Taking the residency test out of the courtroom

ANYONE HOPING for a purely day counting approach in the statutory residency test was bound to be disappointed. Although some jurisdictions manage it, the cost to the Exchequer of individuals ticking the days off the calendar to know when they will reach the non-residence threshold would be devastating.

A more realistic hope was that the test would bring certainty where there had been none. That means no more consideration of where you hold your golf club membership, as has been raised in recent tribunal cases. For many, allying this with the imperative to keep the policy cost neutral for the Exchequer was unachievable.

So has the government’s consultation, released today, been able to provide certainty for individuals and advisors while making it rigorous enough to prevent abuse?

The day counting method would no doubt have provided the certainty that the consultation was meant to bring. But the consultation unsurprisingly ruled this out immediately. Although it considered the approach, the government “believes that where someone is resident is more than just a question of where they spend their time”. Most importantly, it adds, “a definition based purely on time spent in the UK would lead to outcomes that cannot be justified”.

Instead, it placed individuals in three categories: conclusive non-resident; conclusive resident; and individuals that do not fall into either of those two categories. The third category remains fairly wide; those spending less than ten days in the UK fall into the non-resident category, more than 183 days and they are resident.

There are other stipulations. For example, people with one home, which is in the UK, will be resident; people who work full time abroad – 35 hours a week job – will be non-resident, so long as they work in the UK no longer than 20 days in the year and are present in the UK for fewer than 90 days; and full time workers in the UK will be resident.

The government also differentiates between “arrivers” – those who have not spent all of the past three years as resident – and “leavers”, those who have. The consultation states that it should be harder for “leavers” – people who have been resident for all of the previous three tax years – to relinquish their status than it should be for arrivers to acquire it.

Stephen Herring, a partner at BDO, welcomed this. The government “is right to focus on facilitating non-UK residents looking to invest in existing UK businesses or establish new businesses by removing unnecessary concerns about their exposure to UK taxation”, he says.

The final point of certainty regards arrivers – if they spend less than 45 days in the UK in the tax year, they are counted as non-resident.
But the main battleground was always going to be over the third category, the grey area between conclusive resident and conclusive non-resident. It is unsurprising that the most radical – and contentious – proposals surround this group.

The residency status will be determined by a combination of whether they are an arriver or a leaver, day count and most crucially “connecting factors”, five defined stipulations based around family, employment, accommodation, time spent in the UK in the previous year and, only for leavers, time spent in the UK compared with other countries.

The consultation proposes that arrivers will always be counted as non-resident if they spent less than 45 days in the UK. Those who spend between 45-89 days in the UK will only be counted as resident if four factors apply to them. This will go down to three factors for people spending 90-119 days in the UK; and two factors for 120-182 days.

Leavers will find it harder to prove they are non-resident. They will be counted as resident if they spend 120-182 days in the UK and only one factor applies to them. This goes up to two for 90-119 days; three for 45-89 days; and four factors for 10-44 days.

Therefore, the certainty that the test is supposed to create is dependent on the definitions of the five factors and this is where it will succeed or fail. Two of these are relatively unambiguous: whether the individual has spent less than 90 days in the UK the previous year; and whether the individual spends more days in the UK than in any other single country, which only applies to leavers.

This does, of course, lend itself to day counting. But this should be stringent enough to allay government’s fears that individuals will change their behaviour to avoid UK tax, especially as they are only factors within a wider formula.

The other areas might provide more of a problem. UK resident family, for example, is defined as either the individual’s spouse, civil partner or common law equivalent, and excludes those that are separated under a court order “or a separation agreement or where the separation is likely to be permanent”; or UK resident children (a definition that excludes boarding schools) under 18 who spends time with the individual for all or part of 60 days in a year in the UK or elsewhere.

Accommodation is similarly wordy. The positive definition is relatively straightforward – “accessible to be used by them as a place of residence” or by their family as defined above. But the exceptions are numerous; accommodation provided by an employer that is also accessible to other employees; held on a lease of six months or less, except when consecutive leases are held; where the accommodation relates to their child’s educational boarding; short term accommodation in hotels; and lodging short term with relatives.

Substantive employment is seemingly straightforward – working in the UK for 40 days or more, with working defined as three hours of work.

At first glance, these mini tests seem to be complex. Nigel May, a partner at MacIntyre Hudson, says it includes “a truly byzantine set of rules for cases which do not fall within the clearly non resident or clearly resident categories” and it retains “significant complexity”. Philip Fisher, head of employment tax and rewards at PKF echoes this sentiment. While welcoming the concept, he adds: “On the negative side, the government is planning to introduce a new concept of ‘connection factors’ – which combines presence in the UK with factors such as family and property location – that is ridiculously complicated and will almost certainly test even the experts.”

However, despite being complex, the test could still achieve its aim – to provide certainty. Whereas before, a judge would look into an individual’s unique circumstance, including the famous golf club membership, now someone who is unsure will be able to work out what their residency status is without the need of a judge to preside, even if it does include many calculations.

Steve Wade, tax and pensions director at KPMG, says this does provide conclusive tests. However, there are issues to be kept in mind. First, the consultation makes clear that record keeping will be vital – “the taxman will presume you have been in the UK if you cannot prove otherwise”, Wade says. Secondly, although the tests look conclusive, we will have to wait until later in the year for the draft legislation and to see how they are tested in court.

Furthermore, there may well be people caught as a residency by the test where they may have not been found to be by the courts previously. These cases will become apparent over time and when the draft legislation is published.

However, the general consensus is that this approach is welcome. Although there will be complexity, and some people will lose out, it was never the government’s intention to make it easier for people to become non-resident. The intention was to give people certainty about what their status is. A new proposed online tool will help in this aim – and few would argue that time spent on the computer is preferable to time spent in a tribunal room.