Residence status for UK tax purposes has historically been difficult to determine because there has never been a proper set of rules. On 11 December 2012, HM Treasury published the draft Finance Bill 2013 which includes proposed legislation to establish a new Statutory Residence Test (SRT) with effect from 6 April 2013. The SRT will apply to individuals for income tax, capital gains tax, inheritance tax and corporation tax but not for national insurance and non tax purposes. This legislation will supersede all existing residence legislation, case law and guidance for tax years commencing 6 April 2013.
The SRT consists of:
- automatic tests for non-residence;
- automatic tests for residence; and
- connection factors and day counting tests for individuals who are not automatically non resident or resident.
To apply the rules you consider each tax year separately and apply the above tests to it in order. Once you meet an automatic test you do not consider any later tests. The connection factors make a distinction between “arrivers” (defined as individuals who were not resident for all of the previous three tax years) and “leavers” (defined as individuals who were resident in one or more of the previous three tax years). This reflects the government’s view that residence has an “adhesive nature”.
Resident or non resident?
KPMG in the UK publish a summary of the SRT in the form of a Proposed Statutory Residence Test Decision Tree (PDF 136 KB). The definitions behind each of the tests and connection factors, together with individual circumstances, need to be carefully considered before concluding on whether an individual is resident or non resident for UK tax purposes.
The SRT abolishes the concept of ordinary residence for tax purposes but overseas workday relief will be retained for non-UK domiciled individuals.
The calculation of work-day relief can be very complex. The draft Finance Bill 2013 has not concluded this issue which is still under consultation. Revised draft legislation is expected to be published by February 2013 after the responses to the consultation have been considered.
In addition to dealing with residence status the SRT provides anti-avoidance rules for people leaving the UK for less than 5 years and those that are present in the UK on a large number of days but not in the UK at midnight.
Although the SRT potentially provides greater certainty on residence status it is as important as ever to take appropriate professional advice to ensure a full understanding of the rules.
Residence and tax status are particularly important issues for people leaving the UK to work abroad or coming to work in the UK and for employers of globally mobile employees.
The period to 6 April 2013 before the introduction of the SRT will provide them with some time to adjust their systems and procedures to ensure that they can implement the changes required to accommodate the new rules.
Please see KPMG’s flash International Executive Alert (December 2012) for further information on how the draft legislation will impact employers.
To find out more about the proposed statutory residence test, please call your usual KPMG contact or any of the individuals listed in the attached publications.