Non-Residence A Beginner's Guide

Non-Residence A Beginner's Guide

John T Newth FCA, FTII, FIIT, ATT investigates law and practice regarding non-residence for tax purposes.

As United Kingdom tax legislation continues to proliferate, it is strange that certain subjects are not dealt with in detail, or indeed not at all, in the Taxes Acts. A typical example is self-employment. Another important example is non-residence for individuals.

If one researches the index of Butterworths Yellow Tax book there are substantial entries for non-resident companies, non-resident entertainers and sports-people and non-resident trusts, but nowhere is there a clear definition of residence and non-residence for individuals.

Where does the adviser turn when confronted with the affairs of an individual claiming to be non-resident for United Kingdom tax purposes?

The legislation

Actual statutory provisions regarding residence and non-residence are extremely sketchy. Ignoring capital gains tax and business tax the following are some of the most important.

Personal reliefs: Section 278(1), Taxes Act 1988 sets out the unavailability of personal reliefs for an individual not resident in the United Kingdom.

Persons working abroad: Section 335, Taxes Act 1988 outlines the position of persons working abroad, in that

(1) the 'residence issue' will be decided without regard to any home maintained in the United Kingdom where a person is employed or works full time outside the United Kingdom.

(2) Incidental duties performed in the United Kingdom are ignored for the purpose of determining the individual's residence status.

Temporary residence: Section 336, Taxes Act 1988 deals with the situation of non-residents who are in the United Kingdom temporarily, and their liability to Schedule D tax in the United Kingdom on possessions and securities. Basically, no liability arises unless the individual is resident in the United Kingdom in a tax year for more than six months, once again without reference to any available living accommodation.

Overseas pensions: Sections 614 and 615, Taxes Act 1988 deal with exemption from United Kingdom taxation for pensions received from an overseas territory.

Section 128, Finance Act 1995 in very broad terms limits the tax liability of non-residents to the amount of tax accounted for at source, in the case of investment income, and also disregards that income in calculating the liability on other sources, such as earnings or rents.

Disputes by employees: Section 207, Taxes Act 1988 provides that disputes regarding residence and domicile by employees shall be heard by the Special Commissioners.

Double taxation relief: Part XVIII of the Taxes Act 1988 sets out the approach to double taxation relief.

Secondary legislation

Statutory Instrument No 2902 of 1995 entitled 'Taxation of Income from Land (Non-Residents) Regulations 1995' details the tax provisions for non-residents who own property in the United Kingdom which is let.

The major questions

All of this is helpful but does not answer the major questions which are:

(1) What are the rules for non-residence for:

(a) an employee intending to work abroad;

(b) an individual contemplating moving abroad to live?

(2) What is the position in:

(a) the year that someone leaves the United Kingdom;

(b) the year that an individual returns to the United Kingdom or comes to live in the United Kingdom?

(3) What are the liabilities to capital gains tax:

(a) of disposals of chargeable assets in the United Kingdom when the individual is resident abroad;

(b) of disposals of chargeable assets outside the United Kingdom where the individual is resident abroad?

(4) Can a non-resident individual claim any United Kingdom reliefs against income arising in the United Kingdom?

(5) How is the non-resident taxed on dividends, interest and pensions arising in the United Kingdom?

(6) What is the position of a non-resident and non-domiciled person coming to either live or work in the United Kingdom?

Revenue pronouncements

The next avenue of research is Revenue pronouncements on residence and non-residence. This is with the proviso that what the Revenue states is its view, and is not necessarily law. Case law will be considered later in this article.

The Revenue manuals

Reference is made to non-residence in a number of Inland Revenue published manuals, but the importance of the subject is such that a whole manual, The Residence Guide, is devoted to the subject of residence and non-residence. This illustrates the complexity of the subject, but once again should be accompanied by a warning.

The Residence Guide repeatedly states if the individual is treated as resident or if the individual is treated as non-resident. It is therefore not a guide as to whether an individual is resident or non-resident.

However, The Residence Guide contains the following helpful chapters following the introduction:

(1) Leaving the United Kingdom

(2) Coming to the United Kingdom

(3) Domicile (which is beyond the scope of this article)

(4) Personal allowances

(5) Liability to United Kingdom tax (on various sources of income)

(6) Particular occupations

(7) General information this includes counting days of residence and how to calculate average visits to United Kingdom

(8) Appendices

Readers who are accustomed to dealing with non-resident matters know that a special Revenue office exists for this purpose, indeed two. Financial Intermediaries and Claims Office (Residence Advice and Liabilities) is based at Bootle in North Lancashire and there is also a Financial Intermediaries and Claims Office at Nottingham.

One cannot detail the information in the manual within an article of this length but readers should note that in Chapter 1 reference is made to the Revenue form P85 which is an important document for those intending to leave the United Kingdom. In the same chapter reference is made to Revenue leaflet IR138 (living or retiring abroad) which was issued in October 1995. As an example of the complexity of the subject, this chapter also includes a flow chart which is intended to establish whether someone is resident or non-resident.

In Chapter 2 reference is made to another form, P86, which is important for persons coming to the United Kingdom.

Readers are encouraged to read the manual in detail and the writer completes his consideration of this resource by a statement in Chapter 7.4 which states 'if the individual or the agent disagrees with the residence treatment

do not engage in correspondence;

refer your file to Financial Intermediaries and Claims Office (Residents Advice and Liabilities), Bootle.'

Other Revenue Statements

There are a number of Inland Revenue Statements of Practice, press releases, extra statutory concessions and Interpretations dealing with residence and non-residence. The major and well-known leaflet IR20 will be considered later.

Authors' fees

A Parliamentary Written Answer of 10 November 1969 concerns payments by publishers to non-resident authors. Basically they are subject to deduction of tax at source unless paid to an author by profession or unless a double taxation agreement with the country in which the individual is in residence is in operation.

Accompanying spouse

Extra-statutory Concession A78 is entitled 'Residence in the UK: accompanying spouse'. Where an individual works abroad the accompanying spouse is not treated as resident provided visits to the United Kingdom do not amount to 183 days or more in any tax year, or an average of 91 days or more in a tax year, averaged up to four years.

Ordinary residence

An Inland Revenue press release dated 10 July 1979 provides that where an individual is partly employed outside the United Kingdom and partly self-employed during the tax year then 'the normal rules for determining an individual's residence status apply' – including presumably the length of visit (if any) to the United Kingdom.

Individuals coming to the United Kingdom

Statement of Practice SP 3/81 provides that normally a person coming to the United Kingdom has to satisfy a three year 'tax residence' qualification. However, acquisition of accommodation for use in the United Kingdom brings the date of residence forward.

Definitive rulings

Paragraphs 27 and 28 of the Institute of Chartered Accountants in England and Wales' Technical ReleaseTR806 (16 August 1990) was part of a dialogue between the ICAEW and the Inland Revenue. It dealt with the case of a person working full time abroad, and an instance where the Revenue would not give a definitive residence ruling until the individual had been abroad for three full tax years.

Exceptional circumstances

Statement of Practice SP 2/91 provides that, in calculating United Kingdom residence based on average days of visit over four years, days spent in the United Kingdom because of exceptional circumstances beyond the individual's control, such as illness, will be excluded from the calculation.

Effect of available property

Statement of Practice SP 17/91 acknowledges that 'ordinary residence' is not defined in statute law and is based on court decisions. Normally an individual coming to the United Kingdom is treated as being ordinarily resident from the beginning of the tax year after the third anniversary of arrival. However, where, before that time, a property for living accommodation is purchased or rented, then residence occurs from the beginning of the tax year in which the property was acquired or rented.

Commencement and cessation of residence

Extra-statutory Concession A11

The Taxes Acts make no provision for 'splitting' a tax year. Where an individual either comes to the United Kingdom to take up residence for at least two years or leaves the United Kingdom during the tax year, liability to United Kingdom tax is calculated by reference to the period of residence during the tax year. This is subject to the proviso, where an individual leaves the United Kingdom to work abroad, that the period of employment covers a full tax year and the 'six month' and 'three month' rules are not exceeded. And of course this is a concession which is not given in tax avoidance cases.

Capital gains tax

Revised Extra-statutory Concession D2 applies to any individual who ceases to be resident or ordinarily resident in the United Kingdom on or after 17 March 1998, or becomes resident or ordinarily resident in the United Kingdom on or after 6 April 1998.

An individual coming to reside in the United Kingdom is not chargeable to capital gains tax on disposals made before arrival in the United Kingdom, provided that the individual has not been resident or ordinarily resident in the United Kingdom at any time during the five years of assessment immediately preceding the year of assessment when the individual arrived in the United Kingdom.

Conversely an individual leaving the United Kingdom and then becoming non-resident is not charged to capital gains tax on gains from disposals made after the date of departure, provided that he or she was not resident in the United Kingdom for the whole of at least four out of the seven years immediately preceding the year of assessment in which the individual left the United Kingdom.

Various exemptions to this concession apply in respect of business assets and trust assets.

Full-time employment abroad

Revenue Interpretation RI40

This Revenue statement concerns the meaning of 'full time' in relation to employment as it applies to the 'allowable accommodation' rules under section 335, Taxes Act 1988 and the 'split year' basis in Extra-statutory Concession A11.

In this connection there is no statutory definition of 'full time' and the meaning will always depend on the facts of the case. The Revenue goes on to talk about, inter alia, a full working week, and jobs that do not have a straightforward structure, as well as someone who had a series of part-time jobs within the same group of companies. Its approach to the subject is clarified.

Leaflet IR20

The views of the Inland Revenue are set out comprehensively in Inland Revenue booklet IR20. This is entitled 'Residence and non-residence: Liability to tax in the United Kingdom'. Part 4 of the booklet relates to domicile, which is beyond the scope of this article.

The booklet commences by stating that the notes in the booklet reflect law and practice at October 1999, but are not binding in law. Once again, on page 5 it is stressed that the terms 'residence' and 'ordinary residence' are not defined in the Taxes Acts. However, based on case decisions the booklet states the following:

Individuals will always be resident, if in the United Kingdom for 183 days or more in a tax year. Days of arrival and departure are ignored in this calculation.

Residence in the United Kingdom year after year implies ordinary residence.

It is possible to be resident and ordinarily resident in the United Kingdom and another country. In those circumstances, if a double taxation agreement is in force the individual may be treated as a resident in only one of the two countries.

If the 'split-year' treatment described in Extra-statutory Concession A11 applies, the person coming to or leaving the United Kingdom part way through a tax year is resident from the date of arrival to the date of departure.

Leaving the United Kingdom

Paragraph 2 of the booklet is headed 'Leaving the United Kingdom'. It deals primarily with working abroad and leaving the United Kingdom permanently or indefinitely.

An individual who leaves the United Kingdom to work full time abroad is treated as non-resident and not ordinarily resident if all the following conditions are fulfilled:

Absence from the United Kingdom and employment abroad lasts for a whole tax year

Visits to the United Kingdom

total less than 183 days in any tax year; and

average less than 91 days a tax year over a period of four years.

An individual who goes abroad permanently is treated as remaining resident and ordinarily resident if visits to the United Kingdom average 91 days or more a tax year.

Such individuals claiming non-residence in the United Kingdom may be asked to provide evidence of intention to move permanently abroad. This could include purchase of a property abroad and disposal of a home in the United Kingdom. Individuals who have left the United Kingdom permanently or for at least three years will be treated as non-resident from the day after the date of departure provided:

absence from the United Kingdom has covered at least a whole tax year; and

visits since leaving the United Kingdom total less than 183 days in any tax year and have averaged less than 91 days over four tax years.

Coming to the United Kingdom

Persons coming to the United Kingdom permanently or indefinitely are considered in paragraph 3 of the booklet. Basically they are treated as resident and ordinarily resident in the United Kingdom from the date they arrive if their home has been abroad and they intend:

to come to the United Kingdom to live permanently; or

to come and remain in the United Kingdom for three years or more.

Visitors to the United Kingdom are treated as resident if they are in the United Kingdom for 183 days or more in a tax year, or exceed an average of 91 days in the United Kingdom over four years. Regular visitors who exceed the 91 days test are also treated as ordinarily resident.

Longer term visitors who come to the United Kingdom for a specified purpose, i.e. for employment, are treated as resident if they remain in the United Kingdom for at least two years. Alternatively, residence will apply if a home is purchased or leased in the United Kingdom in the year of arrival. Ordinary residence applies if the intention of the individuals is to stay for at least three years.

Individuals who come to the United Kingdom as students are treated as resident from the beginning of the tax year after the third anniversary of arrival in the United Kingdom.

The booklet then goes on to consider liability to United Kingdom tax. Part 5 considers earned income, Part 6 investment income and Part 7 tax allowances and reliefs and their availability for non-United Kingdom residents. Detailed consideration of these issues is beyond the scope of this article.

Capital gains tax

Extra-statutory Concession D2 provides that individuals who have been in the United Kingdom during a tax year and cease to be resident and ordinarily resident in the United Kingdom are concessionally not liable to capital gains tax on gains arising from disposals made after the date of departure.

However, the 1998 Finance Act closed a supposed 'loophole' that had been exploited by many during the years. Individuals who leave the United Kingdom on or after 17 March 1998 can qualify for the concession only if they were neither resident nor ordinarily resident in the United Kingdom for the whole of at least four of the seven tax years immediately preceding the tax year in which they leave the United Kingdom.

Individuals who become resident in the United Kingdom during a tax year, having been neither resident nor ordinarily resident in the United Kingdom at any time during the five years immediately preceding that year are, by Concession D2, liable to capital gains tax only on gains arising from disposals made after the date of arrival.

For individuals who arrived in the United Kingdom before 6 April 1998, the concession applied if they were neither resident nor ordinarily resident throughout the whole of the 36 months before the date of arrival.

Finally booklet IR20 deals with double taxation relief, the affairs of specialised trades and professions, appeals and National Insurance contributions. It should be recognised that appeals regarding residence matters and claims for relief can be heard by either the General Commissioners or Special Commissioners (but see above regarding employees). Appeals regarding ordinary residence status and domicile are heard by the Special Commissioners.

Case law

Not surprisingly, in view of lack of statutory definition, there is extensive case law on residence, ordinary residence and domicile. Those wishing to research the case law should refer to Chapter 46 in Tolley's Tax Cases 2000.

Perhaps the most well-known case is Reed v Clark [1985] STC 323 which concerned Dave Clark, the well-known pop musician at that time. Although ordinarily resident in the United Kingdom, he left for the United States on 3 April 1978 and did not return until 2 May 1979. The High Court held that Mr Clark was not resident in the United Kingdom during 1978-79, and his presence in California amounted to more than 'occasional residence'.

Self assessment

The self-assessment tax return has special pages for those who wish to claim non-residence, and these have to be ordered separately. The actual form for completion is relatively simple and incorporates:

a claim for resident or non-resident status;

the basis of a claim for non-residence. This includes categories of employment, days spent in the United Kingdom during the tax year, residence for the previous tax year and aggregate of days spent in the United Kingdom during the past four tax years;

a claim regarding the status of being not ordinarily resident;

information regarding domicile, double taxation agreements, etc.

The accompanying notes regarding non-residence amount to twelve pages, the first five pages of which comprise 'yes' or 'no' questions intended to assist the taxpayer in completing the non-residence pages of the self-assessment return.

Conclusion

Readers will have recognised by now that residence and non-residence are specialised subjects, not to be indulged in by tax practitioners in a casual way. The information enumerated above is merely the 'bare bones' of the subject. Application of law and practice demands commitment, experience and the required technical knowledge.

 

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