The UK Government has recently announced proposals to introduce a “statutory test” for UK tax residency, which will have a significant impact on employers with international assignees.
The aim of the proposals is to simplify the tangle of rules that currently apply to individuals who wish to claim non resident, not ordinarily resident, or non domicile status. Currently there is no definition of these terms in UK legislation. Instead, rules have emerged from archaic case law and published Revenue guidelines which are both complex and subjective.
Proposals
The current tests for UK tax residency focus on intentions and actual physical time spent in the UK. For example, any individual spending 183 days or more in the UK during any one tax year (6th April-5th April) will automatically be considered a resident of the UK. Recent guidelines also require an individual to assess their situation on a subjective basis reviewing factors such as family, accommodation, and economic interests.
The proposed statutory residency test is split into three parts. Under “Part A” you will automatically be considered non resident if you meet one of the criteria. Under “Part B”, meeting any one of the criteria will be sufficient to deem an individual resident. “Part C” is then intended to cover those situations that are not covered by Parts A or B.
Part A
If you fall into one of the categories in part A, then you can conclusively say that you will be non resident in the UK for the tax year. The categories are:
- You were not resident in the UK in all of the previous three tax years or are present in the UK for fewer than 45 days in the current tax year, or
- You were resident in the UK in one or more of the previous three UK tax years and are present in the UK for fewer than 10 days in the current tax year, or
- You leave the UK to carry out full time work abroad and 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
If none of the situations in Part A applies to you, then you will have to review Part B. If one of these categories applies to your situation, then you will be considered a UK resident:
- You are present in the UK for 183 days or more in the tax year.
- You have only one home and that home is the UK.
- You carry out full time work in the UK.
Part C
If none of the above applies, then you would need to review Part C, and consider if any of the following factors apply:
- Family – your spouse or civil partner or common law equivalent (provided you are not separated from them) or minor children are resident in the UK.
- Accommodation – you have accessible accommodation in the UK and make use of it during the tax year.
- Substantive work in the UK - you do substantive work in the UK (but do not work full time in the UK).
- UK presence in previous year – you spent 90 days or more in the UK in either of the two previous tax years.
- More time in the UK than in other countries – you spend more days in the UK in the tax year than in any other single country.
Once you have reviewed Part C, then the meeting of one criterion is not enough to make you automatically resident. Below is a table showing the impact of the above factors on the position of residency, comparing the number of days of physical presence in the UK, with the number of factors which apply from Part C.
|
Days in the UK |
Impact of connection factors |
Impact of connection factors |
|
< 10 days |
Always non resident |
Always non resident |
|
10 - 44 days |
4 |
Always non resident |
|
45 - 89 days |
3 |
4 |
|
90 - 119 days |
2 |
3 |
|
120 - 182 days |
1 |
2 |
|
>182 days |
Always resident |
Always resident |
Other changes
The Government is also reviewing the concept of “Not Ordinarily” resident status. Currently this indicates a situation when you would not ‘ordinarily’ or typically live in the UK. For example if you are in the UK for a temporary period or non settled purpose.
There are two options being considered. The first is the abolishment of the term, although some consideration will have to be made for individuals who currently rely on this status to make claims for “Overseas Workday Relief”.
The alternative would be to introduce a statutory definition for this term in the same way as for residency. The current proposal for this option is that individuals who are resident in the UK should be ordinarily resident, unless they have been non resident in the UK for the previous five years. The status may then only be available for a maximum of two full years following the year of arrival.
There is currently no proposal for a transition period or transitional rules for the new regime. The new rules would apply from 6th April 2012, and would not be applied retrospectively. You would be required to know your residency status under the old rules for the previous three years and then apply the new rules for the current tax year, meaning that the schemes would have to run concurrently for at least three further years.
Summary of impact and GTN view
One of the most significant changes is that individuals assigned overseas, but who will be working in the UK for more than 20 days in the tax year, will not meet the conditions required to break residency. The definition of “working day” in this context has been narrowed to any day on which 3 or more hours are worked. If UK residency is not broken, then the individual will be required to report worldwide income to the UK and claim “foreign tax credits” to minimize double taxation. If the UK tax rate is higher than the overseas rate, a balancing payment will remain in the UK which may represent an incremental tax cost to the assignee (or employer, where equalised). GTN view: Employers will need to consider whether they should restrict business trips back to the UK to remain under 20 days per year to ensure non residence status applies and avoid potential additional costs. It will also be more important for assignees to keep travel calendars and evidence of days worked both in the UK and overseas.
Spouses, who leave the UK with the assignee, are currently granted the same UK tax concessions as the assignee (for example split year residency in the years of departure and return). Under the new proposals, this will only be permitted if their sole or main home is outside of the UK. If an assignee’s family remains in the UK and occupies accessible accommodation, then the assignee already possesses two of the ‘connection’ factors for Part C of the residency test. Depending on the days spent back in the UK during the year (and assuming that the family remains this could be significant), the individual could easily retain his UK residency status, putting him in the same position as above. GTN view: We expect that this will have a significant impact for UK to EU assignments, where many assignees adopt a “commuter” approach and choose not to move the family home to the host location.
Individuals moving to the UK are more likely to be resident from day one. The two year requirement for split year residency will no longer exist. Thus, any individuals coming to the UK for nine months or more will be considered as resident in the UK from the date of their arrival. GTN view: The approach to accelerate UK tax residency may however create additional confusion with an increasing number of assignees regarded as tax resident in both the home and host location. It will therefore become increasingly important to review applicable tax treaties to determine “residence”, and utilise such claims to override domestic legislation
There is also a question about whether “ordinarily resident” status will remain, and if not, how this will affect those individuals who currently claim overseas workday relief. Government proposals suggest that even if this is retained, it would be restricted to two full tax years after the tax year of arrival. GTN view: This proposal would effectively reduce the ability to claim overseas workday relief from the current three years down to two, which may significantly increase the tax cost for assignees (and tax gross ups for assignees under tax equalisation policies).