UK Tax Residence - Statutory Residence Test

Given our proximity to the UK and the number of people in the Island with historic links to the UK the topic of UK tax residence is always of interest.  In his 2011 Budget George Osborne announced there will be a consultation on introducing a new statutory test for UK tax residency.  The consultation document was released on 17 June 2011.

In broad terms the proposals if adopted as drafted seem to make it harder for those individuals with continuing links to the UK to break residence.  For those with more complex arrangements the proposals will introduce a direct link between the time that can be spent in the UK and ongoing connections with the UK.  This is merely an extension of the recent trend whereby HMRC has placed less emphasis on the number of days but have considered other factors.  It is a gradual move to looking more holistically at the individual's centre of life when considering residency.  

The consultation can be accessed on the following link, the press release can be accessed here.  

HMRC's view is that for the majority of individuals the statutory residence test  (SRT) will have no impact on their residence status as they will remain clearly resident or resident.  The advantage will be that they will be able to clarify their status. The purpose of the SRT is to clarify the treatment for people with more complicated circumstances.

It is anticipated that the current rules will apply up to 5 April 2012 and that the SRT will not be retrospective.  It will be important however for individuals to consider their position under the current rules as this has an impact under the proposed rules.  

The UK government wants to ensure that the SRT does not lead to the situation whereby individuals can become non resident for tax purposes without significantly reducing the extent of their connections with the UK, but also recognise that they should not be regarded as resident in the UK if there is little connection.  They also recognise that they do not want the spectre of tax residence to discourage people from visiting the UK which will generate economic growth.

In the consultation document it is stated that the SRT has been designed so that it is harder for existing UK resident to become non resident for tax purposes.  The proposed test is wider than simply counting the days spent in the UK and also considers other factors and connections.  Commentary in the consultation recognises that the weight and relevance of each connection should be clearly defined.

The proposed tests are as follows:

Part A
An individual will not be resident in the UK for tax purposes if they meet any of the following conditions:

  • They were not resident in UK for all of previous 3 tax years and present in the UK for fewer than 45 days in the current tax year.
  • They were resident in the UK for more than 1 of the previous 3 tax years and present in the UK for fewer than 10 days in the current tax year.
  • They leave the UK to work under a full time contract of employment abroad  and in the current tax year are present in the UK for fewer than 90 days and of that time do not spend more than 20 days working in the UK (3 hours or more).

Part B
If none of the tests in part A are satisfied an individual will be resident in the UK if they meet either of the following conditions:

  • They are present in the UK for 183 days or more
  • They have one home and that is in UK (or 2 and both in UK)

Part C
This test applies if residence has not been determined by test A or B.  Part C links the number of days that an individual can spend in the UK with their UK connections.  The test draws a distinction between people coming to the UK and those leaving. Connections are defined as follows:

  • Immediate family
  • Accessible accommodation
  • Substantive work in the UK
  • UK presence in either of previous 2 years (90 or more days)
  • More time in the UK than other countries

Additionally some rules which are currently applied when people leave or come to the UK which are currently applied by concession will be incorporated into statute.  Anti avoidance rules are being considered to prevent people leaving the UK for a short time and extracting large amounts of investment income to avoid UK tax.

No change has been proposed to the midnight or 'Cinderella' test and no changes to the transit rules for people travelling through the UK as a passenger.

Ordinary residence
The concept of ordinary resident is different from residence.  Individuals that are resident but not ordinarily resident in the UK have a special status. It is particularly important to individuals from the UK but working abroad.  The government is seeking views on the following options:

  • Abolishing the concept of ordinary residence for tax purposes except for overseas workday relief.
  • Abolishing the concept of ordinary residence for tax purposes except for overseas workday relief but restrict this relief to non UK domiciled individuals only. 
  • Retain  the concept of ordinary residence for tax purposes but put the definition on a statutory footing.

The closing date for comments on the consultation is 9 September 2011.  A summary of the responses will be published in the autumn and draft legislation will be published later in 2011 on which there will be an opportunity to comment.

With the launch of the consultation it is inevitable that there will be a significant amount of press commentary. If you have any concerns or views you would like us to put to HMRC please contact me. As the rules are only released for discussion at this point we would suggest that if you feel you will be adversely impacted that you seek advice before taking any action. The rules may change before they are finally implemented.   Residence by its nature is a very personal and subjective area.

Should you have any questions or concerns you wish to discuss, please use the contact details on this page to speak to one of our tax team leaders.