In a recent commentary written by Trevor Johnson, which commentary was published in International Tax Notes (July 11, 1011) the author describes the long-standing uncertainty surrounding the determining of "residency" for U.K. income tax purposes.
The issue is historical since it dates back over 200 years. Yet, the rules do not state explicitly who is and who is not a U.K. resident for tax purposes. While there is some guidance, the overall subject suffers from uncertainty.
The commentary quotes the Income Tax Act of 1842:
“Any subject of Her Majesty, whose ordinary residence shall have been in Great Britain, and who shall have departed from Great Britain and gone into any part beyond the sea for the purpose of occasional residence . . . shall be deemed, notwithstanding such temporary absence, a person charged with the duties granted by this Act as person actually residing in Great Britain. Provided always that no person who shall . . . actually be in Great Britain for some temporary purpose only, and not with any view or intent of establishing his residence therein, and who shall not actually have resided in Great Britain at one time or several times for a period equal in the whole to six months in any one year shall be charged with the duties mentioned in Schedule D as a person residing in Great Britain in respect of [foreign-source income] but nevertheless every such person shall, after such residence in Great Britain, for such space of time as aforesaid, be chargeable to the said duties for the year commencing on the sixth day of April preceding.”
The statutory language capturing the phrase “ordinary residency” should be clear, at least in certain instances, to be clear and predicable. For example, we are told that a ordinary resident in the U.K. who temporary goes outside of the U.K. is still a resident. Visitors arriving in the U.K. for a temporary purpose without the intention of establishing residence, who spend less than 183 days in the U.K. in any tax year, are not regarded as resident for tax purposes. However, they will become resident for any year in which their presence exceeds 183 days. But as Mr. Johnson points out, there is much work to be done to arrive at a better set of applicable rules and principles.
While such rules sourced from the 1842 legislation were simply stated, additional ambiguous concepts were introduced such as the meaning of a “temporary purpose” and what was meant by “residence”. The commentator notes that when tax cases were first officially reported in 1875, one of the first was concerned with tax residence status. The second rule above also had limited application -- it only covered foreign-source income.
Since 1842’s version’s of residency was pronounced its principles have been restated in other tax acts and now is warehoused at section 829 and 831 of the Income Tax Act of 2007. Nevetheless, there are the same uncertainties present, which has, over time, led to various judicial decisions. The precedents from these cases are the basis from the current law is applied.
In recent years there has been a growing concern that that practice, as set out in publication HMRC6 (previously IR20), Residence, Domicile and the Remittance Basis, does not give certainty, has been changed without notice, and when it comes to the crunch, will not necessarily be supported by the courts. Thus, many in the UK want a more formal statutory definition of residency. The government has responding by forming a working group that will publish a consultative document.
Under current law in the U.K. and individual who spends 183 days or more in the U.S. is a resident for tax purposes. In Wilkie, 32 T.C. 485. Mr. Wilkie contended he was not “resident” by submitting evidence he was present in the UK for only 182 days and 20 hours. He was spared U.K. taxation by four hours. Where an individual moves to the U.K. with the intention either of living here permanently or working here for an extended period or for an indeterminate period then residency is also established. In Lysaght, 13 TC 511 (1928), the taxpayer was found to be resident in the U.K. because of his regular visits to carry out duties as a director of a U.K. company even though he had no definite place of residence here.
Where an individual comes to the U.K. on a temporary basis and is present for 91 or more days per year on the average over a four year period (based on the Lysaght decision) then he is resident. When an individual comes to the U.S. for a particular purpose and remains for at least two years, regardless of the number of days present in each year, i.e., a “settled purpose”, the such person is resident. See Cooper v. Cadwalader, 5 T.C. 101 (1904).
The object of the current consultation project is to provide greater certainty when individuals determine their residence status under self-assessment, whether that be on arriving in the U.K. or leaving it. The consultation seeks views on a proposed statutory residence test, which would apply from April 6, 2012. It will have three parts: (i) to determine whether the individual is clearly nonresident; (ii) to determine if the individual is clearly resident; (iii) to resolve the issue where application of the first two tests leads to a conflicting set of conclusions.
Under the first test of “clearly non-resident’, such would apply to an individual who is present in the U.K. for less than 45 days and was not a resident in any of the three immediately preceding tax years. If such person was resident in any of the 3 preceding years then he must be present for less that 10 days for the year in question. When an individual leaves the U.K. to work full-time abroad and is present in the U.K. for less than 90 days, of which no more than 20 are "working days", then he is non-resident. In this context, full-time work, which includes self-employment, means work of 35 or more hours per week carried out over a complete tax year. A working day is one in which three or more hours of work are carried out.
Under the second part of the consultative prescription for residence, an individual will be treated as resident for the tax year when: (i) he is present in the U.K. for 183 days or more; (ii) his home is located in the U.K., or if he has more than one home, all of his homes are in the U.K.; and (iii) the individual is in the U.K. to carry out full-time work,i.e. work that is 35 or more hours per week carried out over a period of 9 months, wih no more than 25% of such person’s duties being carried on abroad.
Under the third part of the test or the tie-breaker provision, which apply if only if none of the tests in (i) or (ii) are met, factors are used to “connect” the individual to the U.K. Such person will be “resident” in the year depending on the number of days present in the U.K. and one or more of these so called “connecting” factors: (i) the individual's spouse, civil partner, cohabitee, or minor children are resident in the U.K. for that year; (ii) for children, the individual must spend time with them for at least 60 days per year; (iii) the individual has accommodation in the U.K. which has actually occupied in that year other than hotels or temporary accomodations; (iv) the individual has done “substantive work” in the U.K. during the year of 40 days or 3 or more hours of work albeit not full time work in the U.K.; (v) the individual has spent 90 days or more in the U.K. in either of the immediately preceding 2 years; and (v) the individual has spent more time in the U.K. than elsewhere.
For individual arriving in and departing from the U.K., there are special rules or "tariffs" whereby the number of factors needed to make the individual resident for the year varies according to the number of days of presence in the U.K. in that year. The tariff for arrivals -- that is, someone who has not been resident in any of the three immediately preceding tax years -- is proposed to be as follows:
if present in the U.K. for less than 45 days -- none of the factors are taken into account (he would already be nonresident under Part (i));
if between 45 and 89 days -- resident if all four factors are satisfied;
if between 90 and 119 days -- resident if at least three factors are satisfied;
if between 120 and 182 days -- resident if at least two factors are satisfied; and
if 183 days or more -- he would already be resident under Part (ii)
In the case of an individual leaving the U.K. who has been resident in one or more of the three immediately preceding tax years, the tariff is as follows:
if present in the U.K. for less than 10 days -- none of the factors are taken into account (he would already be nonresident under Part (i));
if between 10 and 44 days -- resident if at least four factors are satisfied;
if between 45 and 89 days -- resident if at least three factors are satisfied;
if between 90 and 119 days -- resident if at least two factors are satisfied;
if between 120 and 182 days -- resident if at least one factor is satisfied; and
if 183 days or more -- he would already be resident under Part ii.
While the current rules tend to lead to an all or nothing by concession, "split-year" treatment is available in some situations whereby a different residence status can apply before and after the date of arrival or departure. This treatment is granted when the arrival or departure is for the purpose of taking up permanent residence in the U.K. or abroad or when the departure is in order to take up full-time employment abroad. The intention is to replicate, as far as possible, this treatment within the new statutory rules but to avoid the uncertainty inherent in the phrase "permanent residence." The proposal allows split-year treatment when the individual becomes U.K. resident because his only home is in the U.K., he starts full-time employment here, or he returns to the U.K. after working full time abroad. In the case of departures, the treatment will apply when the individual goes to work full time abroad or establishes his home in another country so as to become tax resident there.
A few years ago, special rules were introduced for capital gains tax to combat the practice of becoming nonresident for a period of a few years, during which the individual realized gains outside the U.K. tax net and then took up residence again. In essence, those gains are stored up and taxed in the year in which the individual becomes resident again. The consultation document proposes that a similar rule be introduced for income tax purposes to target some forms of investment income. One example highlighted by Mr. Johnson is when profits of a privately owned company are accumulated and only paid out as dividends once the shareholder has become nonresident.
The U.K. is probably unique in that, in addition to the concept of residence, taxation is also levied according to the concepts of "ordinary residence," which is also covered in this document, and "domicile," which will be the subject of a separate consultation document.
Are long-standing allies and friends in the U.K. might want to look at the rules we have under section 7701(b) in defining "resident" and "non-resident" for income tax purposes. Perhaps our approach is more sensible and predictable.