture of HMRC practice, guidance and case law.

But having now been involved in the process of responding to the proposals through the consultation process, and attending a meeting at the Treasury to discuss them, it is clear that these proposals are not as straightforward, or as fair, as many first thought.

The proposed new test will be based on looking at how many factors an individual has “connecting” them with the UK. These connections will look at such things as the number of days in the UK, available accommodation, family and previous residence pattern.

The proposals are not meant to alter significantly what is currently understood to be UK tax residency.  However, a certain amount of complexity has been introduced with the various new day counting rules. Ironically, the proposed new rules do make it easier for longer term non residents that do not work abroad to spend more time back in the UK, whilst those going abroad to work appear to be penalised by having to restrict their visits back to the UK even further.

In addition, although most people would accept having available accommodation in the UK as a connecting factor, having a spouse, common law or civil partner in the UK as another factor means that a person immediately has two factors if their “other half” remains in the UK.

There is also a change to the split year rule. Under the current rules there are concessions which treat the tax year as split into two periods of non-residency and residency where an individual leaves or comes to the UK permanently.

A new split year rule is proposed to be put on a statutory footing, but it is to be aligned with the “connection rules” in the proposed statutory residence test.  This means it will be harder to benefit from split year treatment.

In particular, if someone moves “permanently” abroad, to benefit from split year treatment, they must not set foot in the UK for the remainder of that tax year which may be impractical, for example, if they are selling up in order to sever their connections with the UK, or indeed have to return because of family obligations for even one day.

So whilst these proposals are welcome, we await the results of the consultation period with extreme interest to see if the Government is willing to incorporate any of the suggested amendments to their own proposals. 

For employers and employees in particular, these rules will have a profound effect on secondment policies both into and out of the UK in the future. So with the draft legislation expected to be issued very shortly, now is the time to consider how these new ‘factors’ will affect your future plans.

Janet Pilborough-Skinner is Private Client Director, Mazars, Milton Keynes.

If you would like to ask the author a question on this or a related topic email: emc2@mazars.co.uk

In Depth

The Statutory Residence Test

The proposed new test will have three parts:

  • Part A contains conclusive non-residence factors that will be sufficient in themselves to make an individual not resident.  If an individual satisfies any of the conditions in Part A for a tax year they will definitely be not resident in that tax year.
  • Part B contains conclusive residence factors that will be sufficient in themselves to make an individual resident.  If Part A does not apply, but the individual satisfies any of the conditions of Part B, they will definitely be resident in that tax year.
  • Part C contains other connection factors and day counting rules which will only need to be considered by those whose resident status is not determined by Part A or Part B.  That is, if none of the conditions of Part A or Part B is satisfied, the individual should consider Part C. 

In rare situations where an individual satisfies one of the conditions in both Part A and Part B, then Part A takes precedence and the individual will definitely be not resident in that year.

Part A Conclusive Non-Residence

An individual is not resident in the UK for a tax year if they fall under any of the following conditions:

  • They were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 45 days in the current tax year; or
  • They were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current tax year; or
  • They leave the UK to carry out full-time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B Conclusive Residence

An individual will be conclusively resident for the tax year under Part B if they meet any of the following conditions:

  • They are present in the UK for 183 days or more in a tax year; or
  • They have only one home and that home is in the UK (or have two or more homes and all of these are in the UK); or
  • They carry out full-time work in the UK.

Part C Other Connection Factors and Day Counting

Individuals not resident in all of the previous three tax years

The following connection factors may be relevant if they occur at any point in the tax year, namely that the individual:

  • has a UK resident family;
  • has substantive UK employment (including self-employment);
  • has accessible accommodation in the UK;
  • has spent 90 days or more in the UK in either of the previous two tax years.

 These connection factors are combined with days spent in the UK and determine residence status as follows:

Days spent in the UK Impact of connection factors on residence status
Fewer than 45 days Always non-resident
45-89 days Resident if individual has 4 factors (otherwise not resident)
90-119 days Resident if individual has 3 factors or more (otherwise not resident)
120-182 days Resident if individual has 2 factors or more (otherwise not resident)
183 days or more Always resident

Individuals resident in one or more of the previous three tax years

The following connection factors may be relevant if they occur at any point in the tax year, namely that the individual:

  • has a UK resident family;
  • has substantive UK employment (including self-employment);
  • has accessible accommodation in the UK;
  • has spent 90 days or more in the UK in either of the previous two tax years;
  • spends more days in the UK in the tax year than in any other single country.

The way these connection factors are combined with days spent in the UK to determine residence status is as follows:

Days spent in UK Impact of connection factors on residence status
Fewer than 10 days Always non-resident
10-44 days Resident if individual has 4 factors (otherwise not resident)
45-89 days Resident if individual has 3 factors or more (otherwise not resident)
90-119 days Resident if individual has 2 factors or more (otherwise not resident)
120-182 days Resident if individual has 1 factor or more (otherwise not resident)
183 days or more Always resident

Split years

The tax year can be split into periods of residence and non-residence when an individual comes to, or leaves, the UK part way through a tax year. The proposed new rules will treat a tax year as being split into periods of residence and non-residence only if a person:

  • becomes resident in the UK by virtue of their only home being in the UK;
  • becomes resident by starting full-time employment in the UK;
  • establishes their only home in a country outside the UK and becomes tax resident in that country and does not come back to the UK in that tax year;
  • loses UK residence by virtue of working full-time abroad; or
  • returns to the UK following a period of working full-time abroad.

A tax year will not be treated as split where an individual’s residence status changes due to changes in the number of connection factors under Part C.  If a person becomes not resident by virtue of leaving the UK to work full-time abroad and is accompanied by their spouse or civil partner, split year treatment would also apply to the spouse or civil partner provided their sole or main home is outside the UK.

Anti-avoidance provisions

The proposal is to introduce a five-year non-residency rule for income tax aimed specifically at forms of income which can be manipulated, such as dividends paid by closely controlled companies.  The rules will be very similar to the current rules for capital gains tax.

Transitional rules

The Government does not propose to introduce any transitional rules at present.  The current rules will continue to apply until the statutory test is introduced and, therefore, it is not proposed to allow individuals to apply the new definition retrospectively to calculate tax for prior years. However, there may be an argument to allow individuals to elect to use the new rules to apply for the previous three years so that they can decide with certainty what the position is for 2012/13 to 2014/15.

To read the full technical report click here