Following on from the changes announced in the Budget on 23 March 2011 (the “Budget”), the Government has launched its consultation on the reforms to the UK taxation of non-domiciled individuals (“non-doms”) and a statutory definition of tax residence and ordinary residence.
By way of background, there are 3 key concepts to consider when working out the UK tax status of those who only have partial UK ties - residence, ordinary residence and domicile.
Those who are UK resident but are non-ordinarily UK resident or are non-UK domiciled may be able to benefit from the remittance basis of taxation - that is, they may only be subject to tax on non-UK income or gains if they remit (ie bring) relevant non-UK income or gains into the UK. For those who are able to keep gains and income outside the UK, this can be a valuable benefit.
Residence and ordinary residence are currently not statutorily defined and so give rise to many difficulties of interpretation. (Domicile is not statutorily defined either, but the lack of a statutory definition does not give rise to the same number of problems).
The consultations provide details on the reforms and present the opportunity to provide responses to the proposals before legislation implementing the changes is drafted to take effect from 6 April 2012. Both consultations close on 9 September 2011.
Proposed changes for the taxation of non-doms
The annual £30,000 charge will be increased to £50,000 for those non-doms who have been resident in the UK for twelve or more years and who wish to be taxed on the remittance basis. For those individuals who have been resident in the UK for at least seven years but less than twelve years, the £30,000 annual charge will continue to apply.
The consultation invites responses on the scope of the following proposals:
- Income or gains remitted by non-doms to the UK for the purpose of commercial investment in UK businesses will not be taxable.
- A simplification of some aspects of the current rules to remove undue administrative burdens.
Introduction of a statutory definition of tax residence
The Government has acknowledged that the current rules that determine tax residence for individuals, which have developed haphazardly through case law, are complicated and unclear. The recent high profile Gaines-Cooper case highlighted how the absence of clear rules can lead to years of uncertainty for taxpayers.
Reform of the archaic rules defining residence in order to keep pace with the increasingly mobile workforce of the 21st century has been long overdue. In an attempt to provide certainty, a statutory residency test has been proposed with three categories of individuals:
- Conclusive non-resident;
- Conclusive resident; and
- Individuals that are neither conclusive non-resident nor conclusive resident.
The first two categories contain little by way of surprise or sweeping changes. The more substantive changes to the current rules on residence are in the third borderline category, which is discussed in further detail below.
In order to determine which category an individual will fall into, the new statutory test, as well as being based on day counting, would take into account a number of ‘connection’ factors, namely family, accommodation, substantive work in the UK, UK presence in previous years and time spent in the UK compared with other countries. It will effectively be a case of running through a checklist. Whereas working out residence currently involves weighing up different factors, going forward it may be as simple as counting the number of days and relevant factors.
More revolutionary is the news that the Revenue is considering launching an interactive online tool to enable individuals to self-assess their residence status when the new statutory definition is introduced.
Rather surprisingly, the Government has decided the proposed statutory residence test will not apply to National Insurance contributions. The interaction with “treaty” residence is also not considered.
Conclusive non-resident An individual will not be resident in the UK for a tax year if they satisfy any of the following conditions, namely they:
- are present in the UK for fewer than 10 days; or
- have been non-resident in the UK in each of the previous 3 tax years and are present in the UK for fewer than 45 days in the current tax year; or
- leave the UK to work full-time abroad and are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.
The increase from 10 to 20 for the number of days an individual in full time employment abroad can spend working in the UK before being classed as resident is an improvement on the previous position. However, it is still arguable that 20 days is too limited and does not reflect the true business needs of the international market place. Unfortunately, the number of days proposed for the residence test does not appear to be up for discussion as part of the consultation.
Conclusive resident Those who will definitely be counted as resident are individuals who:
- spend more than 183 days in the UK; or
- have only one home which is in the UK; or
- carry out full-time work in the UK.
Neither conclusive non-resident nor conclusive resident For individuals falling within this category, the consultation proposes a number of factors to determine residence status.
The factors are:
- a UK resident family;
- substantive UK employment i.e. employment in the UK for 40 or more days in the tax year;
- accessible accommodation in the UK; and
- spending 90 days or more in the UK in either of the previous two tax years.
In the case of ‘leavers’, individuals who have been UK resident for all of the previous three tax years, an extra factor is included:
- spending more days in the UK than in any other single country.
The extent to which the factors apply to an individual will depend on the amount of time they spend in the UK.
‘Arrivers’, individuals who have been non-resident in the UK in each of the previous three tax years, will always be non-resident if they spend less than 45 days in the UK. Those spending between 45-89 days in the UK will only be resident if four factors apply to them. This goes down to three factors for those spending 90-119 days in the UK and two factors for 120-182 days.
In the case of ‘leavers’, they will be resident if they spend 120-182 days in the UK and only one factor applies to them. This goes up to two factors for 90-119 days, three factors for 45-89 days; and four factors for 10-44 days. The aim being to make it harder for ‘leavers’ to prove they are non-resident.
Individuals worst affected by the changes are those who have previously lived in the UK and now spend more than 45 days working in UK employment and whose family live in the UK, who will now always be deemed resident, which was not always the case previously.
Ordinary residence (“OR”)
OR for tax purposes is a separate concept from tax residence, which allows those who are not ordinarily resident to be taxed on a remittance basis for foreign investment income and foreign employment duties. Arguably, the current rules for OR are even more confusing than tax residence. The Government is therefore considering two options for the reform of OR, which are:
- abolish OR for all tax purposes except foreign employment income; or
- retain OR for all current tax purposes and create a statutory definition. Whichever option the Government decides to implement, it will no doubt be an improvement on the current complex rules derived from confusing case law.
The consultation also includes an intention to introduce a temporary non-residence test for some forms of investment income, along the lines of the current capital gains tax rules. The temporary non-residence test would cover the situation where a person leaves the UK for a short period (less than five tax years) and pays themselves dividends from closely controlled UK companies in respect of profits which had been generated whilst the person was UK resident.
The final position on the non-dom changes and the statutory residence test will not be known until after the consultation has been completed. However, given the Government announcement in the Budget and the level of detail in the consultations (where professional groups have been working with the Government for some time), non-doms and those affected by the residence changes should consider their position carefully in order to identify any actions which may need to be taken as it seems likely that these changes will take effect for the next UK tax year.