Joanne is self-employed as a painter. She has always been resident in the UK, spending more than 250 days here each year. On 6 April 2012 Joanne purchased a property in Spain, and during 2012-13 she mainly lived and worked there. However, she still has a house in the UK where her husband and family live. Joanne visits the UK on a regular basis, staying in the family home. During 2012-13 a total of 60 days were spent in the UK, of which 35 were for work.
Joanne is not definitely treated as resident or non-resident since even although she now works in Spain, more than 20 days were spent working in the UK. As Joanne has previously been resident in the UK she is a leaver. During 2012-13 between 45 and 89 days were spent in the UK, so Joanne is permitted just two connection factors before being treated as resident.
In fact, she has three connection factors – UK resident family, assessable accommodation in the UK, and staying 90 days or more in the UK during the previous tax year. However, if Joanne's lifestyle remains unchanged, the last of her connection factors will no longer apply after two tax years overseas. She should therefore qualify as non-resident from 2014-15 onwards.
The Government recognises that with more certain rules regarding residency, it will be much easier in future for people to arrange a temporary period of non-residency in order to avoid a large income tax liability. For example, the owner of a limited company has accumulated large profits within the company so as to avoid higher rate income tax. Without an anti-avoidance rule it would be possible to become non-resident for a tax year, withdraw the profits by way of dividends without any additional UK income tax liability, and then return to the UK.
Such an anti-avoidance rule is likely to be similar to that which applies for capital gains tax purposes, where exemption is only available if a person is non-resident for at least five tax years.
The Government's proposals for ordinary residence are far less certain than they are residence. Ordinary residence can also have a bearing on a person's tax liability, although the consultation document makes it clear that this affects relatively few people. Two options are being considered:
- simply abolishing the concept of ordinary residence for most tax purposes.
- Retaining the concept of ordinary residence but create a statutory definition. The basic rule will be that people who are resident will also be treated as ordinarily resident unless they have not been resident for all of the previous five tax years. A person coming to the UK will be allowed to remain not ordinarily resident for up to three tax years. However, this status will not be available if a person becomes resident as a result of having their only home in the UK – this is because the Government does not want to extend the ordinarily non- resident status to people coming to live permanently in the UK.
The introduction of a statutory residence test will bring more certainty to this area of tax, although the application of the connection factors will not always be straightforward. This will especially be the case for wealthy taxpayers who may have several homes, numerous businesses, with changeable work and lifestyle patterns.
Unlike the habitual and substantial test, with the statutory residence test there is no averaging between tax years. Previously, it was possible to stay in the UK for, say, five months in one tax year, and balance this out with much shorter stays in other years. With the statutory residence test people will have to be very careful that a few extra days in the UK does not change their residence status. It will be necessary to keep detailed records, not just of days in the UK, but also of time spent working.