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United Kingdom: Proposed statutory residence test

In June 2011, the UK Government launched a consultation document on the introduction of a statutory residence test which the government proposed to introduce in April 2012. This has now been delayed until 6 April 2013. The response to this consultation has recently been issued providing greater clarification.

Residence status in the UK has often created uncertainty as we currently have limited legislation, leaving residence status to be decided mainly via case law. This has led to an unsatisfactory position with vague, complicated and subjective rules. So the introduction of a statutory residence test (SRT) is welcome. The UK government wants the SRT to be transparent, objective and simple to use so that individuals have a clear view of their tax position, to attract individuals and business to the UK and also to ensure that individuals pay the right amount of UK tax. The proposed SRT defines tax residence for individuals and not companies which have a different code. It applies to income tax, capital gains tax and inheritance tax (superseding all previous guidance legislation and case law), but in particular it is noticeable that it does not apply to the national insurance contribution scheme.

Under the current rules an individual will be treated as UK resident if they:

  • Spend 183 days or more in the UK in any tax year (UK tax year runs from 6 April to 5 April)
  • Come to the UK intending to work or live here permanently or with no particular end date
  • Come to the UK temporarily and spend 91 days or more in the tax year in the UK (tested over an average four year period)
  • Come to the UK for a purpose such as employment for at least two years
  • Usually live in the UK and go abroad for short periods

UK residence is not just based on the amount of time spent but also connections with the UK such as family, business, economic etc. This means that there is difficulty in knowing what connections are relevant as well as the extent of their effect on residence status and at what point the build up of connecting factors may change residence status.

Under the proposals the key principle is that residence should have an adhesive nature and, therefore, it would be more difficult to lose UK residence than to acquire it. As such, the ties to the UK should be reduced when seeking to acquire non-residence status. 

There are three parts to the test:

  • Part A – conclusive non-residence factors to make an individual non-resident if certain conditions are satisfied (‘the automatic overseas test’).
  • Part B – conclusive residence factors to make an individual resident if certain conditions are satisfied (‘the automatic residence test’).
  • Part C – which contains other connecting factors to determine residence if parts A and B do not apply (‘the sufficient ties test’).

Under Part A an individual will be conclusively non-resident if they:

  • Were non-resident in the UK in all of the previous three tax years and are present in the UK for fewer than 46 days in the current tax year, or
  • Were resident in the UK in one or more of the three previous tax years and are present in the UK for fewer than 15 days in the current tax year, or
  • They leave the UK for full-time work overseas and are present in the UK for fewer than 91 days in the tax year and no more than 20 days are spent working in the UK in that tax year. The response to consultation proposes either to increase the 20 days to 25 or to increase the hours that constitute a working day from three to five hours.

If an individual does not fall within Part A, it does not mean that they are UK resident but they then need to consider Parts B and C. 

Under Part B an individual will be conclusively resident if Part A does not apply and they:

  • Are present in the UK for 183 days or more in the tax year, or
  • Have only one home and that home is in the UK and is available for more than 90 days (or have two or more homes which are all in the UK), or
  • Carry out full-time work in the UK, employed under a contract of employment for at least 12 months (or carrying out a trade/profession) for 35 hours per week or more and no more than 25% of their duties are performed overseas.

If the individual does not satisfy Part B it does not mean that they are resident, you then move to Part C. Part C applies if the individual residence status cannot be determined by Parts A and B. The general principle is that the more time an individual spends in the UK the fewer connections someone must have in the UK to remain non-resident. Part C takes the number of days an individual spends in the UK and compares it to the number of connecting factors.

The broad connecting factors to be used are:

  • Family - spouse/civil partner (or common law equivalent) or minor children are resident in the UK
  • Accommodation - an individual has accessible accommodation in the UK and makes use of it in the tax year
  • Work – individual does substantive work in the UK but is not full-time
  • Presence – an individual spends 90 days or more in the UK in either of the previous two tax years
  • Time – an individual spends more days in the UK in a tax year than in any other country.

These factors provide an indication of where the centre of a person’s life is and are combined with days spent in the UK to determine residence. The consultation proposes separate scales for arrivers and leavers in order to make it more difficult to become non-resident for leavers and far easier to become resident for arrivers. So taking these connecting factors and combining them with the days spent in the UK provides the following basis.

If an individual is non-resident in all of the previous three tax years (i.e. an arriver to the UK) the following connecting factors will be used:

  • He has a UK resident family
  • Has substantive UK employment/self-employment
  • Has accessible accommodation in the UK
  • Spends 90 days or more in the UK in either of the previous two years

To determine the residence status you would use table 1 below.

two tables that determine residence status in the UK

If an individual is resident in the UK in one or more of the previous three tax years (i.e. a leaver from the UK) the following connecting factors will be used:

  • He has a UK resident family
  • He has substantive UK employment/self-employment
  • Has accessible accommodation in the UK
  • Spends 90 days or more in the UK in either of the previous two years
  • Spends more days in the UK in a tax year than in any other country

To determine the residence you would use table 2 on the right.

In summary, whilst parts A and B are very clear there will inevitably be some uncertainties within Part C to consider. However, the proposals do provide greater clarity on questions of residence which arise after 5 April 2013 and allow individuals greater scope to arrange their affairs. It has not yet been confirmed that legislation will be brought forward to apply from April 2013. There are no indications to suggest otherwise but the final form of the legislation will not be known until the new calendar year.

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