UK wants a statutory residence test for taxpayers

by Ray Clancy on March 24, 2011

UK seeks residency test for taxes

The UK is to consult on proposals announced in the 2011 Budget to bring in a statutory residence test for tax payers from April next year.

Chancellor George Osborne explained that it was part of an aim to simplify the existing complex tax rules for non-domiciles and those living abroad. It is also seen though as part of a crackdown on non-payment.

The Treasury said the current rules that determine tax residence for individuals are unclear and complex. It will consult in June on a statutory definition of residence to provide greater certainty for taxpayers. The test will determine what makes a person a UK resident or non-resident for tax purposes.

A statutory test of personal fiscal residence would end centuries of testing residence on case law and practice principles. In recent years this had led to a high level of taxpayer uncertainty.

Rules covering residency status were set out in HM Revenue & Customs guidebook IR20, later known as HMRC6. But the complex rules on residency status were thrown into further confusion in a 2010 court case involving British millionaire Robert Gains Cooper who lived abroad but still had a house in the UK that was judged to be his main residence.

During the judicial review into his residency status his claim of non-residency was denied by the High Court and HMRC argued IR20 was not binding.

‘The announcement that the Government intends to introduce a statutory residence test from 06 April 2012 is welcome news following the uncertainty of the present position,’ said Greg Limb, partner at KPMG.

He warned though that confusion would need to be gotten rid of. ‘At the moment the situation regarding residence is complex and if the statutory test simply rehearses the issues highlighted in recent cases such as Gaines Cooper, taxpayers and visitors to the UK will still be unclear about their residence status.  This could deter visitors and entrepreneurs from coming to the UK and may have an impact on competitiveness,’ explained Limb.

‘A statutory residence test will only bring clarity if it is easy to operate in practice.  A simple day count test would be most appropriate as visitors to the UK could then easily determine when they were subject to UK taxation,’ he added.

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