On the face of it, this seems like a simple question and is indeed one many people ask. For some it’s because they are genuinely emigrating to another country, for others, they plan on being away for extended periods of time, perhaps because they are ‘snow birds’, choosing to winter in warmer climes. And then, there are others that look to understand how they can reduce their tax burden because they move around, such as ‘digital nomads’. The reality is though, it’s not that simple.
A common question from UK tax payers spending time overseas in different countries, sometimes for relatively short periods is: “Do I still need to pay tax and if so, to whom?” The answer is “most likely and to somebody”. It all depends on where you are, where you’re considered a tax resident and how much time you have spent there. A common mistake is in interpreting what is known as the 183 day rule. We’ll explore that and other points to consider in this article.
Necessity is the mother of invention
Over the past few years, much about everyday life has changed, especially where work and travel is concerned. Some people have been forced out of necessity to make changes, others driven more by lifestyle changes. Taxation is on the rise in the UK and likely so in many parts of Europe. It’s only natural then, for people prepared to move overseas to think about where they will get the best value for money, where their assets may be taxed less and the impact of tax on their retirement plans. Resourceful savers will seek out the best overseas locations with attractive taxation regimes and likely move.
As people retire, some consider the option of retiring abroad. While in the past, as part of the EU, retiring to the warmer climates of Spain and Portugal was high on the list for British people, Brexit and other restrictions have made for an uncertain future resulting in more than a few people returning to the UK, potentially complicating their tax affairs. Still though, consider plans further afield, such as South East Asia or even Central America. A number of countries offer attractive expat or retirement opportunities for those who can afford the residency and immigration fees.
The key question though remains – what will be my UK tax liability and how do i figure this out?
Enter the Digital Nomad
Even before recent pandemic issues, a new breed of worker emerged – the digital nomad. Digital nomads vary greatly in demographic; some are young adventurous travellers seeking to combine work and the joy or travelling, or even just to be based in a different country for an extended period. Others maybe more mature in years, seeking to leverage overseas property or even rent for an extended period to afford a new work location, or perhaps to avoid the inclement weather in the UK.
A number of countries offer attractive digital nomad packages – often for up to 12 months. For these adventurous individuals, it’s natural to ask the question about tax or indeed if they are able to reduce their tax burden by making such changes to their location and lifestyle, and the specific benefits their own circumstances my lead to in regard to UK tax.
So how do you figure out what tax you owe to whom?
Let’s start by considering when you cease to become a UK Tax Resident.
Many people have heard of the “183 day rule”. Simply applied, this means that if you spend 183 days or more in the UK you become a tax resident and need to pay taxes here. If this is the case for you, then the trail stops here. But what does it mean if you spend less than 183 days in the UK – are you automatically treated as a non-tax resident? This is where mistakes are made and people get caught out. Being out of the UK for more than183 days does not automatically mean you are non-tax resident. To work this out we need to refer to the Statutory Residence Test, from which the 183 day rule emerges.
Introducing the Statutory Residence Test – SRT
Ultimately, whether you are tax resident or not will come down to how you fare when you take the “Statutory Residence Test” or SRT.
There are four main parts to the SRT:
- How much time you have spent in the UK in a tax year.
- Automatic Overseas Test.
- Automatic UK Tests.
- Sufficient Ties Test.
Part one: How much time you’ve spent in the UK during the tax year
As we said earlier; if you spend 183 days or more in the UK then you’re a UK tax resident and the test stops here. However, the problem people experience is more evident if the 183 day rule is stated another way: If you’re in the UK for less than 183 days, then you’re not a tax resident. It comes down to how you count, why you’re actually in the UK and what you are up to.
On the face of it, the 183 day rule seems easy to comprehend. In practice though, how HMRC calculates the number of days is not so simple. Let’s start with what HMRC consider as a day? Generally, HMRC considers you as having spent a day in the UK if you were in the UK from Midnight onwards. But, as you’ve probably guessed, other factors apply. In fact, three other considerations need to be made:
- The ‘deeming rule.
- Transiting the UK – transit days.
- Exceptional circumstances.
The deeming rule
As one might reasonably expect, not everyone may spend a full day in the UK if they are not permanently based here. They may be here for meetings or to visit a relative. Perhaps not too surprisingly, HMRC needs to be sure that people are not trying to avoid tax by being based outside of the UK and coming in on a regular basis for part of a day – always a possibility if somebody is based in a close neighbouring EU country or other tax haven.
The deeming rule assesses the following conditions:
- Whether you have been a resident in the UK for 1 or more years in the past 3 tax years.
- Whether during the tax year under consideration, you had more than 3 ties to the UK. These include: A family tie, an accommodation tie, a work tie or a 90 day tie. See Ties Test.
- Whether you were present in the UK on more than 30 days without being present at the end of the day (qualifying day) in the tax year of interest.
More on the deeming rule can be found here.
What’s the impact of the deeming rule?
It basically means that if you meet all the deeming rule’s conditions, after the first 30 qualifying days, all subsequent days within the tax year are treated as days spent in the UK. HMRC gives examples as to how this applies, but in summary, it means that although it may appear that under the SRT you are a non-resident for tax purposes, because of your ties here and previous tax status in the UK, even though you spend less than 183 days here, you may still be treated as a tax resident.
This is quite a complicated consideration and so it is best that you consult with a Tax Agility expert on this issue.
Note: You should still check your tax liabilities with the country you have spent time with though, as their rules may be different and you may still owe tax there. Also check out whether they have a dual taxation agreement with the UK, as this means that any tax you have to pay overseas may be eligible for a tax credit in the UK, lessening your tax liability here.
Transit days
A transit day is a day where you travel to and from other countries via the UK. These are usually not considered full days under the SRT. However, care must be taken here as it may appear tempting to use a transit day as an opportunity to conduct business in the UK or see friends and family. HMRC is quite clear that any activity that is ‘to a substantial extent unrelated to your passage through the UK’, means the day concerned can be counted as a qualifying day. Simply meeting your boss for breakfast or going out on the evening of your arrival with friends, could turn a non-qualifying day into a qualifying day and count towards your allowance. If in doubt, talk to us.
Exceptional circumstances
Sometimes people are forced to return to this country, perhaps because of a death in the family or a sick parent. HMRC are not blind to this and you may be granted special conditions in regard to the total number of days you can spend in the UK.
This may be affected by the number of days you have already spent in the UK, how much work you have engaged in, the location and the type of work involved. Be sure to get clarification on this first though.
Part 2: The Automatic Overseas Test
There are three parts to this test.
First Test: You will be considered as non-resident if you spent fewer than 16 days in the UK during the tax year and were resident in the UK for one or more of the 3 tax years before the current tax year.
Second test: If you were not resident in the UK in any of the three prior tax years and spend less than 46 days in the UK in the tax year of interest, you will be considered as non-resident.
Third test: If you worked overseas full-time over the tax year concerned and:
- spent less than 91 days in the UK in that tax year.
- spent less than 31 days where you worked for more than 3 hours a day in the UK.
- there was no significant break in your overseas work.
A significant break is considered where at least 31 days go by where you’ve worked for more than 3 hours overseas, or would have worked for more than three hours but didn’t because of annual leave, sick leave or parenting leave.
Part 3: The Automatic UK Test
There are three parts to this test.
First automatic UK test: If you’ve spent 183 days or more in the UK, you are a tax resident.
Second automatic UK test: If, for the tax year, you’ve had a home in the UK for all or part of that year and if all the following apply, you’ll be a tax resident:
- one period of 91 consecutive days where you had a home in the UK.
- at least 30 of these 91 days fall in the tax year when you have a home in the UK and you’ve been present in that home for at least 30 days at any time during the year.
- at that time you had no overseas home, or if you had an overseas home, you were present in it for fewer than 30 days in the tax year.
- if you have more than one home, each home should be considered separately for the test and meet the test for one of them.
Third automatic test: You’ll be a tax resident if all the following apply:
- you work full-time in the UK for any period of 365 days, which falls in the tax year.
- more than 75% of the total number of days in the 365 day period when you do more than 3 hours work are days when you do more than 3 hours work in the UK.
- at least one day which has to be both in the 365 day period and the tax year is a day on which you do more than 3 hours work in the UK.
Sufficiency ties test
If you are still in doubt and do not appear to meet the automatic overseas test or the automatic Uk test, then you’ll have to look at your ties to the UK. This will help determine if your time in the UK along with the ties you have here, will make you a tax resident or not. The ties to consider are:
- a family tie.
- an accommodation tie.
- a work tie.
- a 90 day tie.
Also, if in the prior three years you were a UK resident, you’ll need to consider if you have a country tie too. Essentially, the more ties you have to the UK, the less time you can spend here without becoming a tax resident.You can find out more about this here.
Are you considered domiciled in the UK or non-domiciled?
Domicile is another question that often crops up. This typically applies to foreign nationals living and working in the UK. The answer can have a significant impact on your tax liabilities in the UK.
The exact nature of your domicile can change, but ordinarily it is the country of birth for your farther or mother. While you may be considered a UK resident for tax purposes, your domicile status can impact tax on overseas income and inheritance. The exact impact on your tax affairs needs to be very carefully considered and planned out with a qualified tax advisor. If you have questions concerning tax and your domicile status, talk to our tax advisors.
In conclusion
Tax residency status has a habit of being misunderstood simply because of the belief in the 183 day rule. For sure, if you’ve been in the UK for longer than 183 days then unless you’re looking to qualify under non-domiciliary conditions, you’re almost certainly a tax resident. However, for most people concerned about their tax residency status, it’s more likely they are counting days under 183 and fall foul of the other conditions that HMRC will test your status against. These could potentially limit your time to 16 days in some cases, particularly if you’re based overseas and coming to the UK fairly often or still have many ties to the UK.
Our advice is, don’t assume. Talk to a qualified tax advisor before you travel and discuss your plans for the tax year.