UK Statutory Residence Test and Reform of Ordinary Residence
In 2011 the Government announced its intention to introduce a statutory definition of residence to provide clarity and greater certainty to individuals. Following a consultation process the Government has recently published its response to the consultation, raises further issues in an additional consultation period and sets out the draft legislation.
The Government initially proposed that there would be three elements to the test, Parts A Conclusive Non-Residence, Part B Conclusive Residence and Part C Connecting Factors and day count to determine residence as considered in our UK Residence Update in June 2011.
Changes following the Consultation
Part A has been subject to slight modification. An individual is non-resident if they:
- were not resident in all the previous three tax years and are present in the UK for fewer than 45 days in the current tax year; or
- were UK resident in one or more of the previous three tax years and present in the UK for fewer than 15 days (previously 10 days) in the current tax year; or
- leave the UK for full-time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 25 days (previously 20 days) are spent working in the UK in the tax year.
Further consultation is being undertaken on the definition of ‘full time work abroad’. The number of hours that constitute a working day may be increased to 5 hours, from 3 hours, or the number of working days allowed in the UK may be increased from 20 to 25.
Part B is largely unchanged. An individual will be considered to be resident if they:
- are present in the UK for 183 days or more in any tax year; or
- have one home and that home is in the UK (or have two or more homes and all are in the UK; or
- carry out full-time work in the UK.
Further consultation is being considered on the proposal to increase the qualifying period for full time work in the UK from 9 months to 12 months.
Part C factors apply to individuals whose circumstances are complex. Connecting factors may be relevant to the individual’s residence status if they occur at any time in the tax year. Connections that are considered:
- has UK resident family;
- has substantive UK employment including self-employment;
- has accessible accommodation in the UK;
- spent 90 days or more in the UK in either of the two previous tax years;
- spent more time in the UK than any other single country.
There has been acknowledgement that the proposal to determine residence by reference to the individual’s spouse, partner or minor child could lead to a circular argument. In such cases, the family connection will be ignored and residence will be determined without reference to another individual.
It has also been accepted that children being educated in the UK should not be deemed a family connection, providing that the child spends less than 21 days in the UK outside term time.
The Government has also provided the simplified definition of accommodation; being that the premises is available for use for a period of at least 91 days a year and the individual spends at least one night there during the tax year.
Day Counting
Provision will be included to cover the situation when, due to exceptional circumstances, an individual is present in the UK for additional days. Days that are spent in the UK for reasons beyond the individual’s control will be disregarded.
Furthermore, in split years (when an individual leaves the UK to take residence abroad) they will be able to spend 15 days in the UK in the part of the tax year after their departure.
Adjustments have been made to the day counting tables previously published.
Transitional Rules
The transitional rules will apply in cases where an individual needs to establish their residence status in years prior to the introduction of the residence test, when it is necessary to determine their residence in future tax years.
Reform of Ordinary Residence
It is proposed that ordinary residence will be abolished for tax purposes as part of the Government’s aim to simplify the tax system. However, overseas workday rules will remain but will be given a statutory basis.
Transitional provisions will be introduced to ensure that those individuals who currently benefit from being not ordinarily resident are not disadvantaged as a result of the abolition. Thus they will be able to continue to receive their particular tax treatment for up to two tax years following commencement.
Next steps
Following the completion of this new consultation a further draft of the legislation will be published in Finance Bill 2013 later in the autumn. A final version will be published shortly after Budget 2013 and will then be subject to parliamentary scrutiny in the usual way.