Statutory Residence Test
The Government has announced that it will introduce a new residency test in the Finance Bill of 2013. The Statutory Residence Test is designed to formalise and codify the way in which the HMRC determines an individual’s tax residency status. In the past, this has been decided by case law, HMRC guidance and standard practice. So, in short, the test is intended to clarify a complex and vague process. It will be enforced from 6 April 2013.
The test requires people to consider their previous residence status, the number of days they’ve spent living and working in the UK in the relevant tax year, and their number of ‘ties’ to the UK.
Here’s a basic summary of how the Statutory Residence Test will work.
The test is broken down into three test stages:
- an automatic residence test
- an automatic overseas test
- a sufficient ties test
1. The Residence Test
There are four automatic residence tests and they consider whether a person:
- spends 183 days (or more) in the UK in a tax year
- has their only home (or homes) in the UK
- works full time in the UK
- in certain circumstances, dies during the year.
If an individual meets at least one of these criteria, and none of the automatic overseas tests (see below), they will be automatically resident for the year.
2. The Overseas Test
A person will be automatically non-resident if one of these tests is met:
- only a minimal number of days were spent in the UK in the tax year (fewer than 16 or 46 depending on when they were last UK resident)
- the individual works full time overseas
- in certain circumstances he or she dies during the year.
Most people will be able to determine their residency status through completing these first two steps. But if it’s still unclear, a third — more complex — test stage has to be completed.
3. The sufficient ties test
The next step is to look at the sufficient ties test. Residence status depends on the number of ties with the UK in conjunction with the number of days spent here. The ties to consider are:
- family tie
- accommodation tie
- work tie
- 90 day tie
- country tie (only applicable if the individual was resident for one or more of the preceding three tax years.)
The application of these factors varies according to the individual’s status in the previous three tax years.
Although it is supposed to clarify the issue of residency, the draft legislation consists of over 50 pages of draft clauses.
To make things easier, there is a prototype online-tool available on HMRC’s website.
Please do not hesitate to contact us if you would like more information and advice on the Statutory Residence Test on 020 8780 2349.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.