UK News

UK statutory residence test

July 2012

HM Treasury has published draft legislation in relation to the proposed statutory residence test together with a summary of responses received during the consultation process.

Background

In June 2011, the Government published its detailed plans for the introduction of a statutory definition of tax residence and invited comments from interested parties during a 3-month consultation period.

In its original consultation document, the Government proposed that the statutory residence test (SRT) be divided into three parts:

  • Part A (conclusive non-residence).
  • Part B (conclusive residence)
  • Part C (other connection factors and day counting)

These are discussed more fully in our article "Complexity replaces uncertainty"

Overall, the responses to the Government's proposals were positive and there has been widespread support for a statutory definition of residence that provides greater clarity and certainty for taxpayers though respondents did have concerns with regard to some of the detail. The Government has accepted some of those concerns as valid and, as a result, has made some amendments to its original proposal and these are reflected in the draft legislation.

What has changed?

With regard to determining conclusive non-residence for a tax year;

  • An individual who has been resident in the UK for one or more of the three preceding tax years will be conclusively not resident if they spend fewer than 16 days in the UK in the year in question. (This has been increased from 10 days).
  • An individual who has not been resident in the UK for any of the three preceding tax years will be conclusively not resident if they spend fewer than 46 days in the UK in the year in question. (This has been increased from 45 days to provide consistency with the adjusted day count thresholds in Part C of the test).

What may yet change?

Under the proposals, an individual will be regarded as automatically not resident for a tax year if they work full time abroad for a period which includes a UK tax year and they spend no more than 90 days in the UK in the tax year in question. Additionally, the number of UK days in the tax year that they work 3 hours or more must not exceed 20.

Many respondents felt that this 20-day limit was too low especially since incidental duties in the UK (currently deemed to be performed outside the UK) will now be included as duties performed in the UK.

The Government has responded by asking for views on two options:

  • Increase the limit of working days permitted in the UK from 20 to 25
  • Increase the number of hours that constitute a working day from 3 hours to 5 hours.

It is clear that the Government is willing to introduce one of these changes but not both. It also appears that it favours the latter though it has asked for suggestions on other ways to define full-time working abroad.

It is proposed that an individual should be regarded as working full-time in the UK if they were employed or self-employed over a continuous period of 9 months with no more than 25% of their work being performed overseas in that period. The Government will consider extending the 9 month period to 12 months. However, it appears to view the shorter period as a more appropriate way forward.

Commentary

The further opportunity for consultation is to be welcomed as is the possibility of a working day being 5 hours instead of 3 hours. However, it should be noted that, for the most part, the Government is holding firm to its original proposals. For example, the definition of an average working week remains "35 hours or more" for the purpose of deciding if someone is in full time employment abroad. We do expect that there will be further changes to the draft legislation other than as a result arising from the two options.

For further information or to discuss the issues raised, please contact John Mooney or Bina Gayadien on +44 (0)20 3051 5711.

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