Treasury issues consultation paper on statutory residence test

20 June 2011

The government has published a consultation paper on the long-overdue statutory residence test. At the same time it issued proposals to reform taxation of non-domiciled residents (non-doms).

Both papers have attracted widespread comment, especially the residence test. HM Revenue & Customs currently uses vague ideas of “family ties” and whether someone has made a “distinct break from the UK” to decide tax residence. A series of court cases in recent years – especially the Gaines-Cooper appeal – has demonstrated that this approach produces unpredictable results.

Even HMRC admitted in 2009 that it needed to develop objective criteria of UK tax residence. Last year’s change of government added some urgency to the process, since the new government believes individuals’ uncertainty about their residence status is a deterrent to investment.

The proposed new test classifies migrant individuals as “arrivers” (those who have recently come to the UK), “leavers” (who have recently left the UK) or “full time workers abroad”. To these individuals it applies three sub-tests. One seeks information that would definitively exclude the individual from UK tax residence, while a second will look for answers that will definitively include him. Day-counting will be the key factor in these tests. For example, leavers will be judged non-resident in a tax year if they spend fewer than 10 days of it in the UK.

If these tests fail to decide, a third test will be applied that balances day counts against “connecting factors” in the UK, such as family, employment and accessible accommodation. HMRC has set out a sliding scale to determine for each class of taxpayer whether they are resident, based on their day counts and the number of other factors that they do or do not satisfy.

The Treasury says this will allow individuals “to assess their residence status simply and without the need to resort to specialist advice”.  But this component of the test will also be its most controversial part. Philip Fisher, PKF’s Head of Employment Tax called it “ridiculously complicated” and “a recipe for disaster”. Nigel May of McIntyre Hudson called it “truly byzantine”.

Nevertheless, the proposal appears to be better than the present situation. “The broad principles behind the proposed test appear to be objective”, said Wendy Walton, chairman of STEP’s Technical Committee. “They will provide simplification and greater certainty over the current position.”

David Kilshaw of KPMG UK agreed that the consultation document contains some “quite sensible and workable” provisions, but left others unsolved.

Sean Drury, international mobility partner at PricewaterhouseCoopers, said PwC was “broadly positive” but said the proposals “still do not reflect the truly global nature of business and limit the attractiveness of the UK as a global centre.” He singled out for criticism the de minimis ten-day limit, which implies that a “connected” individual could become tax resident by visiting the UK for only ten days, if he had been resident in any one of the previous three years. “Ten days is extremely restrictive and leaves virtually no room for manoeuvre”, said Drury. “Unfortunately, it appears the number of days are not up for discussion as part of the consultation.”

Christopher Groves of Withers said the test would supply some welcome certainty, but at a price. “While these [new] rules are for the most part clear, they cannot always be described as generous”, he said.”Some of the permissiveness of the current regime will be lost, but for many individuals this will be a price worth paying.”

HMRC is considering encoding the test as an interactive on-line tool, so that individuals can self-assess their residence status when the new definition is introduced in April next year. A prototype of the tool is available as an Excel questionnaire from the consultation website.

However, if taxpayers really will be expected to self-assess their residency, there are bound to be disputes which will have to be settled in court. “That is precisely what the Treasury is trying to get away from”, said PKF’s Philip Fisher.

The consultation is open until 9 September.

• We will write in detail about the non-dom consultation later this week.





HM Treasury (Statutory residence test)

STEP Statutory Residence Consultation Summary

HMT Treasury (Non-dom taxation)

STEP Non Domicile Taxation Consultation Summary  

STEP statement

Tax Journal



Withers (PDF)

IFA Online

Accountancy Age

STEP Consultation Database  


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