Personal & trust tax - the residence test & day counting rules
Please note that the details on this page reflect the contents of the 2008 Budget and its associated paperwork. Some points may therefore have been superseded by subsequent events.
An individual's liability to income tax and CGT depends on their residence status. Determining residence for these purposes is not straightforward as there is no clear statutory residence test. The one clear test provided by statute is that someone who is present in the UK for 183 days or more in any UK fiscal year will be UK resident.Where this test is not met an individual might still be UK resident and it is necessary to look at a mixture of statute, case law and HMRC practice. The so called ‘91 days averaging ‘ test, which is so often in point, is not a statutory test but has been extracted by HMRC from historic case law. The averaging takes place over four years but the numeric calculation is not the whole story as intentions may also be relevant.The proposed change to the legislation is with respect to day counting.
There has historically been no statutory definition of a day's presence in the UK. Current HMRC practice (though cases such as Gaines-Cooper have demonstrated that they can depart from this practice where they feel it is being abused), is that days of arrival and departure are ignored.Thus a five day visit may count only as three days.
It was announced in the Pre-Budget Report that with effect from 6 April 2008 legislation will be introduced to set down how days should be counted for residence test purposes. It was announced that days of arrival and departure would be counted as days of physical presence in the UK for the purposes of residence tests though there was a limited exemption for passengers in transit. Following consultation the proposals have been changed.
Now for the purposes of day counting only any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes. Furthermore, there is an exemption for passengers in transit which is more generous than that announced at the time of the Pre-Budget Report. Broadly, days spent in transit which will involve being in the UK at midnight will not be counted as days of presence for residence test purposes so long as during transit the individual does not engage in activities that are to a substantial extent unrelated to their passage through the UK, such as attending a business meeting during this time.
The legislation will automatically apply for the purposes of the 183 day statutory test. HMRC has stated that days should also be counted in this way when looking at the non statutory ‘91 day averaging' test.
The day counting test proposed at the time of the Pre-Budget Report was universally felt to be too strict with the ‘passengers in transit' exemption being too narrow.The announced changes are very welcome. However, it is extraordinary that a major world power in the 21st century does not have a proper statutory residence test.The UK economy needs to attract internationally mobile individuals and such individuals want certainty in their tax affairs.
Having to determine residence by looking to statute, case law and HMRC guidance (which can be departed from, changed or amended) does not provide the necessary certainty. A commitment from Government to introducing a statutory residency test in FA 2009 and the establishment of a working party from HM Treasury/ HMRC and the professional bodies and other key stakeholders to develop the necessary legislation would be very welcome.
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