Today is: 22 May 2012
Please note that international tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
In the Eagles song "Hotel California," released in 1976, the last lyrics in the song are:
- Last thing I remember, I was
- Running for the door
- I had to find the passage back
- To the place I was before
- 'Relax,' said the night man,
- 'We are programmed to receive.
- You can check-out any time you like,
- But you can never leave!'
UK residents wishing to leave the UK, and its taxes, may feel the UK has become a Hotel California happy to welcome taxpayers but unable to let them go. Where you are considered to be resident has several important consequences, not least of which is your exposure to taxation. Any individuals who are considered to be resident in the UK will be taxed (at up to 50%) on their worldwide income and gains as they arise, unless they fall within the 'remittance' basis taxation for non-domiciliaries or they benefit from any exemption. Subject to some limited exceptions, non-residents are only taxable in the UK on UK-source income. This is particularly pertinent in respect of individuals who have been resident in the UK but have subsequently left the country.
Following recent increases in income tax and capital gains tax, a good number of individuals have been seeking to cease their UK residency. Given the difference in tax treatment for residents and non-residents, it is important for these people to have a clear idea of what constitutes residency in the UK. Unfortunately, the present interpretation and application from HMRC is unclear and largely unhelpful.
No statutory definition
The main issue which confuses the residency position is that there is no statutory definition at present. All that individuals have to rely on is guidance from HMRC and the approach of the courts, both of which offer little assistance in clarifying the matter.
HMRC Practice
HMRC states that the word "residence" is to be given its ordinary meaning, without clarifying what this is. Guidance has been provided historically by HMRC and up to April 2009 this was provided in the note IR20. This guidance was withdrawn in 2009 and replaced with HMRC6. Under the previous IR20 guidance, it appeared clear that HMRC employed a practice whereby an individual who left the UK to live and spent less than 91 days a year back in the UK would be treated as non-resident for tax purposes.
In the long-running case of Gaines-Cooper, the Court of Appeal held that in order to fall within the relevant passage of IR20 it was necessary to leave permanently cutting all ties with the UK. If you did not do this you had never left the UK and the IR20 test was not relevant. Averaging less than 91 days is not itself sufficient. This effectively alters the way in which IR20 was considered to apply. Confirmation of this approach is awaited from the Supreme Court. If the Court of Appeal's decision is upheld, it would mean that many individuals who had left the UK prior to 2009 and stuck rigidly to the less than 91 days in the UK limit may be considered to have never become non-resident due to maintaining links with the UK.
Under the HMRC6 guidance, which applies from 6 April 2009 onwards, to establish non-residency an individual must have either left the UK to work full-time abroad or left the UK permanently or indefinitely and cut all ties with the UK. This appears harder than the historical test of non-domicile which has been difficult to establish for individuals leaving the UK. This strict test means individuals will find it hard to argue that they are non-resident if they have maintained any link with the UK, be it a property, a family connection or any business interest. The original guidance states that you may continue to visit the UK after going to live elsewhere but if your visits exceed, on average, 91 days a year you will still be treated as UK resident.
Update to HMRC6
HMRC has recently updated the HMRC6 guidance in an attempt to clarify certain matters. Although the issue of residency is still unclear whilst the Supreme Court's decision in the Gaines-Cooper case is awaited, the amendments to HMRC6 are helpful to a certain extent. The amended guidance contains a clarification that any individual who does not set foot in the UK during a given tax year will be non-resident for that tax year. This is regardless of the links which they have maintained with the UK. This helps to put some individuals into a position where they can have some certainty to their residency status. The only exception to this rule is an individual who is on a one-off year long holiday.
In order to cease being considered UK resident, you will need to either leave the UK to work full-time abroad or demonstrate that you have left the country permanently/indefinitely. The guidance sets out that the act of leaving the UK is not sufficient in itself to demonstrate non-residency. Under the amended guidance, what must be shown is that you have made a definite break from the UK and that any connections you retain with the UK are consistent with being non-resident. If questioned by HMRC on this you will need to show that you have left permanently/indefinitely and that there has been a clear change in the pattern of your life. Further guidance is then provided about the evidence of a definite break.
However, this offers little assistance in clarifying how an individual might go about providing this evidence. It merely sets out that individuals whose circumstances change gradually will only become non-resident when ties to the UK have been sufficiently reduced. It also explains that the level of evidence required to show this definite break will vary depending on the extent of your ties to the UK in the first place. Therefore an individual who has come from another country to live in the UK for say 5 years will find it easier to show they are non-resident than someone who has lived here all their life.
Perhaps surprisingly, the amended version of HMRC has removed reference to the test whereby an individual who has left the UK permanently/indefinitely but continues to spend at least 91 days a year here will definitely be considered to be UK resident. Despite the amendments to HMRC6, the position of individuals seeking to become non-resident is very unclear and is certainly not something which a person can say with any certainty has been achieved (unless there are no days spent in the UK during the tax year).
The approach of the Courts
Where HMRC challenges an individual's residency status before the courts, a balancing test will be applied to determine whether or not the individual is resident in the UK. The Court's approach has been to apply a balancing test in order to come to any decision on this. Several factors will be taken into consideration here including the availability and nature of accommodation in the UK and in the country where you claim to be resident, family ties, time spent in a country, business and other investment interests.
Future approach to residency
The decision of the Supreme Court in Gaines-Cooper is likely to clarify some matters and provide a more definitive ruling on the question of residency. However, it would be more desirable to have a clear statutory definition. It is unacceptable that individuals should find themselves in a position where they cannot determine their residency status. In most cases a double tax treaty in force with the country which they are moving to is likely to have a positive effect on their non-residency claim. This will not be relevant for moves to most tax havens which will not have treaties with the UK.
What to do now
The best approach in the current circumstances is to adopt a "checklist" approach and see what steps you can take to cut ties with the UK as set out in the decisions of the courts and HMRC6. This should include disposing of any UK accommodation you have available to you either by sale or other disposal say into trust. This will usually be particularly helpful under any double tax treaty which applies as the treaty "tie breaker" test usually involves available accommodation in the countries concerned. Whilst the law is unclear ticking as many "non resident" boxes is the only low risk option and is likely to be the courts approach if your residency is tested.
The only consolation to the bewildered tax payer is the lyrics of the Kinks in 1966.
- The tax man's taken all my dough,
- And left me in this stately home,
- Lazing on a sunny afternoon.
- And I can't sail my yacht,
- He's taken everything I got,
- All I've got's this sunny afternoon.
January 2011
Sykes Anderson LLP9 Devonshire Square
London EC2M 4YF
Telephone + 44 20 3178 3770
E-mail: david.anderson@sykesanderson.com
Website: www.sykesanderson.com