A Tax Test for all Expats

 Martin Rimmer, Tax Technical Manager, the Fry Group, talks us through HMRC's statutory residence text consultation and outlines what it means to British expats.

In the March 2011 budget, the UK Government announced its intention to formulate a legal definition of residence. The aim was to come up with a framework which could be easily used to help people decide with certainty whether they are resident in the UK or not year on year. On 17th June 2011, the Government issued a Consultation Paper outlining their thoughts. After the consultation period ends, new legislation will be enacted which will bring new residence rules into effect on 6th April 2012.

 Now that the Government’s thoughts on these matters are known, it is clear that the proposed changes will impact the UK tax planning of every British expatriate anywhere in the world to a greater or lesser degree. Happily, the consultation document shows that the government has a good appreciation of the difficulties people have faced when trying to establish whether they are resident in the UK or not. It is clear that the Government is striving to arrive at a new set of rules which are faithful to the principles established in case law over the years.

 If there are no major changes after the consultation, 6th April 2012 will herald a new system in which residence status is decided on an annual basis, with each year being viewed in isolation from the previous one. One of the principles established over the years is that residence has an ‘adhesive quality’. So, the new rules seek to make it harder to break residence for UK tax purposes than to become resident again or to drift back into residence.

The well-known ’91 day average test’ will be scrapped. Instead:

  • anyone who is present in the UK for 183 days or more will always be resident
  • anyone who is present in the UK for less than 10 days will always be non-resident
  • those who fall outside of these narrow definitions will be reviewed through a series of tests
  • Test A – a ‘Conclusive non-residence test’ – if certain conditions are met, the individual is definitely non-resident
  • Test B – a ‘Conclusive residence test’ – if certain conditions are met, the individual is definitely resident
  • Test C – an ‘Other connection test’ – if the results from tests A and B are inconclusive, the matter is determined by a combination of time spent in and a person’s connectedness to the UK. Test C operates a sliding scale whereby the more a person is connected to the UK, the less time they may spend in the UK during the year. The connecting factors include whether the individual has family, employment and accommodation in the UK, how much time has been spent in the UK in the two previous tax years and whether the individual spends more days in the UK than in any other country.

The number of factors present will set the limit on the maximum number of days a person may spend in the UK in a particular tax year. For example, if someone has 4 or more of the factors present in the year, the maximum number of days they can spend in the UK is 44. If they have 3 or more factors, the maximum number of days is 89 and so on.

 At first glance, the proposed rules seem basically unchanged for those leaving the UK for full-time overseas employment, save a complication if they work for more than 20 days in the UK per tax year. This will be a tremendous relief to many thousands of expatriates.

 However, anyone leaving the UK for any other reason (retirement, change of lifestyle etc) will find the rules quite restrictive and an exit from the UK would need to be planned very carefully. For example, in certain circumstances leaving the UK for anything less than full-time overseas employment and spending more than 10 days in the UK in the year of departure, will still mean ensuring resident status in the UK for tax purposes for that year. As a result, the timing of a departure from the UK is likely to become more important.

 For those who are already non-resident and are not working full-time, advice will be needed as to the strength of connections to the UK, and the maximum amount of time which can be spent in the UK in each year. An annual review will, almost certainly, be needed. Those who claim non-resident status whilst undertaking ‘substantive’ employment in the UK and who have other connecting factors are likely to be the most at risk of becoming resident.

 Ultimately it is a question of how carefully each expatriate plans their overseas life. The Government appears focused on applying new guidelines to those who are trying to claim non-resident status whilst everything in the way they live their life points in the opposite direction.

 For the British expatriate who lives abroad and has only modest connections to the UK, the proposals look to be good news. For those not working full time abroad, whose families remain in the UK, whose main home may be in the UK and who are keen to spend as much time in the UK as possible, the proposals are not much more concerning.

 Finally, it is important to note that this is merely a summary of the Government’s proposals. The final rules are likely to be somewhat different, and time will show just what the British expatriate will face in terms of residence rules.

The Fry Group is a specialist in residence and domicile matters, and has helped British expatriates with their UK tax and financial planning for over 100 years.  www.thefrygroup.co.uk.