New and complex rules relating to tax residency in the United Kingdom have been proposed. By allowing more specific determination of tax residency, they add clarity but cast the tax net wider. So, who is the beneficiary here: you or the UK taxman?
The articles regarding tax over the past two weeks have raised many eyebrows. A lot of individual expats are wondering how they will be treated under new regimes used by governments to reach out and net expats living abroad. Some readers expressed their thoughts while others had additional questions about the specifics of the new proposed UK statutory residence test and state pension regulations. These separate subjects were often raised in the same inquiry.
The new UK tax residency test system has been designed to be much more specific, as in the past we often saw rules manipulated to the advantage of the individual. This culminated in the Gaines Cooper case, which Her Majesty's Revenue and Customs (HMRC) won, and was a landmark used as a major test of residence and abuse of tax rules. The judgement created a need for review and streamlining when determining an individual's residency for taxation in the UK.
The new rules appear more complex but are rather more specific about determining whether you are liable to taxes. In the proposals there are three major parts to test UK tax residency:
A. THE AUTOMATIC OVERSEAS
TEST: This is intended to be conclusive and follows three main points. You will be deemed a UK non-resident for tax if:
- If you were deemed non-resident in the UK for all the previous three tax years and you visited the UK for less than 46 days in the current tax year, or;
- You were resident in the UK for one or more of the previous three tax years but spend less than 16 days in the UK in the present tax year, or;
- You leave the UK in the current tax year for full-time work abroad, are in the UK for less than 91 days and do not work for more than 20 days in the UK in the current tax year.
If you fail all three of these tests then you move to:
B. THE AUTOMATIC RESIDENCE TEST:
This is intended to be a conclusive test, once again following three main points. You will be determined a UK tax resident if part A does not apply and:
- You are present in the UK for 183 days or more in the current tax year, or;
- You have a home that is available to you for at least 90 days in the tax year, or you have more than one home in the UK, or;
- You work full time in the UK, for a minimum 35 hours per week, with a contract for at least a year, and you spend less than 25% of your working time abroad in that tax year.
If you fail all three of these tests then you move to part C.
C. UK CONNECTING FACTORS:
Where it is less than clear about residence or non-residence, in using parts A or B there are four "connecting factors" that are used to determine UK tax resident status:
- You have a family resident in the UK. This refers to a close family such as a spouse and children, rather than siblings, parents etc;
- You have substantive UK employment with an employer or by being self-employed;
- You spent 90 days or more in the UK in either of the previous two tax years;
- You spend more days in the UK than in any other single country.
The above are linked with days spent, as the table shows.
There are further factors to determine the resident status of returning expats or "new arrivers" and I have omitted these here. However, if there are any readers who believe they will be an expat returning to the UK and wish to know these factors please contact me.
With these tools you are able to conclusively determine whether you are a tax resident in the UK for the year beginning on April 6, 2013. It seems relatively straightforward for the vast majority of expats who have been expats for some time. However, I can see that the expats who may have some difficulty will be those who:
- are relatively new expats, in their first three years abroad;
- live in Thailand but have a home available to them in the UK, which they use;
- spend time in several countries over the course of a year, creating a situation where the UK is the one country where they spend the most time of all the countries they visit.;
- spend more than 46 days in the UK per year.
While it appears that the rules are being revamped in such a way to make it clear exactly what the situation is for UK nationals, there is also an ever increasing requirement in terms of qualifying for tax non-residency of individuals.
I hope this will clarify many of the individual questions that have been posed about the new system. If you are still in doubt and feel that you need specific advice about your own situation, then I suggest you contact a professional adviser to discuss the details.
Years ago the "one-sixth rule" was used for expats. Basically, if you spent less than one sixth of your total time abroad in the UK, you were considered non-resident. Once you got to three tax years with this you were considered non-resident for tax purposes. From there you were allowed to spend 90 days on average over four tax years in the UK provided the total number of days in any single year did not exceed 180.
While these rules were used there was also the principle that you may be a UK tax resident if the centre of your life was deemed to be in the UK. This is where the confusion crept in. To determine the centre of a person's life there are precedents that can be challenged either way. The new rules are intended to make the situation clear and allow you, as an individual, to assess your own situation.
In taking a view on the reasonableness of the proposed new regulations, it would also appear that there may well be a greater number of people who can be deemed resident in the UK for tax purposes. The government would then further its current indomitable attitude of increasing collections because it has (mis)managed its way into a very difficult financial mess and needs to increase revenue _ some may say at any cost.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to email@example.com.
About the author
- Writer: Andrew Wood