Consultation on Statutory Definition of Tax Residence for Individuals

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1 Consultation on Statutory Defition of Tax Residence for Individuals SUMMARY The government has released a consultation document proposg the troduction of a statutory residence test ( SRT ) for dividuals. The new test is tended to give the same outcome as the existg test most cases. The aim is that it will be more transparent, objective and simple to use. Key features of the SRT clude: simple rules to deal with the more straightforward cases; separate treatment of arrivers and leavers ; the placg of split-year concessions on a statutory footg; and a reduction the number of factors which may affect residence. The SRT would apply to dividuals for the purposes of: come tax; capital gas tax; and heritance tax. Strangely, however, it would not apply for the purpose of National Insurance (social security contributions). The government proposes that the new defition would apply from 6 April 2012 (the start of the next come tax year). The proposals would brg a welcome degree of clarity to what has been an unsatisfactory area of law. New York Washgton, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijg Melbourne Sydney

2 BACKGROUND The way of taxpayers is hard and the Legislature does not go out of its way to make it any easier the words are pla and it is only their application that is haphazard and beyond all forecast. Thus Viscount Sumner, commentg on the failure of the s come tax legislation to say what it means by resident back The task of defg what it is for an dividual to be resident the has fallen, by default, to the courts. Judges have identified several factors as relevant: whether an dividual has accommodation available to him 2 the ; the length, purpose and frequency of his visits to the ; and the extent of his ties to the. The result is a test which is highly fact-sensitive and difficult to apply practice. The test does not simply depend on countg days spent the. Parliament has grafted on some limited statutory rules. In practice, however, HM Revenue & Customs has played a significant role, both by adoptg extra-statutory concessions and by publishg guidance, previously IR20 and more recently HMRC6 3. HMRC s guidance has itself come under scruty from the courts Davies and Gaes-Cooper 4, which the taxpayers argued that the guidance supported them but HMRC was refusg to apply it. This has added to the general concern that the existg rules are unacceptably vague, especially for ternationally mobile dividuals. THE CONSULTATION DOCUMENT The government accepts that, under a self-assessment tax system, dividuals should be able to be sure whether they are resident for tax purposes the. It proposes to resolve the uncertaty at last by puttg the residence test on a statutory footg and by makg it transparent, objective and simple to use. HM Treasury and HMRC issued a jot consultation document settg out their proposal for the new test on 17 June The consultation is open until 9 September The government proposes that the new defition would be cluded the Fance Bill 2012 and apply from 6 April Levene v. The Commissioners of Inland Revenue 13 TC 486 at 502. Or, a couple of cases, her. Guidance on Residence, Domicile and the Remittance Basis, The most recent judgment these cases (now joed as The Queen (on the application of Davies and James) and The Queen (on the application of Gaes-Cooper) v. HMRC) was that of the Court of Appeal: [2010] EWCA Civ 83. At the time of writg, the Supreme Court has heard the case but not given judgment. -2-

3 The government has identified three prciples underlyg the proposed framework of the new test. 1. Application to both straightforward and complicated cases. The SRT has been designed to make it easier for all dividuals to self-assess their tax residence status, regardless of how simple or complex their affairs may be. 2. Relevance of both time spent the and personal connections. The government recognises that the concept of residence should contue to volve more than simply countg the number of days one spends the a given tax year. The strength of a person s connections with the will also be taken to account, but the terests of simplicity and clarity, the number of factors which may be considered will be limited and their weightg made clear. 3. Adhesive ( sticky ) nature of residence. The government considers that someone who is already resident the one tax year should be more likely to be resident the subsequent years (and claims that this prciple derives from case law). Accordgly, the proposed SRT treats arrivers and leavers differently (see below). THE PROPOSED TEST Overview Scope. The SRT would apply to dividuals for the purposes of come tax, capital gas tax and heritance tax. It will not apply to companies or oddly for the purposes of National Insurance contributions. Structure. The proposed SRT volves up to three stages: Does X meet any of the conditions Part A? Yes X is resident Yes No Does X meet any of the conditions Part B? X is not resident the No the Yes Is X resident under Part C? No Each of Part A and Part B consists of a list of conditions, only one of which need be met. Part C is more complex. It volves testg the number of connection factors an dividual has agast the number of days he or she has spent the. Stickess. Part A and Part C apply different criteria to arrivers (those dividuals who were not resident all of the previous three tax years) and leavers (anyone who was resident any of the -3-

4 previous three tax years). The effect of drawg the distction this way is to make it more difficult to become non-resident when leavg the after a period of residence than it is to become resident when an dividual comes to the. This is compounded by the way the two categories are treated. Part A: conclusive non-residence Under Part A, arrivers will be treated as conclusively non-resident if they have been present the for fewer than 45 days the current tax year. Leavers, however, will only be treated as non-resident if they are present the for fewer than 10 days. The SRT also provides that those who leave the to carry out full-time work abroad ( FTWA ) will be treated as non-resident, provided they are present the for fewer than 90 days the tax year and no more than 20 days are spent workg the the tax year. 5 Under the proposed SRT, the meang of day of presence the will rema a question of countg the number of midnights a person is present the (ignorg certa transitg airle passengers). By contrast, a workg day will be defed under the SRT as any day on which an dividual carries out more than three hours of work, regardless of whether or not they are present the at the end of the day. Part B: conclusive residence Provided Part A of the test does not apply, an dividual will be conclusively resident for the tax year under Part B if they meet any of the followg conditions: (as under the existg law) they are present the for 183 days or more a tax year; or they have only one home and that home is the (or have two or more homes and all of these are the ); or they carry out full-time work the. The consultation document specifies that residential accommodation will not be treated as an dividual s home if that accommodation is beg advertised for sale or let and the dividual lives another residence. Home itself, however, is not defed. The position for leavers and arrivers under Part A and Part B is summarised the diagrams below. 5 The consultation document suggests that, as under existg practice, the FTWA condition for nonresidence applies only to leavers, not to arrivers. This is surprisg, sce theory at least it could also benefit arrivers. (An arriver the same circumstances would be non-resident under Part C, but only so long as he or she was not resident under Part B.) -4-

5 Leavers Arrivers Days Days Sole home(s) FTW Sole home(s) FTW FTWA Non-resident under Part A Resident under Part B Part C: other connection factors and day countg Part C applies where an dividual s status is not settled by Part A or Part B. It departs from the case law test by providg an exhaustive list of connection factors that are relevant to a determation of residence, which an dividual will need to compare agast the number of days he or she spends the. Another departure lies the proposal that they should be equally weighted (rather than the weightg beg a matter of impression for the courts). Essentially, the more time dividuals spend the, the fewer connection factors they may have if they are to escape beg classified as resident. As Part A, the criteria to be applied vary accordg to whether an dividual is an arriver or a leaver. In Part C, however, leavers are also effectively divided to two classes: they are treated differently accordg to whether they have spent more days the than any other country durg the tax year. 6 The followg connection factors are relevant to the residence status of arrivers and leavers: the dividual has a -resident family. Family is defed under the proposed SRT as consistg of: a spouse, civil partner or common law equivalent, except a spouse from whom the dividual is separated (where the separation is by order or agreement or likely to be permanent); or 6 This is framed the consultation document as an additional connection factor which may be relevant to leavers. -5-

6 children under 18 years of age with whom the dividual spends all or part of 60 days or more (whether the or elsewhere) the tax year, except children whose presence the is caused maly by time spent a school; the dividual has substantive employment (cludg self-employment). Under the proposed SRT, this will be where an dividual works the for 40 days or more. Three hours of work a day is enough to qualify, and it does not matter whether the dividual has left the by the end of the day; the dividual has accessible accommodation the. Accommodation will be relevant as a connectg factor if an dividual has residential accommodation that is accessible to be used by them or their family as a place of residence. This is subject to a number of exceptions, cludg short-term hotel accommodation, accommodation held on a lease of six months or less (provided it is not part of a series of consecutive leases); the dividual has spent 90 days or more the either of the previous two tax years. Each dividual must determe how many of the four common connection factors are present his or her case and then set them agast the number of days he or she spends the : Days Non - - resident Arrivers Leavers not spendg more days than any other jurisdiction spendg more days than any other jurisdiction Factors -6-

7 Example. The consultation document gives the followg example of how the Part C test might apply. Mr D is a wealthy busessman with homes various countries. He has not been resident the prior to He has busess terests the and owns a house London but, until , he spends only a few days the each year. In , his wife moves to the to live the London house with their two children. His wife and children become resident the. The children enrol local schools, and Mr D visits whenever he can. He spends 95 days the 2012, 80 of them workg. He stays the London house on days when he is the. Leaver / Arriver Accessible accommodation: 90 days + 1 of previous 2 years: -resident family: Substantive employment: Mr D is an arriver. He spends 90 days or more the and has three relevant connection factors: Days Non--resident Arrivers Mr D Factors Mr D is resident the

8 OTHER POINTS Current law to rema relevant until Under the SRT, a person will be classified as either an arriver or leaver dependg on whether or not he or she was resident the any one of three previous tax years. This raises the question of whether dividuals should apply the old or the new defition of residence for years up to 5 April 2012 to work out whether they are arrivers or leavers. The government s preference is to use the old defition for previous years, as dividuals will already have had to work out their residence status for those years under the old defition. Split-year treatment. By concession, HMRC allows an dividual to split a tax year to periods of residence and non-residence where an dividual comes to or leaves the part of the way through the tax year. The government tends to put this concession onto a statutory footg, amendg the conditions which the taxpayer must meet to fit with the new SRT. Anti-avoidance rules. The government is concerned that offerg taxpayers certaty as to whether they are resident or not could allow them to plan their affairs to avoid come tax. The consultation document proposes an anti-avoidance rule, taxg temporary non-residents on certa types of vestment come whose quantum can be raised fairly easily (such as dividends from certa privately owned companies). (A similar rule was brought for capital gas tax 1998.) Ordary Residence. The government also proposes troducg a statutory defition for the slightly separate concept of ordary residence. An dividual who is resident, but not ordarily resident, the is entitled to be taxed on foreign vestment come and -source employment come for duties performed outside the only when he or she remits the come to the. An dividual who is ordarily resident, but not resident, the remas subject to capital gas tax. 7 The consultation document proposes that dividuals who are resident the would be ordarily resident unless: (i) they are not domiciled the ; (ii) they were not resident the for five tax years before their arrival; and (iii) they have been resident the for at most two full tax years followg their tax year of arrival. The consultation document vites responses on whether the concept of ordary residence should be retaed only for the purposes of allowg the remittance basis for -source employment come for duties performed outside the. 7 In fact, some cases suggest that it is not possible to be ordarily resident without first beg resident. -8-

9 PRACTICAL IMPLICATIONS The SRT would significantly clarify the current rules relatg to tax residence. There is scope for improvement, however, and any would-be non-resident would still need to bear other legal and practical considerations md. We note three of them overleaf. Family connection factor and divorce. Concerns have been raised that a divorced or separated parent livg abroad whose children are the could be discouraged from spendg time with them: the connection factor applies if they spend 60 days or more together, whether or not that time is spent the. Double Taxation Agreements. The SRT would defe the domestic law position. Individuals who would be resident under the SRT may still be able to claim the benefit of a double taxation agreement if they are resident elsewhere. Individuals will need to ensure they are well-formed about the relevant treaty tie-breaker rules relatg to their situation order to mimise their liabilities both the and abroad. Documentation. Taxpayers should contue to reta accurate records of their ternational movements as far as possible. Anyone treated as a leaver will need to be able to show not just whether they were the or elsewhere on a given date, but where they were outside the, if they tend to claim that the was not the country where they spent the most time. * * * Copyright Sullivan & Cromwell LLP

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