So many of our clients these days have financial connections with other countries - either because they live, work or hold assets there. If you are in this position then the new statutory residency test, which came into force at the start of the tax year, may well be of interest.
Previously individuals have had to rely on case law to decide whether or not they count as resident in the UK for tax purposes as there was no meaningful test. Now we have a series of automatic non-residence tests, then some automatic residence tests and, if those all prove inconclusive, further tests that weigh the days in the UK and your ties here to determine your position.
The purpose of the new rules is to try and simplify matters and give people more certainty over their position. As a general rule, a UK resident is liable to tax on their worldwide income. A non-resident will often only pay on their UK source income. There are then other complications to consider, but that’s the broad starting point. The difference between being UK resident or non-resident can make a significant difference to someone’s tax position.
Examples we commonly see where residency is important is when clients go to work abroad. There are specific rules that can allow you to claim non-residence if you are working abroad full time, so that your overseas income is then not subject to UK tax. This is great if the country where you are working has a lower tax rates. There are quite a few hoops to jump through though – with limits on how much you can come back to the UK and a minimum time period to be spent abroad. The new tests also introduce a requirement to work an average of 35 hours a week to count as full time.
Another example is someone spending increasing time away in a holiday home. At what point does that become the main centre of their lives? If you spend enough time in France for example, the French authorities could consider you are resident there and you could have reporting requirements and tax to pay in France, coupled with severe penalties if you do not.
A common misconception is that you can choose which country you pay your taxes – as long as you are paying somewhere it’s got to be ok right? No, sadly not. It’s all a question of establishing the facts and reviewing the rules in both places. It is possible to be resident for tax purposes in more than one country. If that’s the case then we have to look at what are called Double Tax Treaties. These are agreements between countries to govern who gets ‘dibs’ over someone with connections to both countries and taxing rights over their income. What is taxed where depends on the type of income and all your income sources need to be reviewed.
Residency is an interesting area and one which it’s important to get right, so it’s always a good idea to take advice in both countries to make sure you don’t get tripped up.
Helen Thornley, Tax Consultant
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