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06/03/2012Expert tax tips: Becoming non-resident
A well-publicised court case on residence created great interest. International tax expert Dean Power clarifies the position and what it means to be non-resident for tax purposes.
The case of entrepreneur Robert Gaines-Cooper and his battle through the UK legal system created substantial media interest. News headlines exclaimed ‘Tax exiles may have to pay back taxes after ruling' and created a tremendous amount of interest in the UK residence rules. Scaremongering has resulted in fear amongst the British expat community.
However, stepping back from this and reviewing the actual judgment and reasons for the rulings generates at least one or two principles that can apply to all those living outside the UK.
The ruling confirmed that if a taxpayer leaves the UK for full-time overseas employment, with no substantial duties performed in the UK, for a period of at least one complete tax year and remains within the standard visiting limitations (less than 183 days in any one year and less than 91 days on average taken over the period of absence or four years, whichever is shorter), that person will be non-resident. Do remember that any work duties performed in the UK must be ‘merely incidental' to those performed abroad. It is also clear that having a home, family and regular return visits to the UK (provided they are within the limitations) will not impact non-resident status.
Should a taxpayer leave the UK for any other reason, qualifying as non-resident requires more in-depth review. Those who fall into this category need to demonstrate that they have made a clear and distinct break from the UK. This would normally involve giving up their home, breaking links to clubs as well as moving financial, social and family ties to their chosen destination. Clearly it is not enough to move abroad purportedly for permanent residence without full-time overseas employment and yet leave close family (spouse and dependent children) in the UK, maintain a regular presence here or keep a property in Britain that is used regularly when visiting.
For some, this is bad news: many expatriates are retired or work part-time abroad but have maintained active ties to the UK, such as property or regular visits to immediate family. The ruling explicitly states that unless a clean break from the UK can be demonstrated, there is a presumption that UK resident status will have continued. Emboldened by this, it may be the case that the taxman increases scrutiny of non-residents in this category, especially those who are very wealthy.
In short, anyone who is not in full-time overseas employment and who maintains ties to the UK needs to think carefully about their position and what steps need to be taken to protect their non-resident status. This is of course a very general appraisal of the current position and every case is reviewed on its own merits.
It is proposed that a statutory residence test will be implemented in April 2013. At this stage, a consultation document has been produced with an outline of possible rules. This is, naturally, subject to change and has generated many responses from the taxation profession. In fact, the Government have delayed implementing the test, which was originally intended for April 2012, as there is so much to cover with the test being as robust as possible.
The principle mentioned above exists in the proposed test - if someone is employed overseas in full-time employment and within the limitations, then they are conclusively non-resident. In general terms, anyone falling outside of this must then review their circumstances against a number of defined ‘connecting factors' with the UK. Dependant on the number of factors that exist, a ‘scale' of days that can be spent in the UK without becoming resident applies.
In the lead-up to its implementation in April 2013, we do expect clarification and alterations to the test as it stands.
In the meantime, if you would like to review your status, The Fry Group provide 'Residence Reviews' that look at all relevant matters to identify and minimise risks, and provide expats with peace of mind that their financial position is as secure as possible.
Dean Power, Assistant Tax Manager, The Fry Group
Got questions? Contact Dean via our Ask the Expert channel (in the Tax category).
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