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This article was first published in the October 2011 edition of Accounting and Business magazine.
Generally, people that are resident in the UK are taxed on their overseas income, whereas non-residents are not.
People who leave the UK to work full-time overseas have always had certainty regarding their residence status, but other leavers have had to rely on the habitual and substantial test. It was previously believed that non-residence status could be established by restricting UK visits to less than 91 days per tax year averaged over four consecutive years.
However, following recent tax cases involving Lyle Grace and Robert Gaines-Cooper, HMRC now only consider this test to be relevant once a 'distinct break' has been made from the UK. Although both Grace and Gaines-Cooper stayed in the UK for less than 91 days each year, factors such as the continuing ownership of property in the UK meant that neither of them had made a distinct break – and were therefore both still resident here.
Such uncertainty has led to the Government consulting on the introduction of a statutory definition of residence, with the intention of implementing changes from 6 April 2012. This article outlines the proposals made in the consultation document.
There are some situations where a person will always be treated as UK resident. These are where:
- a person stays in the UK for 183 days or more during a tax year – no change from the current situation. There is also no change to the definition of a 'day in the UK', so a person is treated as being in the UK for any day when they are here at midnight
- a person's only home is in the UK
- a person works full-time work in the UK – defined as working more than 35 hours per week either on an employed or self-employed basis.
The split year treatment can be applied to the second and third situations. For example, if a person came to the UK on 1 November 2012 to take up full-time employment, then for 2012-13 they would be treated as non-resident from 6 April to 31 October 2012, and resident from 1 November 2012 to 5 April 2013.
Just as some situations will always make a person resident, other situations will result in them always being treated as non-resident. These are where:
- a person stays in the UK for less than 10 days during a tax year
- a person stays in the UK for less than 45 days during a tax year provided they have not been resident for any of the previous three tax years. The Government is not proposing any transitional rules, so if a person wishes to rely on this test for 2012-13 their residence status for 2009-10, 2010-11 and 2011-12 will be determined using the old, less certain, rules
- a person has left the UK for full-time work overseas. Full-time work is as previously defined, and must be carried out for at least one complete tax year. Visits to the UK have to be less than 90 days a year, and no more than 20 days a year can be spent working in the UK. A working day is any day where at least three hours of work are carried out. This is similar to the current situation, although the 20-day rule should be more generous than the 10 days that are presently accepted as incidental by HMRC.