What constitutes tax residence in the UK is a question of fact. Such guiding rules as there are have evolved largely through a combination of decided cases and HM Revenue & Customs practice.
The basic rule
An individual will always be UK resident for a tax year if he or she spends 183 or more days in the UK in that tax year. There are no exceptions to this.
From 6 April 2008, a ‘day’ for this purpose includes any day when the individual was present in the UK at the end of that day. Days where the individual is in transit through the UK are not counted, provided that no non-travel “activities” are conducted while in the UK. The HMRC gloss on this is as follows; “ …if you attend a business meeting, visit a property you own, arrange to meet people socially or attend social activities, you must count that day as a day of presence if you are in the UK at the end of the day”.
HMRC Practice
HMRC practice is set out in booklet HMRC6 which attempts to deal with the problems posed by visitors – both “short term” and “long term” and by those leaving the UK.
Short term visitors
An individual who arrives in the UK for a temporary purpose only, will not be resident in the UK as long as he or she spends fewer than 183 days in the UK in the tax year in question
However, if the individual comes to the UK frequently as a ‘short term visitor’, the average number of days spent in the UK must be considered. Visits averaging 91 days or more per tax year over a four year period will result in residence status from the fifth year if visits continue.
Residence status can start earlier if:
(a) the individual knows in advance that visits are going to average 91 or more days per year, in which case residence starts from 6 April in the tax year in which visits commence;
(b) the individual realises after starting to visit the UK regularly that visits are going to be for an average of 91 days or more – residence commences from 6 April of that tax year – the year in which it is clear that the 91 day average will be breached.
Long term visitors
If, however, the individual comes to the UK for a purpose that involves spending two years or more in the UK (e.g. for employment) or if accommodation in the UK is purchased or leased on arrival, he or she will be a ‘long term visitor’ and will be resident in the UK from the day of arrival until the day of departure.
Leaving the UK
Recent cases (particularly Karim and Gaines-Cooper) have shown that, where an individual is trying to demonstrate that he or she has ceased to be UK resident, relying on “day counting” alone can cause problems.
In “leaving” situations HMRC look for evidence of a ‘clean break’. This involves a change in lifestyle, not simply a reduction in days spent in the UK. The ownership of accommodation in the UK is often an important feature in determining whether or not there has been a complete break.
“Split Years”
Strictly, an individual is taxed as a UK resident for the whole of any tax year when he or she is resident here for any part of it.
But, if the individual leaves or comes to the UK part way through a tax year, the year may, by concession, be split. This means that the UK tax payable is calculated on the basis of the period of actual residence, rather than for the whole of that tax year. In effect this concessionary treatment splits the tax year into resident and non-resident periods. This split year treatment will apply to individuals who:
(i) come to the UK to take up permanent residence or to stay for at least two years, or
(ii) leave the UK to become permanently resident abroad or, subject to certain conditions, leave the UK for full-time service under a contract of employment.
Companies
A company is tax resident in the UK if;
(a) it is incorporated in the UK, or
(b) the central management and control of its business is in the UK.
What is meant by “central management and control”?
It is clear that this term refers to strategic decision-making rather than administration. A company can be managed and controlled from the UK even if it is administered from outside the UK. The residence of the directors is irrelevant if they simply follow the instructions of some other person, or if they cannot act freely in relation to key business decisions.
Are non-UK resident directors able to make independent decisions and can they act on their own authority?
If non-UK resident directors can act freely, even if following advice provided by UK advisors, then they will be seen to exercise central management and control. However, if all that is happening is that decisions made in the UK are “formalised” abroad then the non-UK directors will not be able to demonstrate the requisite level of independence.
These issues were examined in the recent case of Laerstate BV v HMRC. The owner of the company (Mr Bock) was UK resident. He was a director but later resigned. There was one Dutch director.
Formal managerial meetings were held outside the UK. The UK resident owner did not attend all these meetings. The tax Tribunal found that Mr Bock’s activities were concerned with policy, strategic and management matters throughout the time when he was a director of the company and also after he ceased to be a director.
His activities constituted the real top level management of the company and the Dutch director’s activities were limited to signing documents when told to do so and dealing with routine matters such as the accounts. As such the place of effective management was in the UK. The company was therefore UK resident for tax purposes.
Trustees
Determining the residence status of trustees is relatively straightforward.
The trustees of a settlement (trust) are treated as a single person for tax purposes and this deemed person is distinct from the actual persons (individuals and/or companies) who act as the trustees.
- All trustees are resident in the United Kingdom
- The trustees are resident in the UK for tax purposes.
- All trustees are resident outside the UK
- The trustees are not resident in the UK for tax purposes.
- There is a mixture of resident and non-resident trustees acting at the same time
The trustees are resident in the UK unless the settlor was:
- not resident in the UK, and
- not ordinarily resident in the UK, and
- not domiciled in the UK at any relevant time.
‘Relevant time’ means;
(i) any time a settlor made or is treated as making the settlement, and
(ii) any time when a settlor adds property to the settlement.
Where the settlement arises on an individual’s death, it means the time immediately before his or her death.
The Future
HMRC is working on a statutory definition of residence which should make life easier for all concerned. However it seems unlikely that draft legislation will be available much before the end of 2010.
