Comments from ACCA to HM Revenue and Customs (HMRC), August 2011.
ACCA welcomes the proposal to introduce a statutory definition of residence for tax purposes. The current situation is viewed as unsatisfactory by a significant proportion of those involved in establishing the residence for tax purposes of individuals who spend much of their time overseas. The patchwork of case law and guidance has not kept pace with changes in modern communications and working practices. Reliance on loosely defined 'connection' criteria combined with a lack of clarity as to the relative importance of those criteria causes problems for tax payers and their advisers. The proposals put forward in this consultation will go a long way to enabling tax payers and their advisers to establish whether an individual is resident in the UK or not during a given tax year.
However, while the general direction of travel is positive, much remains to be done in tightening up the definitions to be employed in the new test. Those definitions must be contained within the legislation, and be sufficiently comprehensive and robust to be capable of independent operation without the need to refer to non-statutory guidance. Any ambiguity or gaps in the definition must be resolved at the drafting stage and not left to be addressed in non-binding materials which can be changed or withdrawn at any time without consultation or review.
ACCA is disappointed that the definition cannot be extended to cover National Insurance Contributions as well as taxes. In an environment where the government is actively considering options to reduce the compliance burden on taxpayers and their employers alike arising from the dual track system of tax and NICs the failure to consider the potential for, and implications of, aligning the residence requirements looks like a missed opportunity. Clearly the current proposals should not in any way be delayed while NICs is considered, but thought should be given to ensuring that any new provisions for tax purposes are not framed so as to be fundamentally incompatible with NICs.
The proposed review of ordinary residence is welcomed, although ACCA's preferred option, in the interest of simplicity, would be to do away with the separate category altogether and provide Overseas Workday Relief through some other mechanism.
The legislation should also include scope for HMRC to exercise discretion in exceptional cases where individuals are unable to meet day count requirements as a result of either being unable to leave the UK, or forced to return to the UK from overseas due to eg civil disturbance or natural disaster. In addition to ad hoc requests, provision should be made for certain situations, eg Foreign Office advice or CAA closure of airspace, to constitute a reasonable excuse for all individuals affected by notice from HMRC.
Question 1: Do you think there are any other circumstances in which an individual should be conclusively non-resident? If so, what are those circumstances?
The current proposals are a fair and reasonable set of conditions to deal with the extremes of the taxpayer population, enabling those whose lifestyle and affairs clearly indicate a lack of the requisite connection with the UK to bring them within the tax net for a particular year (or years).
As is inevitable with any test involving 'day counting' or other arbitrary criteria will inevitably result in the occasional hard case where external factors intervene to disrupt the intentions of the individual and result in spending more days in the UK than had been intended. However the interaction with the new Part C test should reduce the number of cases where individual who had intended to be non-resident will find themselves caught in a situation where they are unexpectedly brought within the UK tax net.
Nonetheless, we would suggest raising the day limit to 15 days from 10 for "leavers", which would allow individuals the opportunity to make two separate visits of one week each during a year without triggering the need to consider the Part C test.
ACCA welcomes the retention of the full-time work abroad provisions, although the limit of 20 working days amounts to less than two days per month. While modern communications may reduce the need for employees to physically 'return to base' while eg managing overseas projects, the imposition of the three hour working day rule will make it harder for executives to avoid days in the UK becoming work days if required to return for meetings with investors or external advisers related to their overseas duties. Again, a 50% uplift to 30 work days (without changing the overall proposed limit of 90 days) is likely to fit better with modern working practices and the current proposed definition of working day.
Question 2: Do you think there are any other circumstances in which an individual should be conclusively resident? If so, what are those circumstances?
The effect of the existing rules in Part 4 of the Constitutional Reform and Governance Act, deeming MPs and sitting members of the House of Lords to be UK tax resident, ordinarily resident and domiciled for income tax, inheritance tax and capital gains tax should be retained. This could be achieved either by retaining the existing rules in their entirety (subject to any revision in the event of abolition of ordinary residence status) or by incorporating into the new legislation a term that MPs and Peers are deemed to carry out full time work in the UK, and that Part A cannot apply to them.
Day counting
The legislation should include scope for HMRC to exercise discretion in exceptional cases where individuals are unable to meet day count requirements as a result of either being unable to leave the UK, or forced to return to the UK from overseas due to eg civil disturbance or natural disaster.
Such cases will fall into two broad types, those where the factors affect only the one individual (illness, bereavement etc) and those where a class of individuals are affected (eg ex-pats forced to flee civil disturbance, or travellers trapped in the UK by closure of air space or strike action at ports and airports).
The former cases can be dealt with on an ad hoc basis as now, although guidance should be provided as to the factors considered sufficient to satisfy a breach of the statutory limits. In the second case, the legislation should include provision for HMRC to designate certain events as automatically meeting the criteria to suspend the counting of days, so as to give taxpayers certainty. Notice could be given in a prescribed format, and confirm for taxpayers that when self-assessing their residence for the year they could take into account the related delays, with a prescribed format of words for use in the "white space" on the tax return when claiming special treatment under the specified event. While there would still be a need for some level of HMRC scrutiny of such claims, the existence of a prescribed format would assist efficient processing of the claims on both sides.
Question 3(a): Do you think that these connection factors are appropriate and are there other connection factors that should be included?
In order to preserve simplicity of the test, the number of connection factors should be kept to a minimum, so no further factors should be included. The current list of proposed factors is in line with existing case law and practice, and the general concepts (if not the precise definitions; please see responses on question 5 below) should be familiar to practitioners, tax inspectors and the courts.
Question 3(b): Does this part of the test provide a fair outcome?
ACCA is concerned that there will be considerable overlap in practice between the Family and Accommodation factors. It seems almost inevitable that an individual with resident family will also have accommodation available to them. As a result, 'unattached' individuals will always have a one factor advantage over an equivalent individual who is has resident family.
Reliance on the residence status of a spouse could also prove problematic where the status of each individual relies upon that of their spouse, and each will be resident/non-resident according to the other's position. For example, take three individuals who have been resident in the previous three years, but in the fourth year spend only 30 days in the UK with connecting factors of accommodation, >90days presence in previous years and substantive UK employment. If the third individual is "unattached" they will be non-resident. However, if the first two are married to each other, each will be resident if the other is, or neither will be.
Replacing the two factors of family and accommodation with a single connecting factor of 'family and/or accommodation' (and a corresponding adjustment to the number of factors required for residence) would overcome this difficulty, and reduce the potential disparity between the treatment of those with and without family.
Question 4: Would the lack of a transitional rule as described in paragraph 3.57 leave significant uncertainty?
The lack of a transitional rule would result in uncertainty for some taxpayers who would need to apply the tests in Part C to establish their UK residence status for tax purposes. However, those individuals would in any event be faced with significant uncertainty under the current system.
ACCA believes that even in the absence of a transitional rule tax payers will be (at least in terms of the administrative burden in establishing residence, albeit in some cases only slightly) better off than under the current system. Accordingly, given the difficulties of framing a transitional rule, the limited impact any such rule would have, and the other competing demands on the resources of government, drafting a transitional rule which will by definition be of limited lifespan and application would not represent the best use of legislators' time.
Question 5(a): Do you think that the proposed definitions are appropriate?
While the proposed definitions appear broadly appropriate and to be generally in line with existing case law and principles, they are not sufficiently precise to allow tax payers to reliably self assess.
For example, the pace of change in technology and working patterns may well start to cause difficulties in the interaction of the Working Day and Day of Presence tests. For many self-employed entrepreneurs the nature of their
Question 5(b): Would these definitions have an adverse impact for particular groups? If so, which groups and what would the impacts be?
The reliance on "average working hours" to define Full Time Work Abroad would mitigate against those whose duties are performed in less than 35 hours a week (for example performing artists, or sportsmen who habitually train 4 hours per day, 7 days per week) or the self employed, who would be presumably required to maintain records of working patterns to support their contention of 'Full Time' occupation overseas.
The concept of Ordinary Residence is every bit as problematic, if not more so, for taxpayers, their advisers and the authorities as the definition of Residence. Its principal benefit is the provision of overseas workday relief. If this relief can be preserved without the need for a separate test of Ordinary Residence this would represent a far better solution than revision and retention/ of the separate Ordinary Residence definition.
Question 6(b): If a new definition of ordinary residence was introduced, should it be restricted to non-domiciled individuals only?
Removing the benefit of the concept for UK domiciled individuals who currently fall within the provisions would be unfair. Their existing status should be grandfathered until such time as other factors change it.
Question 6(c): Is the proposed definition of ordinary residence appropriate? If not, are there alternatives that would not have a material exchequer cost?
The proposed revised definition is overly reliant on the (poorly defined) criterion of 'home'. In many cases the working patterns of the significant UK community of temporary economic migrants is such that they will have sold or otherwise disposed of their 'home' before coming to the UK. In much of Europe renting, rather than ownership, is the norm for most of society. While family members who leave spouse and children behind may be happy to pay rent in two countries at once, single workers or those whose partners and children accompany them would often have no reason (other than UK tax considerations) to continue renting 'at home'. The test would effectively discriminate against those trying to build a settled family life.
ACCA is not in a position to comment on the potential Exchequer cost of the proposed definition.