Proposed Statutory Defition of Tax Residence for Individuals SUMMARY The government has released draft legislation for 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. 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 2013 (the start of the next come tax year). The SRT 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 www.sullcrom.com
BACKGROUND 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 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. 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. The existg rules, however, are unacceptably vague, especially for ternationally mobile dividuals as witness the cases, decided October last year, of Gaes-Cooper and Davies and James. 1 The government 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 a new statutory test on 17 June 2011. 2 That consultation closed on 9 September 2011. Followg the consultation, the government decided to extend the timetable for consultg on and enactg the new test. On 21 June this year the government issued a further consultation document, along with draft legislation. The tention is that the new test will be cluded the Fance Bill 2013 and apply from 6 April 2013. The government identified three prciples underlyg the proposed framework of the new test. 1. Application to both straightforward and complicated cases. The SRT is tended 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 takes the view that someone who is already resident the one tax year should be more likely to be resident the subsequent 1 2 See our client memorandum of 31 October 2011, available at www.sullcrom.com/uk-tax-residence- 10-31-2011. See our client memorandum of 25 July 2011, available at www.sullcrom.com/uk-tax-residence-07-25- 2011. -2-
years (and claims that this prciple derives from case law). This stance is likely to crease the number of cases of dual residence among ternationally mobile dividuals. 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 unhelpfully for the purposes of National Insurance contributions. (The government argues that, because NICs are usually assessed on a pay period basis, rather than annually, it would be impractical to apply the statutory residence test this form to NICs.) Structure. The proposed SRT volves up to three stages: Does X meet any of the conditions Part A (the automatic overseas test )? Yes X is resident the Yes No Does X meet any of the conditions Part B (the automatic residence test )? No X is not resident the Yes Is X resident under Part C (the sufficient ties test )? No Each of Part A and Part B consists of a list of conditions, only one of which needs to be met. Part C is more complex. It volves testg the number of connection factors ( ties ) an dividual has agast the number of days he or she has spent the. Stickess. Part A and Part C apply different rules to arrivers (those dividuals who were not resident all of the previous three tax years) and leavers (anyone who was resident any of the 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 fairly limited period of residence than it is to become resident when an dividual comes to the. -3-
Part A: conclusive non-residence the automatic overseas test Under Part A, arrivers will be non--resident if they have been present the for fewer than 46 days the current tax year. Leavers, however, will only be treated as non-resident if they are present the for fewer than 16 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 no more than 90 days the tax year and no more than 20 days are spent workg the the tax year. 3 The government has vited comments on creasg the number of workg days allowed the from 20 to 25 workg days. The relevant qualifyg period for FTWA is at least one complete tax year. 4 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 some 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 he or she is present the at the end of the day. 5 The government has raised the possibility of creasg the number of hours that constitute a workg day from three to five hours. (The government is not offerg to raise the length of a workg day the as well as the number of workg days allowed the : it would be one or the other.) Part B: conclusive residence the automatic residence test If Part A of the test does not apply, dividuals will be 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 them are the ); or they carry out full-time work the ( FTW ). 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 government has concluded that home is extremely difficult to defe precisely, but the vast majority of people will know what their home is. The government has asked for feedback on whether to crease the qualifyg period for FTW from ne months to twelve months. 3 4 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.) It is proposed that ternational transportation workers will be excluded from beg eligible for FTWA. Aga, there will be a different rule for ternational transportation workers. -4-
The position for leavers and arrivers under Part A and Part B is summarised the diagrams below. Leavers Arrivers Days Days 183 182 Sole home(s) FTW 183 182 Sole home(s) FTW 91 90 91 90 45 44 FTWA 45 44 10 9 10 9 Non-resident under Part A Resident under Part B Part C: other connection factors and day countg the sufficient ties test 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 ties 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 ties they must have if they are to escape beg classified as resident. As Part A, the rules 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. 6 The followg ties are relevant to the residence status of arrivers and leavers. A family tie. 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 and draft legislation as an additional tie which may be relevant to leavers. -5-
children under 18 years of age with whom the dividual spends all or part of 61 days or more the the tax year; there is an exception for children who are resident the because they are full-time education the but spend fewer than 21 days the outside term time. (The details of this exception have changed from the version suggested last summer.) A work tie (which cludes self-employment). An dividual who works the for 40 days or more will have a work tie. Three hours of work a day is enough to qualify (although this may be creased to five hours), and it does not matter whether the dividual has left the by the end of the day. An accommodation tie. This will apply if: the dividual has a place to live the ; it is available to be used by him or her for a contuous period of 91 days the tax year (subject to an anti-avoidance rule); the dividual spends at least one night there durg the year. (Accommodation held by close relatives will count only if the dividual spends more than 15 nights there durg the year.) All accommodation that satisfies these criteria will count: what right the dividual has to use the accommodation is irrelevant. A 90 day tie. The dividual has spent more than 90 days the either of the previous two tax years. Each dividual must determe how many of the four common ties are present his or her case and then set them agast the number of days he or she spends the. Arrivers 183 182 Non--resident Days 121 120 91 90 46 45 16 15 0 1 2 3 4 ties -6-
Leavers not spendg more days the U.K. than any other jurisdiction 183 182 Non--resident Days 121 120 91 90 46 45 16 15 0 1 2 3 4 ties Leavers spendg more days the U.K. than any other jurisdiction 183 182 Non--resident Days 121 120 91 90 46 45 16 15 0 1 2 3 4 ties -7-
OTHER POINTS Transitional rules. 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 2013 to work out whether they are arrivers or leavers. The government has decided that dividuals should be able to elect to apply the new rules to previous tax years order to determe their residence status under the new SRT. The new rules may not be applied to previous tax years for any other purpose. Exceptional circumstances. Where an dividual spends time the for reasons beyond his or her control (such as hospitalisation), those days of presence will be disregarded for the purposes of daycountg. This exception will be limited to 60 days per year. 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 some types of vestment come whose quantum can be raised fairly easily (such as dividends from privately-owned companies meetg particular criteria). The come would be treated as arisg on their return. How this teracts with the s double tax treaties and whether credit is available for tax suffered while overseas will need to be worked through. (A similar rule was brought for capital gas tax 1998.) Ordary residence. The slightly separate concept of ordary residence is to be abolished for most purposes. Currently, 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 (for -source employment come, this is known as overseas workday relief ). An dividual who is ordarily resident, but not resident, the remas subject to capital gas tax. The government proposes to reta overseas workday relief, replacg the requirement that the taxpayer is not ordarily resident the with a broadly similar statutory test and restrictg the relief to non--domiciled dividuals. The remittance basis for vestment come would apply only to -resident but non--domiciled dividuals. -8-
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 two of them below. 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. The s stated policy of makg it harder for leavers to escape residence may make these tie-breaker rules more significant. 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 2012-9-
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