Posted by Nick Day on 23 Jun 2011

UK Government consults on new UK Statutory Residence Test and reforms for non-domiciled individuals

Executive summary

A consultation document on the introduction of a statutory residence test to be used by individuals in determining their UK tax residence status was issued on 17 June 2011. It is proposed that the new test will apply from 6 April 2012 onwards.

The test has three parts:

  • Part A – factors that will conclusively determine when someone is not resident for UK tax purposes.
  • Part B – factors that will conclusively determine when someone is resident for UK tax purposes.
  • Part C – will apply only to those with more complex affairs who cannot conclusively determine their status under Part A and Part B, using various potential connections with the UK to measure the position. These “connecting factors” are then referenced against the amount of time spent in the UK to determine whether UK tax residence exists.

Details of the new test

For more detailed guidance regarding the new test, please download the following PDF – Statutory Residence Test Appendix 1.

Ordinary UK tax residence

Determining someone’s ordinary tax residence position in the UK in addition to their residence status under current practice means an additional level of complexity for individuals.

The Government is considering reforming or possibly abolishing altogether the concept of “Ordinary Residence”, but is likely to retain the ability for some non-domiciled individuals to claim “overseas workdays relief” and therefore, to potentially avoid UK income tax on employment earnings relating to non-UK workdays.

Our view on the proposals

The current practice for determining UK tax residence is antiquated, has lacked legal framework, and has led to large areas of uncertainty for individuals and employers.

The proposed statutory residence test has a certain level of detail but will provide welcome clarity and certainty for individuals and businesses alike. It proves that HM Revenue & Customs has been listening to widespread concerns raised regarding the complexities of the current process.

Domicile

The Government is also consulting on certain reforms for non-domiciled individuals, including:

  • Increasing the annual Remittance Basis Charge from £30,000 to £50,000 when individuals have been UK tax resident in at least 12 of the 14 previous tax years.
  • Enabling the tax-free remittance of non-UK income and capital gains where used for the purposes of commercial investment in the UK.