Finance Bill 2013: Changes to the Statutory Residence Test

As of 6 April 2013, whether an individual is resident in the UK for tax purposes will be determined by the Statutory Residence Test.

It is designed to give taxpayers greater certainty and clarity as to whether or not they are UK-resident for tax purposes. This in turn will provide certainty as to whether or not they are subject to UK income tax and capital gains tax.  Due to the drafting of these rules, it remains to be seen whether the goal of greater clarity will be met.

In December 2012 HM Revenue & Customs produced draft guidance and legislation for the Statutory Residence Test.  The legislation has since been updated in the draft Finance Bill 2013.

The Main Changes

The main changes to the statutory residence tests were the introduction of ‘sufficient hours’ and the addition of a fifth automatic overseas test.

Sufficient Hours

In the first draft both the third automatic overseas test and third automatic UK test contained reference to ‘full-time work’. This phrase has now been replaced with ‘sufficient hours’, and there is a corresponding test to determine whether an individual has worked ‘sufficient hours’.

The sufficient hours test has been criticised as it does not allow for an adjustment (when determining whether sufficient hours have been worked) for periods of absence other than annual leave, parental leave, sick leave or embedded non-working days.

Therefore an adjustment is not allowed for agreed ad-hoc leave, such as compassionate leave or study days.

The provisions regarding gaps between periods of work are also highly restrictive, applying only where the gap is one between two employments.  It has not been extended to gaps between an employment and a trade, or two trades.

Generally speaking, the sufficient hours test is met when an individual works on average 35 hours per week after making the allowed adjustments, although the actual calculation is complex.

Fifth Automatic Overseas Test

A fifth automatic overseas test has been added where an individual dies during the tax year.

It is, loosely, a test which applies to those who die during the year and who have become non-resident in a previous year because they have gone to work abroad.

Potential Problems

The two most important areas where changes have not been made are in respect of the accommodation tie and of the definition of a ‘home’.

The accommodation tie still contains concepts which have no precise definition such as ‘a holiday home or temporary retreat’.  This is likely to lead to differing interpretations of what is and what is not a holiday home by HMRC and taxpayers.

Perhaps more importantly the Statutory Residence Test uses the concept of home, which is a notoriously difficult word to pin down as it can bear a wide range of meanings.  Unfortunately no clear and exhaustive definition of what constitutes a home has been provided by the Statutory Residence Test which is likely to cause ambiguity in its application.

Highlights from the Autumn Statement 2012 & Draft Finance Bill 2013

A summary of the key changes affecting businesses, individuals and estates from the Autumn Statement 2012 and the Draft Finance Bill 2013

Businesses

Annual Investment Allowance

The Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 per annum to £250,000 per annum.

The increase will take effect from 1 January 2013 and will last for 2 years.

The increased relief should be of benefit to those businesses that intend to invest in capital assets/expansion during the next few years.

Businesses whose accounting periods do not end on 31 December 2012 will need to take care when apportioning the amount of the AIA available to them in accounting periods that straddle the change.  This is an area that has caused confusion following numerous changes to the amount of the AIA in recent years.

Cash Basis for Small Businesses—Income Tax

A new simpler scheme is to be introduced so that ‘eligible sole    traders and partnerships’ will be able to calculate their taxable profits on a cash basis if they wish.

Eligible sole traders and partnerships will include those whose receipts for the year are below the VAT registration limit (currently £77,000) or twice the VAT registration limit (currently £154,000) for recipients of the Universal Credit.  Businesses must leave the scheme where their receipts exceed twice the VAT registration limit.

There are particular rules for determining the ‘receipts’ and ‘allowable payments’ of the business and any losses may only be carried forward against future profits.

The scheme is likely to be of use to smaller traders; however care will need to be taken to ensure that the intricacies of the scheme are adhered to.

Corporation Tax Rates

The main rate of corporation tax for FY 2014 has been reduced by an additional 1% from the rates previously announced.

The rates will therefore be:

FY 2013

Small Companies Rate      20%

Main Rate                              23%

FY 2014

Small Companies Rate      20%

Main Rate                              21%

The latest reduction means that the gap between the small company’s rate and the main rate of corporation tax is becoming ever smaller, thus reducing the potential impact of having associated/group company structures.

 

Individuals & Estates

Personal Allowance

The personal allowance will be increased to £9,440 in 2013/14.  This will save basic-rate taxpayers up to £267, although changes to the basic rate band mean that higher-rate taxpayers are unlikely to benefit

Income Tax Rates

The additional rate of tax is set to be reduced from 50% to 45% with effect from 6 April 2013.

Pension Annual Allowance

The annual allowance for tax relieved pension savings is to be reduced to £40,000 with effect from the tax year 2014/15.

Where a taxpayer’s gross pension contributions (including employer contributions) exceed the annual allowance a tax charge will apply.  The amount of the charge is calculated so as to eliminate tax relief on the excess contribution.

Inheritance Tax—Nil Rate Band

The nil rate band will be increased to £329,000 with effect from 2015/16.

Don’t forget—the unused portion of the nil rate band may be transferred to the estate of the surviving spouse.

 

Finance Bill 2013

The Finance Bill 2013 has been released in draft and includes legislation in respect of:

  •  Income tax reliefs that will be limited to the higher of £50,000 and 25% of adjusted net income.  This does not apply to gift aid on charitable giving.
  •  Entrepreneurs Relief and Shares Acquired under EMI Share Options—subject to the trading/employment conditions being met, entrepreneur’s relief will be available where the EMI options were granted at least 1 year prior to the disposal of the shares.  It is not necessary for the EMI options to have been exercised 1 year prior to the disposal nor for the employee to hold at least 5% of the share capital.
  •  Statutory Residence Test—the draft rules set out a legislative test to determine whether a person is UK resident in a given tax year.  This should give more certainty to taxpayers, however given that the rules are more prescriptive than the current case law based guidance taxpayers should consider their position before the new rules come into force on 6 April 2013.

Please note that our offices will be closed for the Christmas period from Saturday 22 December 2012, reopening on Wednesday 2 January 2013.

 

Wishing you a Merry Christmas & a Happy New Year from all the team at Eaves & Co.

 

Draft Finance Bill 2013 Published

The suggested content of the Finance Bill 2013 has now been published.  If it obtains Royal Assent then the new rules it contains will form part of UK tax legislation from 6 April 2013.  As ever, it is a long document and briefly here are some of the highlights:-

  •  The proposed statutory residency test is included in the Finance Bill 2013.  It has been changed from the draft published under the last consultation and it is therefore worth reviewing these new rules in more detail if they apply to you or your clients.
  • Income tax reliefs are to be limited to £50,000 or 25% of total income
  • Shares acquired through an EMI share option scheme could qualify for Entrepreneurs relief after 1 year from the date of the option’s grant (as opposed to the current rules where the shares had to be owned for a year before a sale).  The 5% shareholding requirement is also removed from shares acquired under EMI options.
  • Pension payments made by employers will only be an exempt benefit to an employee, not the family of an employee.

As ever there are a number of changes.  If you would like advice on any of these please contact Eaves and Co for further details on how the Finance Bill 2013 could affect you.