THE STATUTORY RESIDENCY test announced in the Budget is a long time coming, 20 years after it was first mentioned, and it has been a theme adopted by successive governments. After a string of high profile court cases in the past few years, a test will help advisers to give certainty to their clients.
But how much certainty? The consultation on the test, to be released on 14 June, will likely prove to be a disappointment to anyone who is borderline between residency and non-residency. The legislation will have two aims – firstly, to provide certainty, but also to maintain revenues. These two aims are, if not completely contradictory, then certainly uneasy partners.
There are currently some guidelines about how days spent in the UK count towards residency. HMRC6 states that if you are in the UK for 183 days or longer or for an average of 91 days a year over four years, you are resident. As broken by Accountancy Age, an update to the guidelines has said that employment in the UK of under ten days a year will not count towards residency. But apart from these, there are no hard and fast rules about what constitutes residency. The guidelines state that it depends on your personal circumstances – including family ties, social ties, business ties, property ties and reasons for visiting the UK. Crucially, even the concrete elements to HMRC6 are not statutory.
Quality, not quantity
The taxman has, in the past few years, been focusing on the quality of time spent here, instead of just a day counting method – an approach that has been backed up by the courts – to establish the “adhesive quality of residence”, as the Robert Gaines-Cooper trial put it. That is, whether an individual is, to all intents and purposes, still tied to the UK.
But translating the guidelines and the “adhesive quality of residence” into legislation would be almost impossible. The Lyle Grace (see box) and long-running Gaines-Cooper trial and appeals have focused on the minutiae of their lives, with the latter judgment taking into account the fact that his wife from the Seychelles set up home in England, that his son went to Eton, that he visited his mother in England. That the trial process is not yet over suggests that these issues cannot be put into black and white.
One rule for us…
Following on from this, even if the government were to formulate words that could establish certain links to the UK, many of the cases would involve wealthy individuals, to whom strong ties on paper would not translate into strong ties in reality.
In a non-tax related case involving Roman Abramovich, the owner of Chelsea Football Club, Mr Justice Christopher Clarke said that buying expensive property that would suggest settlement in a country for an average man “may have no such significance to someone for whom money is no object”. By this logic, even stipulating percentages of property owned in the UK would be rendered meaningless. As Matt Coward, partner at Price Bailey, has pointed out, this could be applied to tax status and would require separate legislation for wealthy individuals, which is against the principle that every man is equal under tax law.
This principle could also be violated for UK citizens in comparison with people from overseas, barrister Rory Mullan has said in Taxation magazine. It is harder for a UK citizen to establish that she has severed family and local ties than it is for non-UK nationals. In this case, it is “discriminatory” and “incompatible with European Union law”, he concludes. He applies this to the current “quality of time” approach, but turning these principles into legislation would be easily challenged.
The other option is a simple tick box approach, providing certainty for everyone. Advisers have pointed towards the examples of the US and Ireland for how this works. In the US, residency boils down to whether you are a US citizen, which would be discriminatory under EU law if applied in the UK. In Ireland, it is solely based on the days spent in the country.
But this is unrealistic. The sums involved for HMRC can be large – the Gaines-Cooper case has been estimated at upwards of £30m. Providing individuals with a day count tick box will provide certainty, but this will be certainty on how to remain non-resident for tax purposes while remaining resident in the “normal, everyday meaning”, as HMRC6 puts it.
As well as harming the Exchequer, it could prove politically difficult for the government to abandon the move towards looking at the issue on a case-by-case basis in favour of providing wealthy individuals with an easily circumvented definition.
The most likely scenario is that the rules of thumb – 183 days spent in the UK equals residency, perhaps 30 days or less means non-residency – will be enshrined in statute. For anyone falling between these wide margins, it might be best to cancel your golf club membership and school fees if you want to remain out of the tax net.
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