Plan now for the introduction of the UK Statutory Residency Test

Thursday 04 October 2012

Following HMRC’s recent issuing of the draft Statutory Residency Test legislation, Alison Vine, Executive Director at Ernst & Young in the Channel Islands, urges individuals who spend time in the UK, and Channel Island financial services firms with affected clients to make sure they are aware of the implications of the Test prior to its introduction in April 2013.

The Statutory Residency Test is being introduced by HMRC with the intention of providing an absolute definition of UK residence for tax purposes. This will be relevant to potential UK tax payers, including UK citizens who now live abroad but retain UK connections, as well as individuals who maintain UK assets or who spend periods of time working in the UK.

Broadly, non-UK residents are only subject to tax on their UK source income, whereas those who are UK resident are potentially subject to tax on their worldwide income in the UK.

The test is expected to apply from the UK tax year 2013/14 (i.e. 6 April 2013 onwards) but it is important to note that days of presence in the UK prior to 6 April 2013 are taken into account in some circumstances.

The draft legislation outlines three tests that potentially apply to determine an individual’s residence status. The three tests need to be considered in a particular order because when a test reaches a conclusion on the residence status, there is no need to consider the subsequent tests.

The Automatic Overseas Test: if an individual reaches a conclusion on this test, then they are determined to be non-resident in the UK for tax purposes.

The Automatic Residence Test: those individuals who reach a conclusion at the end of this test are determined to be resident for UK tax purposes.

The Sufficient Ties Test: this test only applies where a conclusion has not been reached in the automatic tests. This third test looks at a combination of days spent in the UK and a number of connection factors such as the presence of family and accessible accommodation in the UK. The test will apply differently depending on whether the subject is an ‘arriver’ in the UK or a ‘leaver’.

“Although the tests will provide greater clarification, the rules are detailed” says Alison Vine. “We would recommend individuals seek advice if unsure of their position. This is particularly important should residency be determined by the Sufficient Ties test.”

“There is no doubt that the residency test is going to affect some Channel Islanders and will also affect the clients of many local financial services businesses. But it will provide the certainty that has been missing previously and allow some to spend more time in the UK than has been the case up to now.”

“Certainty of the implications of the test will only be achieved once the final legislation is enacted; however it is important that firms in the Islands acquaint themselves with the main elements of the draft legislation so they can discuss these with their affected clients in advance.”