HMRC begin “statutory residence test” consultation
On 17th June HMRC finally started the wheels turning towards a statutory residence test by commencing a 12 week consultation period following the issue of their imaginatively entitled document “statutory definition of tax residence: a consultation”. If all goes to plan, it is hoped that draft legislation will be with us ahead of Budget 2012 with the intention of it going live from 6th April 2012.
This note contains an overview of the key proposed terms, however those interested in a more in-depth read (!!) can read the full document at:
It will be interesting to see if this actually achieves HMRC’s aims of “…a statutory test that is transparent, objective, and simple to use. This will enable taxpayers to assess their residence status in a straightforward way. It also intends that the tax residence status of the vast majority of people will be unaffected by the introduction of a statutory test…”.
The document confirms that to be fair, any Statutory Residence Test (SRT) should take into account both the amount of time the individual spends in the UK and the other connections they have with the UK. It also goes on to confirm that “…to avoid the complexity of current case law, the test should not take into account a wide range of connections; relevant connections should be simply and clearly defined and the weight and relevance of each connection should be clear…”
So what are the proposals?
It is proposed that the SRT will have three parts:
- Part A containing conclusive non-residence factors that would be sufficient in themselves to make an individual not resident.
- Part B containing conclusive residence factors that would be sufficient in themselves to make an individual resident.
- Part C containing other connection factors and day counting rules which will only need to be considered by those whose residence status is not determined by Part A or Part B.
If an individual satisfies any of the conditions at Part A for a tax year they will definitely be not resident in that tax year. If Part A does not apply but the individual satisfies any of the conditions in Part B, they will definitely be resident in that tax year. If none of the conditions at Part A or Part B are satisfied, the individual should consider Part C.
Part A of the test will conclusively determine that an individual is not resident in the UK for a tax year if they fall under any of the following conditions, namely they:
- were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 45 days in the current tax year; or
- were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current tax year; or
- leave the UK to carry out full-time work abroad, provided they 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.
HMRC give an example of how Test A would work.
Mrs A owns businesses in several countries. She has never previously been resident in the UK but she owns a flat in London. In 2012-13 she identifies a possible opportunity to expand one of her businesses into the UK. She visits the UK several times to assess the opportunity and to recruit personnel to manage the business. She is present in the UK for only 40 days in the tax year.
Mrs A is not resident in 2012-13 under Part A of the test. This is because she was not resident in all of the previous three years; and spends fewer than 45 days in the UK during that tax year. If she had spent 45 days or more in the UK she would need to consider Part B or Part C of the test.
The document confirms that an individual who does not fall within Part A would not necessarily be UK resident. They would instead need to consider Part B or Part C of the test.
Provided Part A of the test does not apply, an individual will be conclusively resident for the tax year under Part B if they meet any of the following conditions, namely they:
- are present in the UK for 183 days or more in a tax year; or
- have only one home and that home is in the UK (or have two or more homes and all of these are in the UK); or
- carry out full-time work in the UK.
HMRC give an example of how the Part B test would apply:
Mrs C is married and lives in New York with her husband and young children. She works for an international company with offices in London, Paris and Madrid. In 2012-13 she is asked to work on a project in the London office and spends 200 days in the UK. The project lasts for fewer than 9 months. She stays in a hotel and is joined by her husband and family during the summer. She retains her home in the US.
Mrs C is resident in the UK under Part B of the test because she spends 183 days or more in the UK. If she spent fewer than 183 days in the UK, she would need to consider Part C of the test. None of the other criteria in Part B apply to her.
Where an individual satisfies a condition in both Part A and Part B, the individual would be non-resident.
We then move on to Part C, which is headed “other connecting factors and day counting”.
HMRC confirm that “…Part C would apply only to those individuals whose residence status is not determined by Part A or Part B and, therefore, whose circumstances are less straightforward…”
Without reiterating the full text of section C here, residency under this Part will be determined by a combination of “connecting factors” to the UK (such as family, accommodation, work in the UK, UK presence in the previous year and “more time in the UK than in other countries”) and actual days in the UK. It is proposed that different day “scales” be introduced for those arriving in the UK (ranging from 45 to 183 days) to those departing the UK (ranging from 10 days to 183 days).
HMRC give an example of how the Part C test would apply:
Mr D is a wealthy businessman with homes in various countries. He has not been resident in the UK prior to 2012- 13. He has business interests in the UK and owns a house in London but, until 2012-13, he spends only a few days in the UK each year. In 2012-13 his wife moves to the UK to live in the London house with their two children. His wife and children become resident in the UK. The children enrol in local schools and Mr D visits whenever he can. He spends 95 days in the UK in 2012, 80 of them working. He stays in the London house on days when he is in the UK.
Mr D is resident in 2012-13 under Part C of the test. This is because he spends 90 days or more in the UK and has 3 relevant connection factors: a UK resident family; accessible accommodation in the UK and substantive UK employment. This answer is provided by the table at paragraph 3.35 for individuals who have not been resident in any of the previous three tax years.
The overall document is 41 pages long, and whilst we haven’t fully had the time to digest the complete document, our initial thought is that this is a weighty document for something HMRC were originally looking to simplify.
It will be interesting to see how the profession views the document in the coming weeks. HMRC seem clear with its simplicity and confirm “…the Government believes the framework outlined above will allow individuals to assess their residence status simply and without the need to resort to specialist advice…”. HMRC are also considering the implementation of an online tool that effectively self-assesses an individual residency status by asking “…a small number of simple questions…”.
We would very much doubt that what is perhaps currently one of the most difficult areas to give a client clear advice on, can be so succintly summarised in 3 simple questions….without the client even needing to take professional advice!
The Consultation period is now open through until 9th September 2011. We are likely to submit our own thoughts in due course. If anyone wishes to add their own comments please feel free to email me at email@example.com.
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