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Minor improvements announced to proposed statutory test of tax residence


A statutory test of tax residence will be introduced from 6 April 2013 with some small changes from the Government's original proposals, according to a summary of consultation responses published jointly by the Treasury and HM Revenue & Customs (HMRC).

At present the UK's law on tax residence depends on past court rulings and guidance from HMRC. Many of the cases were decided some time ago and ''do not reflect modern work or travel patterns. As a result, the rules for determining whether an individual is tax resident in the UK can sometimes be vague or appear outmoded'' according to the Exchequer Secretary to the Treasury, David Gauke. The aim of the changes is "to provide greater simplicity and clarity."

The new test will apply only for the purposes of income tax, capital gains tax, and, so far as the residence of individuals is relevant to them, inheritance tax and corporation tax. It will not apply to national insurance contributions.

The test will be divided into three parts. Part A contains factors that would be sufficient in themselves to make an individual not resident. Part B contains factors that would be sufficient in themselves to make an individual resident. Part C contains other connection factors and day counting rules which will only need to be considered by those whose residence status is not determined by Part A or Part B.

Part A of the test will automatically determine that an individual is not resident in the UK for a tax year if 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 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 15 days in the current tax year. The original proposal was that an individual who was resident in one or more of the last three tax years must be present in the UK for fewer than 10 days in the current tax year. This was increased to 15 days as a result of responses to the consultation.

In addition Part A of the test provides that an individual who leaves the UK to carry out full-time work abroad will be automatically non resident, 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. As a result of responses to the consultation the government is going to consult further on two alternative options to amend the definition of full time work abroad. These are increasing the number of working days allowed in the UK from 20 to 25 working days; or alternatively increasing the number of hours that constitute a working day from 3 to 5 hours. Increasing the number of hours that constitute a working day would mean that only days on which at least five hours of work was performed in the UK would count as a UK working day.

The Government also proposes that international transportation workers, such as pilots and mariners, will not be eligible for the full time work abroad condition.

Chris Thomas, a tax law expert at Pinsent Masons, the law firm behind Outlaw.com, said that the proposals appeared broadly positive

“The substance of the test is largely unaltered, but does contain some helpful clarifications and relaxations, especially around the qualifying conditions for full time work abroad and the proposal to increase time which can be spent working in the UK without triggering automatic residence," he said. "No doubt some will be disappointed that the relaxations do not go further – and I would certainly have liked to see the regime extended to NICs."

If Part A of the test does not apply, an individual will be automatically resident for the tax year under Part B if they are present in the UK for 183 days or more in a tax year; or 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 carry out full-time work in the UK.

The Government is going to consult further on whether to increase the qualifying period for full time work in the UK from 9 months to 12 months. International transportation workers such as pilots and mariners will not be eligible for the full time work in the UK condition.

Part C of the test applies only to those individuals whose residence status is not determined by Part A or Part B and, therefore, whose circumstances are less straightforward.

Under Part C an individual would need to compare the number of days they spend in the UK against a small number of clearly defined connection factors. The connection factors include: the individual’s spouse or civil partner or common law equivalent or minor children are resident in the UK;  the individual has accessible accommodation in the UK and makes use of it during the tax year; the individual does substantive work in the UK (but does not work in the UK full-time); the individual spent 90 days or more in the UK in either of the previous two tax years; and the individual spends more days in the UK in the tax year than in any other single country. These connection factors will be combined with day counting into a “scale” to determine whether the individual is resident or not.

"Overall it is important to keep in mind that this does represent a substantial improvement over the current regime, and should for most help to promote the certainty that has been so badly lacking," said Thomas. "This is especially relevant in the case of short term business visitors, where the current restrictions on duties performed in the UK create a major headache for many employers."

"However there is still quite a lot of complexity, especially around the meaning of the various definitions, and careful structuring will still be needed in many cases – there must be a real doubt as to whether the new regime will really be “transparent, objective and simple to use” as the Government has promised," he said.

A further draft of the legislation will be published in Finance Bill 2013 later in the autumn. A final version will be published shortly after Budget 2013.

The Government published “Statutory definition of tax residence: a consultation” on 17 June 2011 and the consultation closed on 9 September 2011. On 6 December 2011 the Government announced that it would defer the introduction of the statutory residence test and reforms to ordinary residence until 6 April 2013 to give more time for further consultation.

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