Robert Newey & Co

Get in touch today: 020 7407 9434

News and Articles

UK tax residence: recent and prospective developments

4th July 2011

(NB This article relates to the law that applied up to 5th April 2013. For a discussion of the new statutory residence test click here.)

Introduction

Since around 2005 there have been a series of important developments relating to the law of residence for tax purposes in the UK.

Around that time the UK government in effect abandoned its past practice in this area. The underlying concern may have been to adapt the law and practice to modern conditions. The introduction to the recent Consultation on a statutory definition of tax residence (discussed below) notes that the definition "largely rests on legal cases decided in the courts over a very long period of time and based on facts arising in a very different world from today's globalised economy, technology, travel and working patterns."

This led to a series of cases, based on case law from the late 19th and early 20th centuries, being brought before the courts. The government now plans to bring in a new statutory regime in the Finance Act 2012.

Preliminary points

The scope of an individual's UK tax liabilities (if any) depends partly on whether he or she is:

  • Resident;
  • Ordinarily resident; and/or
  • Domiciled

in the UK.

In order to keep to a manageable length, this note concentrates on the concepts of residence and ordinary residence.

The stream of recent cases

There were numerous cases about the meaning of residence and ordinary residence for tax purposes in the late 19th and early 20th centuries. There is very little statute law in this field.

In practice the gaps in the legislation were for many years filled by guidance from the Inland Revenue (now HM Revenue and Customs - "HMRC") in booklet IR20. This set out Inland Revenue practice in this field. It spelt out, for example, the precise number of days that an individual had to spend in the UK in order to be regarded as UK resident and the number of days that an individual had to spend in the UK over a three-year period in order to be regarded as ordinarily resident. It seems that, as this precise guidance became available, the cases largely ceased.

In recent years, however, there has been a new flood of cases about residence and ordinary residence. One of the first cases was Gaines-Cooper v IRC (2006).

Mr Gaines-Cooper took the view that he was not resident, ordinarily resident or domiciled in the UK. Apparently he organised his life with IR20 in mind. HMRC disagreed with him. In due course he appealed to the Special Commissioners (broadly speaking, a tribunal that heard tax appeals). The Special Commissioners ignored IR20, which simply represented HMRC's practice, and instead focused on the case law from the late 19th and early 20th centuries. They concluded that IR20 did not accurately reflect the case law. On the basis of the case law they concluded that Mr Gaines-Cooper had at all relevant times remained both resident and ordinarily resident in the UK. They also decided that he had remained domiciled in the UK.

In another case (Grace) the Court of Appeal adopted summaries of the case law that had previously been formulated by the High Court and the Special Commissioners. The case law is by no means as clear to apply, however, as the guidance in IR20.

Principles from the case law

The Court of Appeal has thus adopted the following principles:

1.    The word "reside" is a familiar English word, which means, "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place".

2.    Physical presence in a particular place does not necessarily amount to residence in that place where, for example, a person's physical presence there is no more than a stopgap measure.

3.    In considering whether a person's presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place.

4.    Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity.

5.    However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as business obligations) and the sequence of visits excludes the elements of chance and of occasion.

6.    Although a person can have only one domicile at a time, he may simultaneously reside in more than one place, or in more than one country.

7.     "Ordinarily resident" refers to a person's abode in a particular place or country which he has adopted voluntarily and for settled purposes as part of the regular order of his life, whether of short or long duration.

8.    Just as a person may be resident in two countries at the same time, he may be ordinarily resident in two countries at the same time.

9.    It is wrong to conduct a search for the place where a person has his permanent base or centre adopted for general purposes; or, in other words to look for his "real home".

10. There are only two respects in which a person's state of mind is relevant in determining ordinary residence.  First, the residence must be voluntarily adopted; and second, there must be a degree of settled purpose.

11. Although residence must be voluntarily adopted, a residence dictated by the exigencies of business will count as voluntary residence.

12. The purpose, while settled, may be for a limited period; and the relevant purposes may include education, business or profession as well as a love of a place.

13. Where a person has had his sole residence in the United Kingdom he is unlikely to be held to have ceased to reside in the United Kingdom (or to have "left" the United Kingdom) unless there has been a definite break in his pattern of life.

In addition:

14. No duration is prescribed by statute and it is necessary to take into account all the facts of the case; the duration of an individual's presence in the United Kingdom and the regularity and frequency of visits are facts to be taken into account; also, birth, family and business ties, the nature of visits and the connections with this country, may all be relevant.

15. The availability of living accommodation in the United Kingdom is a factor to be borne in mind in deciding if a person is resident here (although that is subject to s 336 of the Income and Corporation Taxes Act 1988). [Section 336 (3), now re-enacted in the Income Tax Act 2007, section 831, gave/gives exemption from certain tax liabilities if a person is in the UK for some temporary purpose only and not with any view or intent of establishing his residence there.]

16. The fact that an individual has a home elsewhere is of no consequence: a person may reside in two places but if one of those places is the United Kingdom he is chargeable to tax here.

The status of official guidance (IR20 and HMRC6)

The line of cases relating to Mr Gaines-Cooper has not yet come to an end. He challenged HMRC's refusal to honour the terms of the guidance laid out in IR20. The Court of Appeal ruled in 2010 that HMRC were obliged to honour this guidance. They went on, however, to analyse IR 20 in great detail. They concluded on the basis of this close analysis that under IR20 Mr Gaines-Cooper should still have been regarded as resident and ordinarily resident in the UK. A further appeal by Mr Gaines-Cooper to the Supreme Court is expected to be heard in summer 2011.

It will be interesting to see whether the Supreme Court agrees with the Court of Appeal in its reading of IR20. It would perhaps be ironic if, having apparently abandoned IR 20 in order to establish that Mr Gaines-Cooper was liable to UK tax, HMRC found that they were obliged after all to give him the benefit of its wording.

In April 2009 HMRC withdrew IR20. They replaced it, at least in part, with another booklet - HMRC 6. They stated that they intended taxpayers in straightforward situations to be able to rely on their Internet guidance. They envisaged that, in more complex situations, taxpayers should be able to rely on HMRC 6. Even more sophisticated guidance was apparently envisaged for professional advisers, but (so far at least) this does not seem to have appeared.

Since its introduction in April 2009, HMRC 6 has itself been revised twice: in February and December 2010.

Movement towards a statutory regime

In the light of these uncertainties there has been renewed pressure for statutory definitions of residence and ordinary residence. A consultation paper was released on 17th June 2011 and legislation is promised for the Finance Act 2012. Details of the consultation paper are set out below. It is of course important to note that this is no more than a consultation: at this stage much may change.

 

APPENDIX: DETAILS OF THE CURRENT CONSULTATION

Note that this is a consultation. In principle everything is subject to change. Legislation is planned for 2012.

The Consultation starts by noting that the circumstances in which individuals are currently treated as UK resident for tax purposes include where they:

  • spend 183 days or more in the UK in a tax year;
  • come to the UK with the intention of living here permanently or to work here for an extended period, or with no particular end date;
  • come to the UK temporarily and spend 91 days or more per year in the UK on average over a four-year period;
  • come to the UK for a purpose, such as employment, that will mean that they remain in the UK for at least two years (whether or not, in a particular year, they spend 183 days or more in the UK); or
  • usually live in the UK and go abroad for short periods, for example on business trips or holidays.

The Consultation notes that whether an individual is resident in the UK is not solely dependent on the amount of time that they spent here. The nature and quality of an individual's connections with the UK are important factors in determining whether they are resident in the UK. For example, family, accommodation, and economic interests can be relevant. The Consultation notes that there is uncertainty because some of the key concepts within the rules are not defined.

The proposals in outline

The proposed new test is intended to define tax residence for individuals: it will not cover the residence of companies. It will apply for the purposes of income tax, capital gains tax and inheritance tax. It will not apply for non-tax purposes or other government services where residence is separately defined, such as National Insurance contributions. It will supersede all existing legislation, case law and guidance for tax years following its introduction.

The Consultation proposes to distinguish between:

  • Arrivers-defined as individuals who were not UK resident in all of the previous three tax years; and
  • Leavers-defined as individuals who were resident in one or more of the previous three tax years.

Under Part A of the proposed test individuals would never be resident in the UK for tax year if they fell under any of the following conditions, namely they:

  • had not been resident in the UK in all of the previous three tax years and were present in the UK for fewer than 45 days in the current tax year; or
  • had been resident in the UK in one or more of the previous three tax years and were present in the UK for fewer than 10 days in the current tax year; or
  • left the UK to carry out full-time work abroad, provided they were present in the UK for fewer than 90 days in the tax year and no more than 20 days were spent working in the UK in the tax year.

Provided Part A of the test did not apply, individuals would be conclusively resident for the tax year under Part B if they met any of the following conditions, namely they:

  • were present in the UK for 183 days or more in a tax year; or
  • had only one home and that home was in the UK (or had two or more homes and all of these were in the UK); or
  • carried out full-time work in the UK.

Part C would apply only to individuals whose residence status was not determined by Part A or Part B. There would be different rules for Arrivers and Leavers.

For Arrivers the following connecting factors would be relevant:

  • family resident in the UK;
  • substantive UK employment (including self-employment);
  • accessible accommodation in the UK;
  • the individual had spent 90 days or more in the UK in either of the previous two tax years.

An Arriver who spent fewer than 45 days in the UK during a tax year would always be regarded as non-resident. An Arriver who spent between 45 and 89 days in the UK would be regarded as resident if all the above factors applied to him/her. As the number of days spent in the UK increased, the number of connecting factors required to establish residence would decrease. An Arriver who spent 183 days or more in the UK would always be resident.

For Leavers a slightly different list of connecting factors would be relevant:

  • family resident in the UK;
  • substantive UK employment (including self-employment);
  • accessible accommodation in the UK;
  • the individual had spent 90 days or more in the UK in either of the previous two tax years;
  • the individual spent more days in the UK in the tax year than in any other single country.

A Leaver who spent fewer than 10 days in the UK during a tax year would always be regarded as non-resident. A Leaver who spent between 10 and 44 days in the UK would be regarded as resident if 4 or more of the above factors applied to him/her. As the number of days spent in the UK increased, the number of connecting factors required to establish residence would decrease. A Leaver who spent 183 days or more in the UK would always be resident.

Certain extra-statutory concessions under which tax years can currently be regarded as split into periods of residence and non-residence would be replaced with a new statutory provision. The new provision would work differently from the existing concessions. A tax year would be treated as split into periods of residence and non-residence if a person:

  • became resident in the UK by virtue of his/her only home being in the UK;
  • became resident by starting full-time employment in the UK;
  • established his/her only home in a country outside the UK, became tax resident in that country and did not come back to the UK in that tax year;
  • lost UK residence by virtue of working full time abroad; or
  • returned to the UK following a period of working full-time abroad.

The tax year would not be treated as split where an individual's resident status changed as a result of changes in the number of connections factors under Part C, such as the arrival or departure of their family.

There would be an anti-avoidance rule for some forms of investment income along the lines of the existing capital gains tax anti-avoidance rule, which applies where an individual leaves the UK temporarily and realises capital gains in the period of non-residence. The rule would apply to some forms of investment income: in particular it would apply to dividends paid by closely controlled companies that reflected profits that had been built up during a period of residence and which were then taken out during a short period of non-residence. The rule would not apply to all types of income received when a person was non-resident. For example, it would not apply to earnings from employment or self-employment or to normal types of regular investment income, such as bank interest or dividends from listed companies.

Ordinary residence

As regards ordinary residence, the government is considering whether to abolish ordinary residence for all tax purposes except overseas workday relief, or to retain ordinary residence for all current tax purposes. In either case a statutory definition would be needed.

The following proposals are noted:

  • Individuals who were resident in the UK would also be treated as ordinarily resident unless they had been non-resident in all the previous 5 tax years.
  • The status of being not ordinarily resident would be available in the tax year of arrival in the UK and for a maximum of two full years following the year of arrival.
  • Notwithstanding the individual's resident status in the previous five years, the individual would be regarded as ordinarily resident if he or she:
    • was resident in the UK on the basis that his or her only home was in the UK; or
    • had more than one home and all of his or her homes were in the UK.
  • The government's preference is that it should only be possible for non-domiciled individuals to be not ordinarily resident.

 

IMPORTANT: These notes are necessarily simplified. Tax law and practice can also change very fast. Always take detailed, specific advice before taking, or deciding not to take, any action.

Back to Articles