11 June 2013
The Statutory Residence Test
This piece is based on a speech I delivered at the Tax Chambers seminar in April 2013.
1. Background to the recent consultation and legislation
HMRC withdrew their publication, IR20 in 2009. IR20 had been relied upon by many thousands of taxpayers in good faith since its introduction in 1973. It was thought to provide a relatively clear test of individual tax residence which was significantly based on numbers and, in particular, day-counts.
As it happens, the Gaines-Cooper Supreme Court decision indicates that the tests in IR20 were perhaps not as clear as might have first appeared. For instance, consider Lord Wilson’s discussion on the meaning of the words ‘leave’ and ‘visit’ in the context of the ‘Leaving the UK to Work Full-time Abroad’ exemption. However, these perceived ambiguities had not often been raised by HMRC in practice and so, on the whole, the document had represented a halcyon period of clarity in this area.
The withdrawal of IR20 was followed by the introduction of HMRC6. This was far less clear and, further, it was expressly qualified so that HMRC do not consider themselves bound by it. So, the withdrawal of the IR20 effectively represented a reversion to the unclear position as it had been prior to the introduction of IR20 in 1973. The position then had been governed by the common law test. This test was amorphous. The cases demonstrate little legal analysis and there seemed to be an assumption that there was such a thing as a commonsensical or lexical meaning of residence and that once all the facts had been ascertained, one would arrive at a natural conclusion as to whether or not a person was resident in the UK.
The government accepted in 2011 that reliance on the common law test or HMRC6 was not acceptable. Among other things, the vague rules could deter investors from abroad who seek certainty and this in turn could affect growth: paragraph 1.6 of the consultation paper. A consultation was set up in July 2011 to consider the introduction of a statutory test of residence. The 12 week long consultation on changes came to an end on the 9th September 2011. In June 2012, HMRC provided a summary of responses to the consultation and how HMRC intended to react to them. HMRC have more recently provided draft legislation, the latest version of which is now found in schedule 43 of the Finance Bill 2013. The new rules will apply from the 6th April 2013.
2. SRT overview
It had been expected that the government would introduce a simple day-count system, as exists in most other jurisdictions. However, the produced draft proposes something more complex.
The proposed scheme is tripartite. Under them, one will be resident if:
(i) one satisfies one of the Automatic UK Tests (initially called Part A); OR
(ii) the Sufficient Ties Test (Part C); AND
(iii) does not satisfy any one of the Automatic Overseas Tests (Part B).
So, the expression ‘Automatic UK Test’ is a misnomer because satisfying one of them does not mean that one is automatically resident (this can be trumped by the Automatic Overseas Test). The only reference to ‘Automatic’ which is correct is in relation to the Automatic Overseas Tests.
As the Automatic Overseas Tests are the only true automatic tests, I start with them despite the order of the provisions (and I suspect that practitioners will follow the same methodology).
At first glance, the Automatic tests (UK and Overseas) appear to address extreme situations. On this basis, it might be thought that there cannot be an overlap between them. However, as we shall see, this is not the case.
2.1 Day in the UK
This is a seminal concept, relevant to all three parts. The test for this will remain the same. A day counts if the individual is in the UK at midnight – though that day will not count if it is spent solely for reasons of transit or exceptional circumstances (these being subject to a 60 day cap).
In addition, there is a deeming rule in paragraph 23(3) to (5) (which where it applies takes precedence under paragraph 23(2)):
(3) The deeming rule applies if:
(a) P has at least 3 UK ties for a tax year,
(b) the number of days in that tax year when P is present in the UK at some point in the day but not at the end of the day (‘qualifying days’) is more than 30, and
(c) P was resident in the UK for at least one of the 3 tax years preceding that tax year.
(4) The deeming rule is that once the number of qualifying days in the tax year reaches 30 (counting forward from the start of the tax year), each subsequent qualifying day in the tax year is to be treated as a day spent by P in the UK.
The deeming rule does not apply for the purposes of sub-paragraph (3)(a) itself (so, in deciding for those purposes whether P has a 90-day tie (which is one of the five significant ties), qualifying days in excess of 30 are not to be treated as days spent by P in the UK.
For another adjustment to the deeming rule, see FTWA below.
3. Automatic Overseas Tests
If an individual satisfies one of these tests, then he will be conclusively non-resident for that tax year. There are now five Automatic Overseas tests.
(a) The number of days spent in the UK during the tax year is less than 16 AND that individual has not been resident in the UK for more than one of the preceding three years;
Under the original draft, this was originally meant to be less than 10 days. However, it was increased following responses to the Consultation to the effect that less than 10 days was too stringent. Reliance on the automatic overseas test will not be possible in certain circumstances involving death:
The conclusive non-residence test in Part A for individuals who have been resident in the UK in one or more of the previous three years and have spent fewer than 16 days in the UK cannot apply.
This restriction in the event of death does not apply to the 46 day test (see below). This makes sense – if you are satisfying the 46 day test, then you have not been residence for the last 3 years and so death ought not to trump the strong historical position there.
(b) The number of days spent in the UK during the tax year is less than 46 AND that individual has not been resident in the UK for each of the preceding three years;
This – the current version – mirrors the position as it was in the draft first produced. Respondents to the Consultation Paper suggested that this should be increased – however, HMRC did not agree. This on the basis that it might allow persons who had significant connections to the UK to continue to spend a significant number of days in the UK.
As stated, this can be relied upon in the event of death. So, just because there are two Automatic Overseas Tests devoted to death (see below) does not mean that one should not also consider the possible application of this particular Automatic Overseas Test on death.
(c) FTWA: This is the third automatic overseas test.
The individual works sufficient hours overseas AND he does not spend more than 90 days in the UK in the tax year AND not more than 31 of these are working days. I discuss this below.
(d) Death: An addition to the first three overseas tests was added late in 2012:
(1) The fourth automatic overseas test is that—
(a) P dies in year X,
(b) P was resident in the UK for neither of the 2 tax years preceding year X or, alternatively, P’s case falls within sub-paragraph (2), and
(c) the number of days that P spends in the UK in year X is less than 46.
(2) P’s case falls within this sub-paragraph if— (a) P was not resident in the UK for the tax year preceding year X, and (b) the tax year before that was a split year as respects P because the circumstances of the case fell within Case 1, Case 2 or Case 3 (see Part 3 of this Schedule).
The objective here is to determine, in cases of death, the residence by reference to the historical position. So, in a year of death, it’s not good enough to have spent less than 46 days in the UK – non-residence in the previous two years is required too.
(e) Death: The FB includes another overseas test pertaining to death:
(1) The fifth automatic overseas test is that— (a) P dies in year X, (b) P was resident in the UK for neither of the 2 tax years preceding year X because P met the third automatic overseas test for each of those years or, alternatively, P’s case falls within sub-paragraph (2), and (c) P would meet the third automatic overseas test for year X if paragraph 14 were read with the relevant modifications.
(2) P’s case falls within this sub-paragraph if— (a) P was not resident in the UK for the tax year preceding year X because P met the third automatic overseas test for that year, and (b) the tax year before that was a split year as respects P because the circumstances of the case fell within Case 1 (see Part 3 of this Schedule).
(3) The relevant modifications of paragraph 14 are— (a) in sub-paragraph (1)(a) and (b) and sub-paragraph (3), for “year X” 30 read “the period from the start of year X up to and including the day before the day of P’s death”, and (b) in step 3 of sub-paragraph (3), for “365 (or 366 if year X includes 29 February)” read “the number of days in the period from the start of year X up to and including the day before the day of P’s death”.
Paragraph 14 refers one back to FTWA. So, if P was non-resident for the preceding two tax years on the basis of FTWA AND in the year of death would have been non-resident on the basis of FTWA, then he is automatically non-resident in the year of death. For these purposes, FTWA for the year of death is satisfied for these purposes as though references to year X were references to the commencement of year X till the day before P’s death. In other words, it is for this period that P must sufficient hours overseas and during which there must be no significant breaks from overseas work.
One clear advantage here is that the individual can have spent more than 46 days in the tax year in the year of death. It is a shame that the pre-conditions require FTWA to have applied to the preceding two tax years. On the other hand, any addition to the Automatic Overseas Death at this late stage is welcome.
3.1 Issues arising in relation to FTWA:
The third automatic overseas test is that:
(a) P works sufficient hours overseas, as assessed over year X,
(b) during year X, there are no significant breaks from overseas work, (c) the number of days in year X on which P does more than 3 hours’ work in the UK is less than 31, and (d) the number of days in year X falling within sub-paragraph (2) is less than 91.
(2) A day falls within this sub-paragraph if— (a) it is a day spent by P in the UK, but (b) it is not a day that is treated under paragraph 23(4) as a day spent by P in the UK.
(3) Take the following steps to work out whether P works “sufficient hours overseas” as assessed over year X—
Step 1 Identify any days in year X on which P does more than 3 hours’ work in the UK, including ones on which P also does work overseas on the same day. The days so identified are referred to as “disregarded days”.
Step 2 Add up (for all employments held and trades carried on by P) the total number of hours that P works overseas in year X, but ignoring any hours that P works overseas on disregarded days. The result is referred to as P’s “net overseas hours”.
Step 3 Subtract from 365 (or 366 if year X includes 29 February)— (a) the total number of disregarded days, and (b) any days that are allowed to be subtracted, in accordance with the rules in paragraph 28 of this Schedule, to take account of periods of leave and gaps between employments. The result is referred to as the “reference period”.
Step 4 Divide the reference period by 7. If the answer is more than 1 and is not a whole number, round down to the nearest whole number. If the answer is less than 1, round up to 1.
Step 5 Divide P’s net overseas hours by the number resulting from step 4. If the answer is 35 or more, P is considered to work “sufficient hours overseas” as assessed over year X.
I refer to this nostalgically, as others will, as FTWA.
One can see why the FTWA exemption is going to be the source of much disputation in the future – first, because many taxpayers will want to rely on it (as it allows for one to spend up to 90 days in the UK as opposed to 15 or 45 days – and possibly even more, as deemed days of presence are expressly excluded) and, second, because it does bring with it some ambiguities.
Sufficient Hours Test: The test at sub-paragraph (a) was originally:
P works full-time overseas for year X,
And there was no reference to ‘sufficient hours’.
One of the concerns raised by the respondents to the consultation related to the ‘complete tax year’ element in the original sub-paragraph (a). The concern was that some individuals (those who left just before the tax year) would satisfy the test more easily (by spending 366 days abroad). Others (those who left just after the start of the tax year) would find it harder to satisfy the test and would have to have left for almost two years before they would satisfy this condition. One suggestion, therefore, was to adjust the limb to ‘one complete tax year’ or ’18 calendar months’, whichever was shorter. However, HMRC initially rejected this proposal. This on the basis that most employers will factor this into account!
The position under the latest version is less stringent. First, one looks at a period of 365 days – or 366 where Year X is a leap year. One disregards from this 365/366 period by the total of
(a) days in which 3 hours are spent working in the UK; and
(b) some other days under schedule 28 representing annual or sick leave, non-working days (days on which the individual was not meant to be working but on which he or she does in fact work) embedded within a block of leave).
This gives the ‘reference period’. One divides the reference period by 7 (rounding down to the nearest whole number unless the division results in a number less than 1, in which case one rounds up). So, one has an approximation of the number of complete weeks one spends working purely abroad in Year X given by Step 4.
Second, one divides the number of hours spent working abroad in employments and trade, this gives the ‘net overseas hours’ at Step 2.
Lastly, one divides the net overseas hours by the number of weeks. If the number (which is the average number of hours spent working abroad) is more than 35, then the test is satisfied.
This test could be satisfied if one went abroad for one week and worked 35 hours during that week (and did not work more than 3 hours in the UK during that week).In this case, there reference period would be 365-288 = 7. Dividing this by 7 gives 1. Diving 35 by 1 gives 35.
In the context of the point raised by the Complainants, suppose I leave the UK on the 10th April in a year and am away for the rest of it. There are five disregarded days. So the reference period is 360. Dividing by 7 gives 52. So, as long as I work for 52*35 days abroad, I should be able to satisfy this test. Not having left before the commencement of the tax year has not had a detrimental affect.
This is much better and, in particular, what happens before or after the tax year concerned should not make a difference (unlike in the case of FTUK). Of course, in each of the examples above, the other FTWA conditions would need to be met – i.e. in relation to presence in the UK at sub-paragraphs (1)(c) and (d). In addition, there must not be a ‘significant break’ from overseas work. As we shall see, this means that it is not enough to satisfy the sufficient hours test by working abroad for 35 hours in one week.
One moral from the above is that the individual should spend less hours in relation to overseas employments on disregarded days and more on regarded days, so that these hours are included in the calculation of ‘net overseas hours’.
Full Time: Another concern related to the definition of ‘full time’ and the requirement that, on average, 35 hours must be spent on work every week. It was suggested by respondents that this be lowered to 30 hours. However, HMRC have rejected this. They are concerned that ‘part-time’ workers should not be able to satisfy the ‘automatic overseas test’, as such persons may well have significant connections with the UK.
However, MRC now make clear that the full-time work can be comprised of different employments, vocations, professions. Furthermore, if the employment ceases, then FTWA can still be claimed as long as you find employment within 15 days. It’s also important to remember that the 35 hour test needs to only be satisfied on average over the course of the tax year. Once again, the position appears to have improved under the FB, as Step 2 includes in the calculation of ‘net overseas hours’, the hours ‘(for all employments held and trades carried on by P) the total number of hours that P works overseas in year X,…’ So, as long as on average 35 hours are being spent working, it does not matter whether this is in relation to one employment or more (so that one is part-time).
Work: HMRC make clear that undertaking unpaid voluntary work will not constitute ‘work’.
The first point to make is that the difference between unpaid and paid work is, technically speaking, £1.
But, second, whether this is supported by the provisions. At paragraph 26 of schedule 43: (1) P is considered to be ‘working’ (or doing ‘work’) at any time when P is doing something: (a) in the performance of duties of an employment held by P, or (b) in the course of a trade carried on by P (alone or in partnership). The question of whether something must be done in the performance of duties of an employment must be more or less determined by the employment contract. So, if the contract requires the individual to work abroad for a full year and also requires him to spend no more than 30 working days in the UK, then drafting alone ought to go a long way towards satisfying this condition. Even if the employee spends more time working in the UK (than is required by his duties) then this ought not to constitute work.
What about sub-paragraph (2)?:
(2) In deciding whether something is being done in the performance of duties of an employment, regard must be had to whether, if value were received by P for doing the thing, it would fall within the definition of employment income in section 7 of ITEPA 2003.
Let’s say that P does something more than is required by his employment contract. One has to assume that value is received by P (and also that this value is ‘money or money’s worth’, otherwise there would be a priori problems with the legislation) AND that the value is received by him for doing that thing (so that causation, in one sense at least, cannot be a defence and so it cannot be argued that the value is for full consideration or is a present) AND that P is chargeable to income tax under ITEPA (sub-paragraph (5)). The question then arises: does that value fall within the definition of employment income? This in turn begs inter alia the question: does the value fall within section 62 ITEPA? The answer to this question must depend upon the facts and, in particular, on what that thing is and whether it is required by the employment. In Laidler v Perry 42TC363, Lord Reid said:
Did this profit arise from the employment? The answer will be no if it arose from something else. So, even though one can’t question whether or not the deemed value received by P is for the thing, it should remain open to ask whether the thing itself is done in the course of employment.
So, sub-paragraph (2) doesn’t take one further away from the employment contract. To take more obvious cases, if I return to the UK and sell my house (whether to me employer or someone else) OR if I take part in a swimming competition, the deemed value given for doing this thing should not constitute employment income. Likewise, if a return to provide promotional or consultancy services under a collateral contract, this should not constitute employment income either: See Sports Club [2000] STC (SCD) 443.
A similar reasoning should apply to the case of the worker who somehow performs more under his employment contract than he is asked to – though I agree the position is not quite as clear cut. To refer to the words of Lord Reid, the (in this case, deemed) profit cannot arise from the employment, quite simply because the employment does not require the thing to be done. In this context, it is worth remembering: .
(8) A voluntary post for which P has no contract of service does not count as an employment for the purposes of this Schedule.
This seems to override sub-paragraph (2) (which assumes value to have been given). So, if there is no contract of service and there is no trade (which is defined narrowly), then there is no work done in the UK.
Of course, just as the client will be anxious not to work in the UK more than he is permitted, he will also be desirous of demonstrating that he has worked full time abroad. So, the employment contract will be just as crucial in relation to that aspect. In this respect, the definition of ‘work’ is similar to other tax definitions such as ‘connected’ – the draftsman drafts with one aspect in mind but the width can be useful in others.
In the context of ‘trade’, the provisions provide: .
(3) In deciding whether something is being done in the course of a trade, regard must be had to whether, if expenses were incurred by P in doing the thing, the expenses could be deducted in calculating the profits of the trade for income tax purposes.
The first point to make is that whilst ‘employment’ hinges upon chargeability, ‘trade’ hinges upon deductibility. The trade deductions are more generous than then the employment deductions. This seems strange. Suppose I return to the UK to set up an EBT for my employees. The expenses may not be deductible because of the EBC rules. The expense may not be a revenue expense and no capital allowances will be available. It may be that the ‘wholly or exclusively’ test is not satisfied (because my purpose in setting up the trust is, say, to fund an acquisition of assets from me). However, the absence of deductibility should not, as a matter of language, mean that I am not acting in the course of a trade.
To conclude the discussion on the definition of ‘work’, I think that the opening lexical definition is preferable. But the qualifications in sub-paragraphs (2) and (3) cited above and which aim to link the characterisation to other tax issues don’t quite work and are unnecessary. It may be that they are not considered that important, as after all, all that is required is that regard is had to them and it is not clear what weight they carry. However, they present opportunities.
Working while travelling: Paragraph 26 provides:
(4) Time spent travelling counts as time spent working—
(a) if the cost of the journey could, if it were incurred by P, be deducted in calculating P’s earnings from that employment under section 337, 5 338, 340 or 342 of ITEPA 2003 or, as the case may be, in calculating the profits of the trade under ITTOIA 2005, or
(b) to the extent that P does something else during the journey that would itself count as work in accordance with this paragraph.
In the context of employment, one is looking at sections 337 to 339 ITEPA. Travel from home to work is not included generally. This is useful because if an employee has a one-hour commute each way and then works for one hour, then this would result in there being a working day. In the context of trade, one considers where the base is (which may be the home) and expenses from the base to a place of work may be covered. In the case of Newsom v Roberts [1952] 33TC452, it was held by Lord Denning that the fact that the barrister had a study at home did not result in it constituting a base for these purposes. As for (b), this might result in travel time constituting work to the extent that the individual does some work (other than the travel) in the course of it.
Work in the UK: As for the location of work, this, in simple terms, is determined by reference to the embarkation/disembarkation point: see paragraphs 27(1) and (3). This might be helpful for directors outside the country. One concern pertained to the number of working days permissible in the UK. The current position is that an individual can spend:
(a) as many days of ‘incidental’ work in the UK (provided, of course, that he does not exceed the 90-day absolute limit); and
(b) he can spend up to 10 days involving ‘substantive’ duties. (The 10-day limit is not statutory but flows from HMRC pronouncements of March 2011).
Under the initial version of the draft, 20 working days were permitted. As to the meaning of ‘working days’, the provisions in the original SRT draft do not make a distinction between ‘incidental’ and ‘substantive’ duties. Rather there is just one concept – that of a working day i.e. if you spend 3 hours working in the course of the day. (In the more recent drafts, HMRC have done away with the expression ‘working day’, possibly because it was misleading – though the concept remains the same). So, there is a shift of emphasis from the nature of the work to the time spent. Questions will arise as to how compliance with the 3 hour limit can be evidenced. The individual may have to ‘clock off’. S
If you are carrying out ‘substantive duties’, the position under the SRT is beneficial, as the limit went up from 10 to 20. However, if you are carrying out ‘incidental’ duties, the position is detrimental – as the limit comes down from 90 to 20 (unless by ‘incidental’ one means working for less than 3 hours a day). Individuals (or a class of individuals) who were non-resident under the present regime would become resident under the SRT.
In relation to this, most respondents agreed with HMRC that the distinction between ‘substantive’ and ‘incidental’ duties ought not to be maintained – as it involved subjective judgements. However, it was suggested that: (1) the definition of working day be amended so that a greater number of hours was required to be spent on work; (2) that reporting and training duties be excluded; and (3) the 20 day limit be raised. Furthermore, clarification was sought as to how ‘work’ would be defined. As for (2), HMRC are not minded to exclude certain duties such as reporting or training – this on the basis that it would provide scope for avoidance. HMRC, however, were open to changing (1) working days and (3) the working day limit. HMRC was considering between (1) (raising the hour threshold from 3 hours to 5) and (3) (raising the day threshold from 20 to 25).
The absolute limit of working hours one can obtain, in light of the 90 day limit, is around 8*90 (540). If you are to exhaust all your working days under (1), then you obtain 8*20 (160) plus 3*70 (210) – so, 370 out of a theoretical total of 540. If you are to exhaust all your working days under (2), then you obtain 8*25 (200) plus 3*65 (195). So a total of 395 out of a theoretical total of 540.
In the end, they opted to leave the working day definition at 3 hours and have increased the working day limit to 30. Quite apart from the particular question of hours gained, I suspect most employers would prefer this stance, as having a longer absolute limit for working days allows greater flexibility.
Significant Break from Overseas Work: Under paragraph 29, there is a ‘significant break from overseas work’ if at least 31 days go by and not one of those days is:
(a) a day on which P does more than 3 hours’ work overseas, or
(b) a day on which P would have done more than 3 hours’ work overseas but for being on annual leave, sick leave or parenting leave.
In other words, there is a significant break from work if there are 31 consecutive days where each one is a day where not more than 3 hours are spent working AND is not a day on which the employee is away on annual leave, sick leave or parenting leave. If the individual takes, say, an annual leave during those 31 days, then this prohibition should not apply. It is not immediately clear to me when the significant break is deemed to occur (relevant to the question of which tax year it occurs in). It would appear that it occurs at the end of the 31 day period. Where the period straddles two tax years should mean that the break occurs in the later tax year (and the fact that part of it falls within another tax year should not mean that there is no significant break in the second year).
One implication of the definition of significant break is that one may satisfy FTWA by working full-time overseas (theoretically) 1 day and then not working for 30 days, then working for 1 day and then not working for 30 days. Theoretically (emphasis!), one could work for just as many days as there are 30 month periods in a tax year. As long as 35 hours on average was spent working during these days and the individual did not breach the 90/30 days limits, he would be automatically non-resident. International
Transport Workers: HMRC had decided that international transport workers (pilots to truck drivers) should not qualify for FTWA. Originally,
28. (1) An ‘international transportation worker’ is someone who: (a) holds an employment, the duties of which consist of duties to be performed on board a vehicle, aircraft or ship as it makes international journeys, or
(b) carries on a trade, the activities of which consist of the provision of services on board a vehicle, aircraft or ship as it makes international journeys.
(2) But a person is not an international transportation worker by virtue of sub-paragraph (1)(b) unless, in order to provide the services, he or she has to be present (in person) on board the vehicle, aircraft or ship as it makes those journeys.
(3) In deciding whether the duties of an employment or the activities of a trade consist of duties or activities of a kind described in sub-paragraph (1)(a) or (b):
(a) it is sufficient that substantially all of the duties or activities consist of duties or activities of that kind (even if, for example, the person occasionally performs duties or provides services on board a vehicle, aircraft or ship as it makes domestic journeys), and
(b) duties or activities of a purely incidental nature are to be ignored.
Otherwise, the individual might have a home and family in the UK and yet still not be resident here. However, it is still possible for them to satisfy the ‘Automatic Overseas Test’ or else fail the ‘Significant Ties’ test. Likewise, it will not be possible for international transport workers to satisfy the FTUK test.
Under the FB, the terminology has been done away with and paragraph 14(4) simply provides:
(4) This paragraph does not apply to P if—
(a) P has a relevant job on board a vehicle, aircraft or ship at any time in year X, and
(b) at least 6 of the trips that P makes in year X as part of that job are cross-border trips that either begin in the UK, end in the UK or begin and end in the UK.
As for relevant job, paragraph 30 provides:
(1) P has a “relevant” job on board a vehicle, aircraft or ship if condition A and condition B are met.
(2) Condition A is that P either—
(a) holds an employment, the duties of which consist of duties to be performed on board a vehicle, aircraft or ship while it is travelling, or
(b) carries on a trade, the activities of which consist of work to be done or services to be provided on board a vehicle, aircraft or ship while it 15 is travelling.
(3) Condition B is that substantially all of the trips made in performing those duties or carrying on those activities are ones that involve crossing an international boundary at sea, in the air or on land (referred to as “cross- border trips”).
(4) Sub-paragraph (2)(b) is not satisfied unless, in order to do the work or provide the services, P has to be present (in person) on board the vehicle, aircraft or ship while it is travelling.
(5) Duties or activities of a purely incidental nature are to be ignored in deciding whether the duties of an employment or the activities of a trade consist of duties or activities of a kind described in sub-paragraph (2)(a) or (b).
The major change here is the requirement at (4)(b) for there to be 6 cross-border trips before one is excluded from FTWA.
4. Automatic UK Tests
There are four automatic UK tests at paragraphs 4 to 10. If an individual satisfies one of these tests, then he will be resident for that tax year unless he also satisfies one of the Automatic Overseas Tests. There are four ways in which an individual can fall within this Part.
(a) The individual spends more than 183 days in the UK during that tax year;
(b) The individual has only one home and that is in the UK OR the individual has more than one home and they are all in the UK;
(c) The individual carries out full-time work in the UK.
(d) Individual resident for last 3 year dies in a tax year.
4.1 The 183 day test
This is an improvement (in terms of clarity) on the existing 183 day rule. The old 183 day rule (as re-written) was not absolute (for reasons explained by me in my book on this topic). As a matter of drafting, the 183-day test continues not to be absolute – as, as seen above, an Automatic Overseas Test trumps an Automatic UK Test.
Of the four Automatic Overseas Tests, only one can possibly trump the 183 day test. That is, FTWA. Even though this requires a satisfaction of the 90 day meta-rule in FTWA, this rules does not include days which are deemed days of presence. Looking back at paragraph 14(2) of FTWA:
(2) A day falls within this sub-paragraph if:
(a) it is a day spent by in the UK, but (b) it is not a day that is treated under paragraph 22(4) as a day spent by P in the UK.
The legislator includes in (a) all days of presence (as generally defined) and then expressly excludes any day which is deemed to be a day of presence by paragraph 22(4). As seen above, once the ‘qualifying day’ threshold of 30 is reached, all subsequent qualifying days are excluded for the purposes of FTWA. And if the individual has not been resident in one of the preceding 3 years, then the deeming rule does not apply in any event. In other words, an individual can spend 90 days of presence (as generally defined, so that he spends the night in the UK on those nights) and he can be present in the UK on each of the remaining days provided that he does not spend the night here. Of course, the other conditions of FTWA would have to be abided by.
4.2 The Main ‘Home’ Test
The second automatic UK test is at paragraph 8:
(1) The second automatic UK test is that— (a) P has a home in the UK during all or part of year X, (b) that home is one where P spends a sufficient amount of time in year X, and (c) there is at least one period of 91 (consecutive) days in respect of which the following conditions are met— (i) the 91-day period in question occurs while P has that home, (ii) at least 30 days of that 91-day period fall within year X, and (iii) throughout that 91-day period, condition A or condition B is met or a combination of those conditions is met.
(2) Condition A is that P has no home overseas.
(3) Condition B is that— (a) P has one or more homes overseas, but (b) each of those homes is a home where P spends no more than a permitted amount of time in year X.
(4) In relation to a home of P’s in the UK, P “spends a sufficient amount of time” there in year X if there are at least 30 days in year X when P is present there on that day for at least some of the time (no matter how short a time).
(5) In relation to a home of P’s overseas, P “spends no more than a permitted amount of time” there in year X if there are fewer than 30 days in year X when P is present there on that day for at least some of the time (no matter how short a time).
(6) In sub-paragraphs (4) and (5)— (a) a reference to 30 days is to 30 days in aggregate, whether the days are consecutive or intermittent, and (b) a reference to P being present at the home is to P being present there at a time when it is a home of P’s (so presence there on any other occasion, for example to look round the property with a view to buying it, is to be disregarded).
(7) Sub-paragraph (1)(c) is satisfied so long as there is a period of 91 days in respect of which the conditions described there are met, even if those conditions are in fact met for longer than that.
(8) If P has more than one home in the UK— (a) each of those homes must be looked at separately to see if the second automatic UK test is met, and (b) the second automatic UK test is then met so long as it is met in relation to each of those.
A lot of this is numerlcal – 91 consecutives days where no home overseas and 30 days of that has to fall within year X. Even though HMRC used the word ‘Only’ to describe this test in their consultation documentation, the presence of an overseas home is not sufficient to discount this rule where the other home is occupied by the individual for less than 30 days in year X. The test is better described as the ‘Main Home’ Test.
HMRC have this to say:
3.92 The Government wants to ensure that having a home in the UK does not make someone conclusively resident if it is the individual’s only home for a short period. Therefore, an individual will not fall under the “only home” condition if their only home (or homes) is in the UK for a period of fewer than 91 days.
3.93 If there is a continuous period of at least 91 days during which the individual’s only home is in the UK and this period falls into two separate tax years, the individual would be treated as having an “only home” in both tax years (although in some cases split year treatment may apply to such individuals).
3.94 In addition, the Government confirms that where an individual is in the process of selling a home, it will not continue to count as a home for the purpose of the test after they have moved out of the property.
As for ‘home’, this is:
(1) A person’s home could be a building or part of a building or, for example, a vehicle, vessel or structure of any kind.
(2) Whether, for a given building, vehicle, vessel, structure or the like, there is a sufficient degree of permanence or stability about P’s arrangements there for the place to count as P’s home (or one of P’s homes) will depend on all the circumstances of the case.
(3) But somewhere that P uses periodically as nothing more than a holiday home or temporary retreat (or something similar) does not count as a home of P’s.
(4) A place may count as a home of P’s whether or not P holds any estate or interest in it (and references to ‘having’ a home are to be read accordingly).
(5) Somewhere that was P’s home does not continue to count as such merely because P continues to hold an estate or interest in it after P has moved out (for example, if P is in the process of selling it or has let or sub-let it, having set up home elsewhere).
What this means is that if an individual does not satisfy one of the Automatic Overseas Tests, does not satisfy one of the other Automatic UK Tests (so he spends less than 183 days in the UK and does not work here, I discuss FTUK below), then he can spend up to 182 days in the UK provided that he does not have an only home in the UK in which he spends 30 days.
The simplest way to preclude this test from being satisfied is to have a home outside the UK and to spend the permitted time in it. The definition of ‘home’ seems to imply that there must be an element of permanence about the individual’s arrangements. At the same time, (3)(b) is clearly predicated on the view that one can spend less than 30 days in it.
4.3 Full Time Work in the UK
The third automatic UK test is at paragraph 9:
(1) The third automatic UK test is that— (a) P works sufficient hours in the UK, as assessed over a period of 365 days, (b) during that period, there are no significant breaks from UK work, (c) all or part of that period falls within year X, (d) more than 75% of the total number of days in the 365-day period on which P does more than 3 hours’ work are days on which P does more than 3 hours’ work in the UK, and (e) at least one day in year X is a day on which P does more than 3 hours’ work in the UK.
(2) Take the following steps to work out, for any given period of 365 days, whether P works “sufficient hours in the UK” as assessed over that period—
Step 1 Identify any days in the period on which P does more than 3 hours’ work overseas, including ones on which P also does work in the UK on the same day. The days so identified are referred to as “disregarded days”.
Step 2 Add up (for all employments held and trades carried on by P) the total number of hours that P works in the UK during the period, but ignoring any hours that P works in the UK on disregarded days. The result is referred to as P’s “net UK hours”.
Step 3 Subtract from 365— (a) the total number of disregarded days, and (b) any days that are allowed to be subtracted, in accordance with the rules in paragraph 28 of this Schedule, to take account of periods of leave and gaps between employments. The result is referred to as the “reference period”.
Step 4 Divide the reference period by 7. If the answer is more than 1 and is not a whole number, round down to the nearest whole number. If the answer is less than 1, round up to 1.
Step 5 Divide P’s net UK hours by the number resulting from step 4. If the answer is 35 or more, P is considered to work “sufficient hours in the UK” as assessed over the 365-day period in question.
(3) This paragraph does not apply to P if—
(a) P has a relevant job on board a vehicle, aircraft or ship at any time in year X, and (b) at least 6 of the trips that P makes in year X as part of that job are cross-border trips that either begin in the UK, end in the UK or begin and end in the UK.
The concept of “sufficient hours” is the similar to – but not the same as – that discussed above in the context of FTWA. It is a way of testing whether in a given period of 365 days (ignoring days on which the individual works 3 hours overseas), the individual works on average 35 hours per week in the UK.
The seminal point to make here is that just as FTWA could be significantly beneficial to the individual (as it allows a 90-day presence in the UK), FTUK could be disproportionately disadvantageous. This because the 365 period is not the tax year concerned and is instead any given period of 365 days – there is no marriage here, as there is with FTWA, with Year X at (1)(a) or in the definition of “sufficient hours”. If even part of the 365-day period, which satisfies the sufficient hours test, falls within the tax year, then under sub-paragraph (1)(c), the automatic UK test will have been met.
The policy objective that undergirds this test is explained in the paper of June 2012:
3.98 The main purpose of this condition is to provide certainty for employers when they bring employees to the UK. Groups representing expatriate employers have emphasised that this is important and reduces administrative burdens.
Doesn’t the employee – the taxpayer – have a say in the matter? Also, under the new SRT would not the position be clear any way?
It is therefore helpful for employers if employees coming to the UK on secondment for a substantial period are automatically resident and, where relevant, have access to split-year treatment in the year of arrival and departure. In the absence of this condition, many employees who arrived in the UK late in the tax year would not have spent 183 days in the UK and might not be resident in the year of arrival.
In other words, because the individual would not otherwise have been resident (because he entered the UK after the 1st week of October), a special rule must be created to make him resident!
Moving away from the purported policy, the proposal under the original draft was that the individual should be treated as working full time in the UK if they were employed or self-employed in the UK over a continuous period of 9 months, and no more than 25 per cent of their duties were carried on outside the UK during the period of full-time work. One objection that was raised to this was that this test was dissimilar to that proposed for FTWA. So, HMRC have raised the 9 month threshold to 12 months. This increase from 9 months to 12 months in the last draft (and maintained in the FB) will significantly reduce the impact of FTUK.
If one is trying to escape this rule, then that means that one will otherwise escape the 183-day rule (otherwise there would be no point). Suppose the individual arrives before early October. Such an individual must leave within 6 months if he is to be non-resident in that year (the year of arrival) under the 183-day rule (let us ignore the more complex situation where he might be satisfying the 183-day test on the basis of deemed days of presence, so that he might wish to place reliance on FTWA). This person will not satisfy the sufficient hours test in FTUK in any event for a 365 day period (unless he is working a very large number of hours a week).
Suppose the individual arrives after early October. Such an individual must leave by early October of the following tax year if he is to be non-resident in the following tax year. Such a person should not satisfy the sufficient hours test in FTUK either for any period of 365 days which straddles these two tax years – though the hours he works per week will have to be carefully watched.
On the whole, FTUK is unlikely to impact significantly on planning where the individual is not likely to satisfy the 183 day test in any tax year. However, consider the case of an individual who arrives before early October and is reconciled to being resident in that tax year but does not want to be resident in the following tax year. If this person works for a period of one year only (so that the 183 day test is not satisfied in relation to the following year), he may still be ‘automatically’ resident in the following tax year. The danger of FTUK is that 1 days work in the following tax year can result in the ‘automatic’ residence. (Similar problems arise where the individual arrives after early October and is reconciled to residence in the following year on the basis of the 183 day rule but does not want to be resident in the year of arrival. FTUK might result in him being resident in the year of arrival).
This problem may be alleviated by the split year treatment. Another solution would be for there to be a significant break from work (which is similar to that discussed above in the context of FTWA).
4.4 Death of former resident An earlier version provided:
The fourth automatic UK test is that:
(a) P dies in year X,
(b) for each of the previous 3 tax years, P was resident in the UK by virtue of meeting the automatic residence test,
(c) even assuming P were not resident in the UK for year X, the tax year preceding year X would not be a split year as respects P (see Part 3 of this Schedule), and
(d) when P died, P’s normal home was in the UK (even if P was living temporarily overseas at the time).
The latest version at paragraph 10 is similar but subject to one addition to (d): .
Or P had more than one home and at least one of them was in the UK.
HMRC give the following rationale:
3.185 The statutory residence test will need to cater for situations where an individual dies part way through the tax year. The Government considers that, without specific provisions, the proposed test could give unfair and unwelcome results depending on when in a tax year an individual dies. For example, an individual who had been UK resident for all, or most, of their lives but who died abroad early in the tax year after spending very few days in the UK in that year could be automatically non-resident under Part A of the statutory residence test. A number of changes have therefore been made to the way in which the test applies to individuals who die during the year: . . * the conclusive non-residence test in Part A for individuals who have been resident in the UK in one or more of the previous three years and have spent fewer than 16 days in the UK cannot apply; * the number of days that need to be taken into account in the day counting tests of Part C will be reduced on a pro-rata basis, based on the proportion of whole months left in the tax year following the month of death; and . . * where an individual has been resident in the UK for the previous three years on the basis of satisfying one of the conditions in Part A of the test and, in the year of death their normal home was in the UK, they will remain UK resident for that year, regardless of circumstances.
5. Significant Ties
If an individual does not fall within the Automatic Tests, then one has to turn to the Significant Ties tests. Under Part C one has to consider five possible connecting factors. He will be deemed to be resident in the UK if he has a certain number of connecting factors. The number of connecting factors that are necessary to result in the individual becoming resident in the UK will depend upon the number of days he spends in the UK in that year. In general, the more time he spends in the UK, the fewer the number of connecting factors are needed to find him to be resident.
There are to be separate scales for ‘Arrivers’ and ‘Leavers’ (though the legislator has abandoned this terminology).
5.1 Days of Presence ‘Days of presence’ has been discussed above.
5.2 The Part C Connecting Factors: The connecting factors are as follows:
(a) UK resident family
The definition of Family allows for self-determination.
32(1) P has a family tie for year X if—
(a) in year X, a relevant relationship exists at any time between P and another person, and
(b) that other person is someone who is resident in the UK for year X.
In the context of ‘relevant relationship’, this includes relationships with partners (spouses, civil partners and common law partners) but does not include those one is separated from (and this includes circumstances where the separation is likely to be permanent).
Objections were raised to the inclusion of ‘common law partners’ – however, HMRC state that such associations can be as real as marriages and ought to be taken into account. They also state that they, in the context of tax credits, have ‘experience’ is determining issues such as when a relationship starts to constitute a common law partnership.
Family initially included minor children whom the individual spends time with ‘all or part of 60 days in the year’ (whether in the UK or elsewhere and whether one to one or with other people. This has now been amended to only take into account minor children whom the individual sees in the UK.
Under the original draft, children who were attending school in the UK but who spent less than 60 days in the UK outside term time and whose main home was not in the UK could not constitute a family tie – this limited the exemption to children in boarding school. Under paragraph 32(3), this exemption has now been amended – the time limit has now been reduced to 21 days but there is no other requirement pertaining to the main home of the child.
Other relatives such as adult children, parents and siblings are not included.
The nuclear definition of Family favours Leavers. It is unlikely to affect the position of persons entering the UK. The definition of children (and the exclusion of children who have reached majority) seems to favour slightly older individuals (or young ones).
One problem with the incorporation of the Family test is that it might give rise to a vicious cycle. If A’s residence status is dependent on his wife’s residence status and his wife’s residence status is dependent on his residence status, then it not clear what the position would be. The later draft provides at 33(2):
A family tie based on the fact that a family member has, by the same token, a relevant relationship with P is to be disregarded in deciding whether that family member is someone who is resident in the UK for year X.
In other words, if A’s wife is (or would be) resident in the country only by virtue of being in a relationship with A, then she does not count as a family tie. This applies to all family members and so there ought not to be any vicious circle.
(b) Substantive work in the UK
5(1) P has a work tie for year X if P works in the UK for at least 40 days (whether continuously or intermittently) in year X.
(2 )For these purposes, P works in the UK for a day if P does more than 3 hours’ work in the UK on that day.
There are further elaborations for International Transportation Workers.
(c) Accessible accommodation in the UK
One of the ciriticisms made by respondents was that the inclusion of this factor constituted double-counting, as those with a family were more likely to have a house. However, HMRC take the view that in such cases the ties with the UK are stronger and so each of these factors should count. The definition initially included accommodation available to the individual’s family members. This has been amended under the present draft so that only accommodation which is available to the individual will count. As for what constitutes ‘accessible accommodation’:
3.140 The Government…proposes a simple definition that an individual will have UK accommodation if: * the individual has a place to live in the UK * it is available to be used by them for a continuous period of at least 91 days in a tax year; and * the individual spends at least one night in that place during the tax year.
3.141 Where there is a gap of fewer than 16 days between periods in the tax year in which a particular place is available to the individual, that place will continue to be treated as if it were available to the individual during that gap. This mirrors the distinction that was made in the cases between (i) availability of accommodation; and (ii) duration of stay in it. (incidentally, under the previous statutory test, availability of accommodation was not a determinative factor – though it was as a matter of case law, such as in Cadwalader). It does not matter whether the individual owns the property or not, whether it’s provided by an employer or not.
3.142 There will be an exception for accommodation held by relatives (other than the individual’s spouse, partner or minor children). In theory such accommodation, for example, the parental home, may be available continuously and it would not be right to count such accommodation as a connection factor if the individual spent, say, a night or two with their parents at Christmas. Therefore, accommodation held by relatives will only count as a connection factor if the individual spends more than 15 nights there during the tax year. See paragraph 34(5).
(d) UK presence in the previous years – i.e. the individual spent 90 days or more in the UK over the previous two tax years;
(e) A country tie – More time in the UK than in any one other country. This reminds me of the First Process of Elimination (refer to Individual Tax Residence).
The scale for Arrivers: An ‘Arriver’ is someone who was not resident in any of the preceding three years. This word does not otherwise exist in the English dictionary. It is not included in the latest draft but continues to be referred to by the consultation report. Factor (e) is not taken into account in the case of such a person. So, there are only four potential connecting factors in such a case: paragraph 31(3).
Days in the UK Impact of connecting factors
46(45) to 90(89) days Resident if individual has 4 factors (else NR)
91(90) to 120(119) days Resident if individual has 3 factors (else NR)
121 to 182 Resident if individual has 2 factors (else NR)
The scale for Leavers: A Leaver is someone who was resident in the UK in any of the preceding three years. All of the 5 connecting factors listed above can be relevant in the case of a Leaver – and this allows for the scale to be more articulated.
Days in the UK Impact of connecting factors
16 (10) to 45 days Resident if individual has 4 connecting factors (else NR)
46 to 90 (89) days Resident if individual has 3 connecting factors (else NR)
91(90) to 121(119) days Resident if individual has 2connecting factors (else NR)
120 to 182 days Resident if individual has 1connecting factor (else NR)
One key difference between Arrivers and Leavers is where more than 16(10) days are spent but less than 46(45). An Arriver will always be non-resident in such circumstances. A Leaver, on the other hand, might be resident – though the threshold is high and all 5 connecting factors would have to exist. Another difference is that, for a given number of day of presence in the UK, the Arriver needs to have one more significant ties in the UK than a Leaver would need to be considered to be resident. 6.
Commentary on the proposed SRT:
Day-count test versus a more qualitative test
The day-count is more important in extreme cases (i.e. where more than 183 days are spent in the UK or where less than 45 days are spent in the UK). However, even in such cases, the day count is not always determinative and, other than in cases where 183 days have been spent in the UK, regard must also be paid to whether the individual was resident in any of the preceding three years. In other words, the test under the SRT remains qualitative. The legislator is aiming to simplify the law in this area but at the same time he does not wish to reduce it so much that it ceases to represent the essence or quality of an individual’s connections with the UK. Paragraph 3.5 of the 2011 Consultation Paper states:
The Government wants to ensure that introducing a statutory test does not lead to situations where individuals can become and remain non-resident without significantly reducing the extent of their connection with the UK. Equally, the Government is clear that individuals should not be resident if they have little connection with the UK.
The emphasis on the qualitative nature of residence pays due regard to the common law test. This seems fair as day-count itself is not determinative of one’s connections with the country and their obligations towards it. On a more cynical note, it also makes it harder to forfeit residence through simply (physically) leaving the country.
The SRT represents a beneficial change in the substantive position
Setting aside the anti-avoidance rule, the SRT represents a raising of the substantive test to be satisfied in order for there to be residence.
In the context of Part A or the Automatic Overseas Tests, a Leaver who spends less than 10 days in the UK in a tax year is not resident. Given that HMRC have previously argued that individuals who have never been in the UK during the tax year were resident, this clearly represents a raising of the standard: see Re Young, Re Rogers and Reed v Clark (they even succeeded in the first two).
In the context of cases falling within Part B or the Automatic UK Tests, there has been some tightening of the rules. Previously, the only factor which could of itself be conclusive of residence was day-count. In particular, an individual who spent 183 days in the country would be resident here. Part B represents an enlargement of this class of factors which can on their own deem residence. Under Part B, an individual who works full-time in the UK or whose only home is in the UK will be resident here. However, such an individual would most likely have been found to be resident under the common law principles in any event – and so, on balance, even Part B is not significantly to the detriment of the taxpayer.
The introduction of Part C or Significant Ties means that a case such as that of Cadwalader would not be resident (whereas he was found to be resident). Indeed, I cannot think of many cases where an individual who would not have been resident under the common law test would become resident under Part C. So Mr. Cadawalader’s position (or, rather, the position of those individuals he represents here) would have improved substantively and Part C, for the most part, also represents a raising of the standard to be satisfied in order for there to be residence.
Reduction of administrative burden on taxpayer and HMRC
Part A: In many cases where an individual falls within Part A, it will be unambiguously clear that he does so. One will simply have to look at the day count figure. In the context of the ‘Leaving the UK to Work Full-Time Abroad’ category, the shift from ‘merely incidental duties’ (as found in IR20) to the 90/20 day time limit is welcome.
Part B: In many cases where an individual falls within Part B, it will also be unambiguously clear that he does so. However, to the extent that an individual falls within Part B as a result of spending 183 days in the UK, his position would have been equally clear under the law as it currently stands.
Part C: In those confused cases which do not fall within Part A or B, the position will remain complicated but there is still an improvement. HMRC are right in saying that the vast majority of cases of taxpayers will fall within Part A or Part B but it seems to me that the vast majority of litigated cases would fall within Part C – i.e. where the day count is between 10 or, as the case may be, 45 days and 183 days. Cadwalader involved a day count of around 60 days. In Re Combe the day-counts for the three years were 6 months, 5 months and 2 months. Cases from Levene and Zorab to Grace and Gaines-Cooper involved day-counts of under 6 months. (I agree that a handful of cases did have very low day-counts – such as Reed v Clark and the mariner cases, Re Young and Re Rogers). So, the clarification of rules in this context is welcome and HMRC would be doing themselves a disservice in understating the relevance of Part C.
Under Part C the position of someone like Mr. Zorab, Mr. Combe or Mr. Dave Clark would also have improved. They were not resident under the common law test and this would not have changed under the SRT – but the advantage to them is that they would not have had to litigate to discover that. Furthermore, even if such individuals would have had to litigate, they would have at least known what sorts of evidence one had to adduce. One important aspect of the Part C connecting factors which results in an ease of the administrative burden is that they only include domestic matters and so there is no need for domestic tribunals to take evidence on foreign matters – such as, in the case of Gaines-Cooper, the planting of coco de mar trees in the Seychelles by the taxpayer!
(Indeed, most of the facts which were laid out by the Special Commissioners in their decision in that case went towards demonstrating the taxpayer’s connections to places outside the UK. However, when it came to them presenting their decision at paragraph 166 the facts they listed as being relevant to their decision were those which linked Mr. Gaines-Cooper to the UK. Had the taxpayer known with certainty that foreign factors would be of minimal relevance, then the burden of litigation would have been much relieved).
Comprehensiveness:
Another aspect of the changes I welcome is that it is intended to be comprehensive. Under the present statutory laws, if one is not found to be resident or not-resident under the provisions, then one has to then turn to the common law test for a conclusion. Under the SRT, there will be a comprehensive matrix and one will not have to look elsewhere.
The SRT does not simply determine whether you are resident or not (or whether you are non-resident or not) but rather it determines whether you are resident or not resident (and it does so mostly by reference to domestic factors).
Another testimony to the legislator’s insistence on comprehensiveness is that he has foreseen a possible overlap between Part A and Part B and he has provided that in such cases it is Part A which will take precedence.
He has also taken into account matters arising in relation to death.
The concessions, A11, D2 and A78 relating to the years of arrival and years of departure are to be given a statutory form and so there will not be a need to look beyond the statute book when contending with such special cases.
Finally, the SRT pronounces an individual to be resident – which is different to deeming him to be resident for tax purposes. This provides further certainty.
Areas of uncertainty in Part A or B: Historicity: Unfortunately, there has not been a distinct break from the old regime. One problem which arises is that the particular impact of the day-count often depends upon whether or not the individual was resident in any of the preceding three years.
Example 1: In the context of Part A, if an individual is to be not resident in a year (say 2014-15) where he has (say) spent 40 days in the UK, then he must not have been resident in any of the preceding three years.
So, a determination of his residence status will involve looking back to 2011-12. In this case, one will have to apply the current residence rules to 2011-12 in order to arrive at a determination and so all the rebarbative uncertainties of the current regime will have been incorporated.
Example 2: Consider a case where the individual spends 40 days in the UK in 2017-18.
One will have to consider the tax years up to 2014-15. However, it may be that the residence position for 2014-15 will itself depend upon his residence status in 2011-12 – a year before the SRT came into force. Through this process of iterated forking, one may have to go back quite a few years when considering the residence status for a given year.
Fortunately, HMRC have acknowledged these concerns and they have included transitional provisions:
Transitional provision 152 (1) This paragraph applies if:
(a) year X or, in Part 3 of this Schedule, the relevant year is the tax year 2013-14, 2014-15 or 2015-16, and
(b) it is necessary to determine under this Schedule whether an individual was resident or not resident in the UK for a tax year before the tax year 2013-14 (a ìpre-commencement tax year. (2) The question is to be determined in accordance with the rules in force for determining an individual’s residence for that pre-commencement tax year (and not in accordance with the statutory residence test).
(3) But an individual may by notice in writing to HMRC elect, as respects one or more pre-commencement tax years, for the question to be determined instead in accordance with the statutory residence test.
(4) A notice required under sub-paragraph (3) –
(a) must be given no later than the first anniversary of the end of year X or, in a Part 3 case, the relevant year, and
(b) is irrevocable.
7. Conclusion on SRT
The SRT is a welcome change to the common law test. It is not as simple as a day-count system. It is perhaps fairer than a day-count system. It is arguable that one’s obligation to the state in a given year must depend upon considerations more pervasive than the number of days one spends in the country in that year.When compared to the common law test, the SRT is a major change in both a substantive and administrative sense.
As far as the substantive test is concerned, it represents a raising of the standard that needs to be met to become (or continue to be) resident and therefore constitutes an improvement from the point of view of the taxpayer and growth in the UK. As far as the administrative burden is concerned, the great attraction of the SRT is that the more obvious cases are catered for under separate rules under which the day-count is given a crucial role.
As for the more uncertain Part C cases, there will still be several instances where the position will be clear without the need for litigation. In those cases where there is litigation, the taxpayer will at least know what sorts of factors there are in corroboration of which he needs to adduce evidence and, further, he will rarely have to adduce evidence pertaining to foreign factors. A more cautious taxpayer will always aim to have one less connecting factor then he needs to have in order to be non-resident under the rules.
It might be said by some that the clarity represented by the SRT is undermined by the coeval introduction of the temporary non-residence anti-avoidance rule. However, it appears to me that at least we have a set of clear rules on which to plan upon. In the past, individuals such as Mr. Gaines-Cooper who left the country in the 1970s could not be sure whether they had forfeited residence in the first place – so the absence of a temporary non-residence rule could not assist them in any event. Now, provided that the client is committed to leaving the country for five years, there are relatively straightforward steps that can be taken which can, with reasonable assurance, be expected to achieve mitigation.
8. Other matters arising from the consultation paper
8.1 Split Year Treatment
This will apply in the following cases:
Case 1: starting full-time work overseas
Case 2: accompanying spouse etc
Case 3: leaving the UK to live abroad
Case 4: coming to live or work full-time in the UK
Case 5: starting to have a home in the UK In cases where there is a split year.
There is no universal rule but rather a rule inserted in numerous charging provisions. For instance, in the context of employment income, there is an amendment to section 15 ITEPA:
(1) This section applies to general earnings for a tax year for which the employee is UK resident except that, in the case of a split year, it does not apply to any part of those earnings that is excluded.
(1A) General earnings are ‘excluded’ if they:
(a) are attributable to the overseas part of the split year, and
(b) are neither: (i) general earnings in respect of duties performed in the United Kingdom, nor 19 (ii) general earnings from overseas Crown employment subject to United Kingdom tax. (2) After subsection (3) insert:
(4) Any attribution required for the purposes of subsection (1A)(a) is to be done on a just and reasonable basis.
(5) The following provisions of Chapter 5 of this Part apply for the purposes of subsection (1A)(b) as for the purposes of section 27(2); (a) section 28 (which defines general earnings from overseas Crown employment subject to United Kingdom tax, and (b) sections 38 to 41 (which contain rules for determining the place of performance of duties of employment).
(6) Subject to any provision made in an order under section 28(5) for the purposes of subsection (1A)(b), provisions made in an order under that section for the purposes of section 27(2) apply for the purposes of subsection (1A)(b) too.
8.2 Ordinary residence:
Ordinary residence has been especially relevant to
(i) CGT;
(ii) Remittance Basis;
(iii) TAA; and
(iv) Overseas Workday Relief.
HMRC point out that ordinary residence has started to overlap with the concept of residence significantly. There was once an assumption that in order to become ordinarily resident one had to have been resident ‘year in year out’ or that one had to have been resident for a minimum period of time. However, these notions were not accepted in cases such as Tuczka and the appropriately demonym-titled Genovese and it follows that an individual could become ordinarily resident immediately after he arrives in the country. The test had begun to resemble to residence test significantly.
HMRC also point out that ordinary residence has become increasingly irrelevant as a matter of practice. They state that each year only 300 people claim the remittance basis on the basis of being resident but not ordinarily resident (one hopes its not the same 300 people each year!) They do not state how many people become liable to CGT as a result of being ordinarily resident though the number is small: paragraph 6.11 of the 2011 consultation paper.
In light of these factors, HMRC were initially considering three options:
(i) Limiting the concept to overseas workday relief;
(ii) Keeping it relevant to all tax purposes to which it is currently relevant (such as CGT);
(iii) Irrespective of whether they opt for (i) or (ii) above, amending the definition so that an individual will be ordinarily resident in a tax year if he has been resident in the UK for 1 or more of the preceding 5 years AND that tax year is the year of his arrival or one of the following two years.
In the 2012 paper, HMRC state that they intend to abolish ordinary residence altogether. However, OWR will be given a statutory footing (though it will be restricted to non-doms). In addition, transitional provisions will allow for the treatment to remain the same for 2 years after commencement in cases where the individuals are ordinarily resident. These changes are welcome – especially to the extent that any charge arises on the basis of ordinary residence (CGT). As for TAA, this will not apply to residents and not to those who are ordinarily resident. This ought not to make a significant difference – given the close nature between the two (consider Tuczka). Of course, the changes will be detrimental to those 300 taxpayers claiming the remittance basis. One danger with retaining the concept of ordinary residence (as opposed to effacing it completely) is that it might subsequently have formed the basis for later tax charges.
