The ten-day test

KEY POINTS

• The general principles of becoming non-resident.
• The terms of ITA 2007, s 830.
• The meaning of full-time work abroad and incidental duties.
• The ten-day rule and what this encompasses.

The implications of the rules for those going abroad and those part way through their secondments.The taxation, or otherwise, of individuals by reference to their residence and domicile has been a political hot potato for generations.

Every few years, a new case comes along and advances our understanding of when an individual has, or has not, saved millions of pounds by escaping the UK tax net.

To make things more entertaining, in recent years the public has begun to get involved, egged on by an eager media, which seems to delight in stories about high-profile politicians, businessmen, sportsmen and entertainers who they believe are not paying a fair share of tax like the rest of us.

A series of governments has made a statutory residence test a nirvana but, until today, few have got anywhere near to achieving it.

However, following the Budget, George Osborne has bravely put his head above the parapet, announcing that legislation will be enacted in FA 2012 to put the situation beyond doubt forever.

For better or worse, this will leave the position absolutely clear, in addition to filling the Exchequer’s coffers: one imagines that many individuals who currently do not pay as much tax here as they might will no longer be able to hide behind their own, their partner’s, or anyone else’s nationality or origins.

In the meantime, some clarity has been offered by HMRC in one particular area where there has always previously been doubt, at least in their minds, about the way in which the legislation should be interpreted.

General principles

It has always been accepted that if somebody is not a resident of the UK, they will not be expected to pay income tax except in relation to earnings from sources in this country.

This seems perfectly reasonable because, in the general scheme of things, they will have an obligation to pay tax in the country where they are resident.

There will be occasions where people are not resident in any country because they flit around the world, and there are also some countries that do not levy income tax.

However, that is merely taken to be a fact of life.

The issue that has never been satisfactorily resolved is what happens when somebody ceases to be resident in the UK as a result of leaving to work overseas.

If an individual emigrates permanently, cuts all of their UK ties and never returns, that is simple and uncontroversial. In other situations case law helps to provide interpretations, but now HMRC has stepped in to provide their own interpretation and guidance in this specific area.

Scope and consequences

The interpretation that has now been highlighted will only affect those who leave the UK to take up full-time employment overseas. It should not make any difference to anyone leaving the country permanently or indefinitely.

If somebody is resident in the UK for income tax purposes, they will be obliged to pay UK tax on the basis of their worldwide income, rather than merely their income arising from duties in this country. This extends to investment income as well as earnings.

This will be particularly significant for somebody living in a country without a double taxation treaty with the UK, and even more so where that country has a very low income tax rate or does not levy income tax at all.

The current legislation relating to residence when people leave this country to take up full-time employment overseas and more particularly their taxation status is set out in ITA 2007, s 830, which is headed ‘Residence of individuals working abroad’. This reads as shown in Section 830.

Joint Forum and HMRC 6

This subject has been a matter for fairly heated debate in the Joint Expatriate Forum, a grouping of practitioners and Revenue officers fondly known by the diminutive The Expat Forum, the minutes for which are publicly available.

The debate became particularly pertinent as the new booklet HMRC 6 was developed to replace leaflet IR20. This is intended to give guidance on residence and domicile issues to interested members of the public and advisers.

It has also taken on much greater relevance as HMRC have sought to use it to provide more definitive decisions relating to certain potentially controversial points, such as when somebody has ceased to be UK resident.

In May 2010, the minutes record that ‘a discussion followed on the precise meaning of full-time work abroad and incidental duties, neither of which are defined in statute, and which had been the source of some confusion. HMRC said that the revised HMRC 6 will seek to clarify this matter further’.

The key issue that had been raised by HMRC was their view that, in order to comply with the full-time working abroad requirement, it was necessary for the employment to be carried on exclusively outside the UK.

Even one day of work in this country, possibly only carrying out duties incidental to those of the job overseas, could prevent an individual from establishing that they had qualified to be taxed as an overseas resident.

In the July 2010 meeting, as recorded in the minutes, HMRC identified three particular questions relating to whether somebody was really working full-time overseas or not:

• How many days can be worked in the UK and claimed as merely incidental before they cease to be so?
• How many days can be worked in the UK alongside a separate ‘full-time work abroad’ employment?
• How many days of substantive duties can be undertaken in the UK without undermining a claim to be working full-time abroad?

New interpretation

As an interim measure prior to legislating the statutory residence test, HMRC have introduced a statement of their anticipated future practice, which offers a significant concession when compared with their previous view.

Unusually, this was released in the form of an email sent to members of the Expat Forum, which was then leaked to the media, presumably by professionals on that committee rather than representatives of the department.

This is now in the public domain and, without repeating the whole of the document, having confirmed that it is necessary for individuals to have a full-time employment overseas, which would normally be expected to occupy at least 35 hours each week, the crux lies in the extract shown in Duties in the UK.

Only substantive days?

Regrettably, this guidance was not entirely clear and it has been necessary to seek confirmation from HMRC with regard to whether the ten-day test would merely be based on substantive days spent in the UK or also take into account incidental days, which might have been more congruent with HMRC’s previous interpretation of the law and apparently had the support of their legal advisers.

They have confirmed that where somebody spends time in the UK carrying out duties that are merely incidental to their overseas employment, these will not be counted.

Incidental duties

As part of the same document, HMRC have helpfully sent links to the Employment Income Manual, section EIM40204, which contains four examples of situations where duties either are or are not incidental.

To summarise briefly, time spent on training courses or reporting back to a head office will not be regarded as substantive, while attendance at board meetings, even by teleconference or its equivalent, will be substantive by definition and therefore will count towards the ten days.

Most worrying of all is the last example, that of a courier for a tour operator who visits many countries in the course of the employment. Visits to the UK, however few and however short, are of the same importance to the job as visits to other countries.

As a result, they cannot be regarded as merely incidental.

While these examples are undoubtedly helpful, they are by no means definitive and, in many cases, there will be uncertainty as to whether or not somebody has breached the ten-day limit.

It is well known that HMRC takes a particularly intolerant stance when it comes to deciding if someone has been working substantively in this country. They would almost certainly take the view that a person spending an afternoon clearing their emails or sorting out a problem back at home base has been doing far more than merely carrying out incidental duties.

Examples

Let’s consider some examples of how the rule could work in practice.

• Jane works for an overseas charity providing relief in Africa. She spends the vast majority of her time abroad, but returns to the UK to report back to management three times a year for one-week periods. As Jane spends no time working substantively in the UK, she will not be resident.
• Joan is a company director based in Dubai. She attends day-long board meetings in the UK once a month. Since she spends 12 working days in the UK each year, she will continue to be UK tax resident.

Immediate action required

Now that we understand the basis on which HMRC is working, it is vital that anybody who could fall foul of the new interpretation takes the necessary steps to protect their position.

All employers with employees who might be affected and all affected individuals should keep a careful record of all substantive working days in the United Kingdom and ensure that this does not reach ten days in any tax year.

In addition, where there might be any question as to whether working days are substantive or incidental, it might be safest to avoid work in the UK or, alternatively, avoid coming here at all.

In any event, HMRC are at pains to emphasise that even if someone breaches the ten-day rule, they might still be able to establish non-residence, for example where they have cut many material ties in this country, depending on the exact circumstances of each individual case.

The past

We are left in the rather unsatisfactory position that many people who believe that they have ceased to be UK residents some years ago could now be challenged and forced to pay income tax on the basis that they remained tax resident here throughout.

While it is not entirely clear, it is presumed that HMRC will work on the basis of the ten-days test when considering such cases.

However, in theory at least, they could resort back to what they believe to be the strict legal position, i.e. even one day of work in this country could bring someone back into the tax system.

Similarly, if somebody had successfully remained within the limits for the first two tax years after their departure, but spent ten substantive days working in the UK in the third year, this would then suggest that they had not been serious about taking up full-time employment overseas and, as a consequence, it could be argued that they remained UK resident throughout the three-year period.

Problems for employers

For any business that employs individuals who could be subject to a reinterpretation of their residence status, there could be considerable uncertainty.

In theory at least, if someone is resident in this country it will be necessary to deduct PAYE and NIC from their salary and account for this to HMRC.

Where an NT (‘no tax’) coding has been obtained in good faith, this should be all that is required.

However, it is by no means unknown for employers to establish their own unofficial equivalent to an NT coding, merely neglecting to account for any UK tax in respect of overseas employees.

If it transpired at some future date that those individuals were UK resident throughout their period of absence, it would be possible for the taxman to come knocking on the door demanding all of the underpaid tax from the employer.

Conclusion

The efforts of HMRC to provide a greater degree of certainty are very welcome. Some might believe that the period of ten days is less than generous and, when it is imposed, could lead to consequences that would seem unnatural in the light of the intention of the original legislation.

However, when the basic ten days can be coupled with the ability to spend almost unlimited numbers of days carrying out incidental duties in the UK, a large number of those that might have been very close to being caught out could well be heaving a big collective sigh of relief.

In any event, provided that the many impediments to the introduction of a statutory residence test can be overcome by early next year, the position will become 100% clear as soon as FA 2012 becomes law.

Philip Fisher heads the employment tax and rewards team at PKF(UK)LLP and can be contacted by email. The views in this article are his own and do not necessarily represent those of PKF(UK)LLP.

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Issue: 4301 / Categories: Comment & Analysis , residence test , Residence & domicile