Contractors' Questions: What's in the UK residence test, other than the 183-day rule?

Contractor’s Question: Is the government going to go ahead with the new Statutory UK Residence Test for tax purposes? I understand that the Test will incorporate the existing 183-day rule as a so-called ‘automatic test’ for UK residency, rather than dropping it as some wanted, but what else will it include?

Expert’s Answer: Under the new proposals, from April 6^th next year, an individual’s residence will depend partly on the number of days spent in the UK, but also on their connections to the UK. This will take into account a whole range of factors, such as whether they own property or have business interests here, or where their family are resident.

Unfortunately, despite feedback from tax professionals and others, the new test fails to provide either simplicity or certainty, with the legislation running to nearly 80 pages and many significant terms undefined. 

For example, a crucial question for taxpayers in determining residence will be deciding whether they have a ‘home’ in the UK. However, the legislation fails to provide a clear definition of a ‘home’ – merely stating that it could include a vehicle (so presumably sleeping in one’s car could count) and that ‘it will depend on all the circumstances of the case’.  This leaves taxpayers trying to decide if they have enough of a connection with a property to decide if it is their home.

With a lack of clear definitions, tax cases in this area will continue to grow.  The new rules will be a help, but a number of uncertainties will remain, making many high net worth individuals reluctant to come to the UK or otherwise build connections here.”

The expert was Patrick Stevens, tax partner at Ernst & Young.

Expert’s Answer: The long-awaited Statutory Residence legislation, which has been incorporated in the draft Finance Bill, is a step in the right direction but is unlikely to provide a clear cut answer in more complicated cases.

Disappointingly for those who expected a simple set of rules, the changes cover 55 pages of dense drafting. Despite regular assurances to the contrary, they will not retain the status quo and many people will find themselves resident for UK tax purposes where they would not have been under the existing framework. It therefore seems inevitable that the Treasury will benefit from a windfall as new residents pay additional UK tax.

There have been some further relaxations and helpful clarifications in coming to the latest draft, for example regarding the definition of a ‘home’. However, defining a ‘working day’ either in the UK or overseas as consisting of a mere three hours in certain cases will be impossible to measure accurately or monitor.

While the vast majority of people are likely to fall into the relatively simple categories of the ‘automatic residence test’ [one of the four categories is if they spend at least 183 days in the UK during the tax year] as either resident or not, those at the edges are likely to need a great deal of professional guidance in determining their position under the ’sufficient ties’ tests prior to self-assessing their tax.

As such, this new legislation can be seen as a real let-down since its stated purpose was to offer clarity so that individuals could make informed decisions themselves.”

The expert was Philip Fisher, head of employment tax at PKF.

Expert’s Answer: It is on the surface disappointing that the legislation has grown ever longer but this is a case where longer is better. We need the rules to bring certainty to as many taxpayers as possible and that means spelling out the rules in the law. It is good to see that a number of our concerns – for example around the meaning of ‘home’ – have been addressed, though some remain and we still need guidance in a few areas.

We also welcome the commitment to press ahead with the abolition of ordinary residence which will be welcome simplification and streamlining. Retaining the overseas workday relief in defined situations brings a proper balance to matters.

The expert was Colin Ben-Nathan, chair of the employment taxes committee at the Chartered Institute of Taxation.