statutory residence test – what is it and what will it mean for us?

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Statutory Residence Test – what is it and what will it mean for us?

Isle of Man branch of the Institute of Chartered Secretaries and Administrators

16 October 2012

This document is CONFIDENTIAL and its circulation and use are RESTRICTED (C) 2012 Hotchkiss Associates Limited, an Isle of Man incorporated private limited company 7325V.

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Today

• The History• Why is residence important?• The SRT in detail• Is it a good test?


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It’s simple don’t you know…

The Residence Response Paper provides:-

“The Government does not believe the test is complicated and taxpayers will be able to

determine their residence status with clarity if they know how many days they have spent in the UK and which of the relevant connection factors

they have.”


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Why is individual tax residence important?

• Bedrock of UK taxation– Capital gains tax– Income tax – Inheritance tax

• Residence and tax position of trustees• Tax treatment of beneficiaries and settlors• Residence and tax position of companies


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Why is the SRT needed?

• Case law from 1875• 2 main statutory provision (829/830 ITA 2007)• HMRC guidance – IR20 from 1970s replaced in 2009

HMRC 6• Gaines-Cooper case – Taxpayers have become to rely on guidance without

understanding the law– can rely on guidance if fall precisely in its wording…

• All cases based on law and statute – guidance irrelevant


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The old law


Pre-1930 (15)Times were different!

1930 – 2006 (4) Post-2006 (11)

Re Young [1875]Rogers v IRC [1879]Lloyd v Sulley [1884]Turnbull v Foster [1904]Cooper v Cadwalader [1904]Bayard Brown v Burt [1911]Loewenstein v De Salis [1926]CIR v Zorab [1926]CIR v Brown [1926]Reid v CIR [1926]Peel v CIR [1927]Lysaght v CIR [1928]Levene v CIR [1928]Kinloch v CIR [1929]CRI v Combe [1932]

Withers v Wynyard [1938]Lord Inchiquin v CIR [1948]Wilkie v CIR [1952]Reed v Clark [1985]

Shepherd v HMRC [2006]Robert Gaines-Cooper v HMRC [2007]L Barrett v HMRC [2008]DW Hankinson v HMRC [2009]N Karim v HMRC [2009]Turberville v HMRC [2010]D Farquahar v HMRC [2010]N Ogden v HMRC [2011]Dr P Broome v HMRC [2011]LD Grace [2011]LD Yates v HMRC [2012]

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The timeline

June 2011

June 2012

Autumn 2012

April 2013

Consultation published

Consultation response and draft legislationRevised legislation expectedFinance Bill 2013 effective 6 April 2013

This document is CONFIDENTIAL and its circulation and use are RESTRICTED (C) 2012 Hotchkiss Associates Limited, an Isle of Man incorporated private limited

company 7325V.

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The Statutory Residence Test (“SRT”)

• Individual is Resident in a YOA if:– The Automatic Residence Test is met; or– Sufficient Ties Test

• 3 stage test– Definitely NOT UK resident; or– Definitely UK resident; or– In the middle…

• Automatic residence test?• ONE of the Automatic UK tests; and• NONE of the Automatic overseas tests


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Test 1 – 183 day test

• In any YOA• 183 days in UK• Not necessarily continuous• Mirrors current statute


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Test 2 – ‘Only’ home

• Available for > 91 continuous days (all or part falls in YOA)

• Available for 2 or more periods in YOA > 91 days• What is a home?

• Not specifically defined • Any ‘place’ including vehicle/vessel• No need to have interest in it• Not a ‘place’ if you have moved out (eg for sale or let)

– What is ‘moving out’?• What about timing?


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Test 3 – Full time work

• >276 days 75% of time work > 3 hours a day• No significant breaks from work (>31 days not

working or sick)• All or part falls in YOA• Possible changes? - May increase to 365 days• Secondee's to UK?


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Test 4 - Death

• Previous 3 years UK resident• ‘Normal’ home in UK• Temporarily outside the UK• Die in YOA


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The 3 Automatic Overseas Tests

Remember…(1) Automatic Residence Test applies

(2) If ANY of Automatic UK Tests apply AND

(3) NONE of Automatic Overseas Tests apply

Trump Automatic UK tests


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Test 1 - Less 16 days in UK

• Condition: UK resident in 3 previous years– Spend less than 16 days in UK– Need not be continuous period

• Can you retain only home in UK?


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Test 2 - 3 years non-residence and < 46 days

• N/R for three years• Less 46 days in UK • Die in year?• Home in UK?


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Test 3 – Full time work abroad• In YOA, work ‘overseas’, ‘full time’• < 91 days in UK• < 21 days in UK working (may increase to 25)

• What is ‘Work’?– In employment/trade (if paid for it)– Includes travelling/training (if costs deductible in calculating earnings)– Do something else during the journey that would count as work…thinking?

• What is ‘Full time’? – >35 per week on average over the period

• no reduction for weekends but reduce for sick leave• ‘reasonable’ holidays allowed

– Changes in employment – if a gap of <15 days – the days are ignored• Note 1 - reading e-mails and making calls? Thinking?• Note 2 – voluntary posts are not work


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What is a day?

• Presence at the end of the day– NB ‘Helicopter’ visitors

• Ignore:– transit days (no activities substantially unrelated to

transit)– exceptional circumstances (60 days if beyond

control: emergencies/sudden illness)• What about excess ‘exceptional’ days?


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What if you fall in the middle?The “Sufficient ties” test

• Only applies if NO Automatic UK and NO Automatic Overseas tests apply

• Distinction between ‘Leavers’ and ‘Arrivers’


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The ‘Sufficient Ties’ test

Leavers

Arrivers


Number of ties Max. days in UK4 ties or more 153 ties or more 452 ties or more 901 tie or more 120

Number of ties Max. days in UK4 ties 453 ties or more 902 ties or more 120

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Family Tie• What is Family?

– Relevant relationship exists (husband, wife, CP, co-habitees, parent of child under 18)

– With another UK resident• Children under 18, in full time education are ignored as Family members IF

they spend less that 20 days in the UK outside term time.

• If parent ‘sees’ a child (see below) for less than 61 days there is no family tie.

• ‘Sees’ a child means in seeing in person for whole or part of a day

• What about boarders?– Don’t see them…– Whisk them home once term has ended – deemed non-resident– See them less than 61 days a year


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Accommodation tie

• Place to live• Home, holiday home, weekend retreat or similar• Ownership irrelevant• Includes close relatives houses (parent, grandparent, brother/sister,

child, grandchild): Available for 91 days ‘continuously’• Spend one night there• ‘Continuously’? Gap of less than 16 days = continuous

– NB if close relative: one night rule (below) increased to 16 nights

• Hotels/Serviced Accommodation/company flat?• PS: mates are OK


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The other three

• Work– In UK at least 40 days (continuous or intermittent)– NB work day = 3 hours a day (may be 5)

• 90-day – Spend > 90 days pa– In either or each of the last two years

• Country– Spend more time in UK in a year than any other country– Applies to leavers only– What is a ‘country’?


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Sufficient ties - conclusion

• There are 5 in all• Applied each year• Complacency is a real risk


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Relevance of existing law?

• No transitional arrangements BUT can elect to have SRT applied to 3 earlier years (irrevocable)

• Old rules relevant for at least 10 years (minimum)

• Why?


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Relevance of existing law?

It is therefore necessary for clients to understand the position fully in the period 2009/2010 to 2011/2012. This of course means they will need to be clear on their historic position

before 2009/2010!This document is CONFIDENTIAL and its circulation and use are RESTRICTED (C) 2012 Hotchkiss Associates Limited, an Isle of Man incorporated private limited company 7325V.

Tax year Relevant tax years to consider2013/2014 2009/2010, 2010/2011, 2011/2012

2014/2015 2010/2011, 2011/2012

2015/2016 2011/2012

2016/2017 Depends on 2013/2014 onwards BUT position in 2013/2014 depends on position in 2009/2010

2019/2020 Depends on position in 2016/2017 but…

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Splitting the year• Old split year treatment replicated in part• Case 1 - Full time working abroad

– Residence in PY– Cease residence when start work (not when leave)– 3rd Automatic Overseas Test met for next year– Split year - 90 days/20 days work in UK – pro-rated

• Case 2 - Accompanying spouses– Partner satisfying case 1– No home in UK or Main home outside UK for remainder of year– Days presence in the UK same as partner– Non-resident for year following departure


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Splitting the year• Case 3 – Leaving to live abroad

– ‘Normal’ home in UK and then– No UK home from ‘point’ of departure.– After 6 months, ‘normal’ home is overseas.– Non-resident for following year– Can spend up to 16 days in UK in year of departure (pro-rated?)– Leave at end of the year?

• Case 4 – Coming to live in the UK– N/R in P/Y– Resident in UK by virtue of Automatic UK test (home or working full time)– No sufficient ties in N/R split year period prior to residence (pro-rate days)– Have only home or work full time until the end of the tax year


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Is it a good test?Decision name Old decision Reworked decision

Rogers v IRC [1878] Resident Non-resident

Cooper v Cadwalader [1904] Resident Non-resident

Reid v CIR Resident Part resident part non-resident

Levene v CIR Resident Resident

Lysaght v CIR Resident Non-resident

Zorab v CIR Non-resident Resident

Reed v Clark [1985] Non-resident Non-resident

Gaines-Cooper [2007] Resident Part resident part non-resident

Shepherd v CIR Resident Resident

Grace v RCC [2011] Resident Resident

Hankinson [2009] Resident Resident


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What do you think?

“The Government does not believe the test is complicated and taxpayers will be able to

determine their residence status with clarity if they know how many days they have spent in the UK and which of the relevant connection factors

they have.”


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Concluding remarks

• A successful reform– Complex?– Clear?– Good news?

• But– Lots of record keeping– Difficulty with the past– Onus is on the taxpayer to prove status

Complacency is a real riskThis document is CONFIDENTIAL and its circulation and use are RESTRICTED (C) 2012 Hotchkiss Associates Limited, an Isle of Man incorporated private limited company 7325V.

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Questions?


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Presented by

Paul C Hotchkiss FCCA CTA TEP

Managing Director

Hotchkiss Associates LimitedCooil Shellagh House, Douglas Road

Kirk Michael, IM6 1AU

+44 (0) 1624 [email protected]

Disclaimer

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of

the particular situation


mailto:[email protected]

statutory residence test – what is it and what will it mean for us?

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