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In December 2012 HM Revenue & Customs produced draft guidance and legislation for the Statutory Residence Test.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.

The Supreme Court recently upheld the Court of Appeal’s decision that Mr
Gaines-Cooper was a resident of the UK despite spending the majority of his
time in the Seychelles.

Mr Gaines-Cooper’s main argument centred on the application by HMRC of their guidance set out in the IR20 booklet on residence.  This has since been replaced by HMRC6.

Despite following HMRC’s guidance on residence, Mr Gaines-Cooper was found to be UK resident.  The case revolved around whether there was an ‘implied’ requirement for there to be a distinct break from the UK in order to become non-UK resident.

The case highlights the fact that HMRC guidance is not the law, and following it will not necessarily provide protection. Similar principles have applied in the taxpayers’ favour in recent cases on ‘reasonable excuse’ which have found HMRC’s guidance to be stricter than the actual wording of the legislation.

Going forward, the new statutory rules on residency should provide taxpayers with more clarity, however for prior years the case law principles will still apply.

The matter of UK residency is a common thread in the tax tribunal and courts over recent times.
The Gaines-Cooper case continues to be the main showpeice in relation to UK nationals leaving our shores.
However, professional advisors assisting overseas nationals coming to the UK should consider the case of Tuczka. Which has just been heard by the Upper Tribunal in favour of HMRC.
Tax residency remains a complex area and we will be glad to assist on 0113 2443502

HM Revenue and Customs have updated the guidance on residence, domicile and the remittance basis contained in HMRC6.

Since 6 April 2008, in determining how many days a person has spent in the UK for the purposes of the 183 day test and 91 day test, taxpayers have been able to exclude days in which they were not present at midnight.

However, the new guidance in HMRC6 suggests that where a person spends substantial time travelling to and from the UK, HM Revenue and Customs may seek to look at all the days in which a person was in the UK even where they were not present at midnight.   This appears to build on the recent case of Mr Gaines-Cooper.

The 91 day test is now discussed comprehensively in the coming to the UK section and rather limitedly in the leaving the UK section (in fact it is only referred to here where a person leaves to work abroad full-time), thus the implication is that HM Revenue and Customs now see the 91 day test as a way of bringing people within the UK tax net rather than a way of letting people out of it.

Please call Eaves & Co, Specialist Tax Advisors if you have any UK tax residence issues.