HMRC's new rules on tax residency explained

Do you advise foreign clients? Gerry Brown, technical manager at Prudential, probes the latest HMRC consultation papers you should know about.

June saw the issue of two HM Revenue & Customs (HMRC) consultations of great interest to those who advise international clients.

1. Statutory definition of tax residence

The consultation on a statutory definition of residence concedes that the current rules are “vague, complicated and perceived to be subjective.” The objective is to introduce a statutory test that is “transparent, objective and simple to use.”

The uncertainty in the current rules mainly affects individuals with complicated circumstances – those who travel to and from the UK regularly or those who have connections with a number of different countries.

Few would disagree with these views!

HMRC has come up with a “solution”. Although the consultation is entitled “Statutory definition of tax residence” it does not actually contain a definition of residence. Instead it postulates a test or process by which UK tax residence can be established.

One possible approach would have been to use a simple “day count” – presence in the UK for 183 days or more in any tax year makes the individual concerned tax resident for that year.

Indeed at a simple level an individual who is;

• physically present in the UK for 183 days or more in any tax year; and
• has his/her only home(or homes) in the UK
• will be UK resident for that tax year.

For individuals with a more complex “history” and in particular people who have not been resident in all of the previous three tax years (“arrivers”), or who have been
resident in one or more of the previous three tax years (“leavers”) HMRC has gone for a more sophisticated approach and combined “day counting” with “connection factors”.

The connection factors are;

Family – is the individual’s spouse/civil partner or “common law equivalent” or minor children UK resident
Accommodation – does the individual have accessible accommodation in the UK and does he/she make use of it in the tax year under review?
Substantive UK work – does the individual undertake substantive work in the UK? (but does not work full time in the UK)
UK presence in previous years – has the individual spent 90 days or more in the UK in either of the previous two tax years?
More time in the UK than in other countries – does the individual spend more days in the UK than in any other single country in the tax year in question?

These connecting factors are then combined with “presence days” to give a matrix from which UK residence or non-residence can be determined. This can be done online. The new regime is intended to come into effect on 6 April 2012.