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The new & improved UK statutory residence test?

By Eugene O’Neill

By Eugene O’Neill

The overdue update to the determination of UK residency, the statutory residence test (SRT), is now in full flight from 1 April 2013. In the modern world, people have been determining their tax residence using a system which was developed in a world where it took a month to travel from the UK to the US. The required revamp was necessary given that some businesses send staff across the world on a weekly, if not on a daily basis.

The new SRT is designed to give greater transparency over whether an individual is resident for UK tax purposes. It is important to remember that whether or not a person pays tax in the UK on their income and capital gains is dependent on their UK tax residence status.

This article gives a summary of the SRT, but the reader must bear in mind that the rules are complex and professional advice should be sought before the residence status of an individual can be conclusively confirmed.

The Old Regime

To gauge the significance of the changes from 1 April 2013 it is important that we consider the old rules which determined whether an individual was tax resident in the UK.

The old system was one of uncertainty, as someone's residence and ordinary residence was based on their facts, circumstances and intentions or ties to the UK.

Individuals were never certain as to their tax position. It was generally the case that you were resident in the UK if you were physically in the UK for 183 days in a tax year, or more than 90 days on average per tax year over a four year period. This was however not always the case as demonstrated in the case of Gaines-Cooper v HMRC (2008). Mr Gaines-Cooper had fulfilled the day-counting test stated in IR20, however as he held strong ties to the UK through family connections and possessions, he was held to have retained his UK tax residence status.

In a time where taxpayers work increasingly on a global basis it is important that their tax status can be determined accurately in order to not deter individuals from moving to the UK or businesses from sending their employees to work in the UK.

An Overview of The New SRT Regime

The structure of the new rules consists of three tests:

  1. Automatic overseas test
  2. Automatic UK test
  3. Sufficient ties test

The transitional rules and the special rules for international transportation workers and those individuals who pass away part-way throughout the year are not considered here.

Automatic Overseas Test

If any of the following tests apply you cannot be UK resident:

  1. If you spend less than 16 days in the UK during the current tax year.
  2. If you were not UK tax resident in the previous three tax years and spend less than 46 days in the UK during the current tax year.
  3. If you leave the UK to work full-time abroad. Full time work is generally considered to consist of a 35 hour week. You may work in the UK for a period of up to 30 days and you must spend fewer than 91 days in the UK in a tax year.

If none of the above tests apply to the individual's circumstances, then you must consider if you are automatically UK resident.

Automatic UK Test

In order to be automatically considered UK resident one of these tests must be met by the individual in the year:

  1. The individual spends at least 183 days in the UK. Generally, a day spent in the UK is counted if the individual is present in the UK at the end of the day but there are exceptions which should be considered on a day in which the individual departs the UK.
  2. If the individual's only home is in the UK for more than 90 days and they are present in that home on at least 30 days in that tax year.
  3. The individual is working full time in the UK for a period of 12 months (which does not need to coincide with the tax year).

As is the way in many cases, if the individual does not meet the conditions for either automatic non-residence or automatic residence, the individual must consider the sufficient tie tests.

Sufficient Ties Test

This test sets out five additional elements which need to be considered alongside the number of days spent in the UK in order to determine whether an individual is UK tax resident. The five additional elements are as follows:

  1. Family tie – does an individual have ‘relevant relationships’ with UK resident people i.e. spouse, civil partner, common law partner and minor children?
  2. Accommodation tie – is accommodation available to an individual for a continuous period of at least 91 days (ignoring short periods of unavailability of less than 16 days) and the individual spends at least one night there during the period of availability?
    Available accommodation can include a holiday home and does not need to be owned by the individual. Accommodation can include a property owned by a ‘close relative’ where the individual has spent 16 nights there.
  3. Work tie – working in the UK for 40 days (continuously or intermittently), a working day is considered to be more than 3 hours of work.
  4. 90 day tie – an individual is in the UK for more than 90 days in either of the two previous tax years.
  5. Country tie – this test only applies to leavers and is used to catch individuals who do not take up residence in another country. An individual has a country tie in the UK if they meet the ‘midnight test’ for the greatest number of days in the UK as opposed to another country. The ‘midnight test’ is met if the individual is present in the UK at the end of the day.

The below table summarises whether an individual is UK resident or non-resident once the number of ties has been confirmed. Whether the individual is UK resident or non-resident will also depend on the number of days spent in the UK and whether the individual is a leaver or an arriver.

Days in the UK

Leavers – Individual was resident in the UK in one of the last 3 years

Arrivers – Individual was not resident in the UK in one of the last 3 years

Less than 16 days

Always non-resident

Always non-resident

16–45 days

Resident only if at least 4 ties apply

Always non-resident

46–90 days

Resident only if at least 3 ties apply

Resident only if at least 4 ties apply

91–120 days

Resident only if at least 2 ties apply

Resident only if at least 3 ties apply

121–182 days

Resident only if at least 1 ties apply

Resident only if at least 2 ties apply

183 days or more

Always resident

Always resident

Split Year Treatment

Tax residence is normally always applied to a full tax year. The new provisions allow in the year of departure or arrival for the tax year to be split into two periods. In one period the individual will be treated as UK resident and in the other period the individual will be treated as non-UK resident.

The split year treatment applies where someone:

  1. Starts full time work overseas – the individual must not be UK tax resident in the next tax year.
  2. Accompanies their spouse/civil partner who is working full time overseas
  3. Leaves the UK to live abroad – must not have a UK home any longer and not return to the UK for greater than 15 days in the remainder of the tax year.
  4. Comes to live/work full time in the UK – must have their only home in the UK until the end of the tax year or work full time in the UK until the end of the tax year.
  5. Starts to have a home in the UK – the individual does not have a home in the UK in the previous tax year but does so for the remainder of the tax year and for the next tax year in full.

The Result of The New SRT

The SRT should make it easier for individuals to determine whether they are UK tax resident as it is based on objective measurements as opposed the previous ambiguous and subjective concepts.

The new SRT may provide greater assurance but it could result in a greater amount of people becoming UK resident e.g. an overseas person who establishes their only home and works in the UK for a relatively short period of time, four months, could become UK resident under the automatic UK resident test. Becoming UK resident could be expensive for certain individuals with the 45% additional rate of tax in 2013/2014.

There is also a self-assessment issue with the new rules where an individual with a split tax year could have to wait 23 months to determine their tax residence.

Record keeping has become vital following the introduction of the SRT. Businesses whose employees work globally need to update their systems to keep a daily record of the amount of time their employees spend working abroad and in the UK. It is likely that evidence may also need to be produced for the ‘sufficient ties’ test.

In conclusion the SRT is a step in the right direction but the test is far from simple and professional advice should be sought in advance of any potential change of residency.

Eugene O'Neill is a Tax Consultant with Cavanagh Kelly Chartered Accountants