Statutory residence test
Since income tax was introduced over 300 years ago, there has been no legislation to determine an individual’s residence. Instead, taxpayers have had to rely on case law, HMRC guidance and usual practice.
HMRC’s guidance used to be set out in a document titled ‘IR20’, but the Gaines-Cooper case proved that it was not possible to rely on that guidance. As a result HMRC published a new, simpler guide ‘HMRC6’, but as part of Budget 2011, the government announced plans to introduce a statutory definition of tax residence.
The government’s proposals have been through a lengthy consultation process and draft legislation has now been published. It will form part of the Finance Act 2013, and will take effect from 6 April 2013.
The test is composed of three key elements:
- an automatic residence test;
- an automatic overseas test;
- a sufficient ties test.
It will be necessary to work systematically through the tests in order to determine whether an individual should be treated as not resident in the UK. If someone does not pass the automatic residence test or sufficient ties test for the relevant year they should be treated as not resident in the UK. An online tool to assist in the process will be included on HMRC’s website in due course.
The automatic residence test:
There are four automatic residence tests, and they consider whether a person:
- spends 183 days (or more) in the UK in a tax year;
- has their only home (or homes) in the UK;
- works full time in the UK;
- in certain circumstances, dies during the year.
If an individual meets one of these, and none of the automatic overseas tests (see below), they will be automatically resident for the year.
The automatic overseas test:
A person will be automatically non-resident if one of these tests is met:
- only a minimal number of days were spent in the UK in the tax year (fewer than 16 or 46 depending on when they were last UK resident);
- the individual works full time overseas;
- in certain circumstances he or she dies during the year.
The sufficient ties test:
If the above tests do not give a conclusive result, the next step is to look at the sufficient ties test. Residence in the UK will depend on the number of ties with the UK in conjunction with the number of days spent here. The ties to consider are:
- family tie;
- accommodation tie;
- work tie;
- 90 day tie.
- country tie (only applicable if the individual was resident for one or more of the preceding three tax years.)
The application of the factors in the sufficient ties test varies according to the person’s status in the previous three tax years. A person not resident in the previous three tax years is termed an ‘arriver’, and the sufficient ties factors will impact on them as follows:
|Days spent in UK:||Impact of factors on status:|
|Fewer than 46 days||Always non-resident|
|46-90 days||Resident if person has four factors (otherwise non-resident)|
|91 to 120 days||Resident if person has three factors or more (otherwise non-resident)|
|121 to 182 days||Resident if person has two factors or more (otherwise non-resident)|
|183 days or more||Always resident|
Individuals resident in one or more of the previous three tax years are known as ‘leavers’, and they have a slightly different table:
|Days spent in the UK:||Impact of factors on status:|
|Fewer than 16 days||Always non resident|
|16 to 45 days||Resident if person has four factors or more (otherwise not resident)|
|46 to 90 days||Resident if person has three factors or more (otherwise not resident)|
|91 to 120||Resident if person has two factors or more (otherwise not resident)|
|121 to 182 days||Resident if person has one factor or more (otherwise not resident)|
|183 days or more||Always resident|
Although rather complex, the tests are designed to bring greater certainty and clarity to the question of a person’s tax residence and they will also help to provide a firmer basis for tax planning. For more details about the consultancy process and draft legislation, see HM Treasury's website.