Following a ruling in 2006 in the case of Robert Gaines-Cooper v HMRC, many have begun wondering whether the taxman in the UK has changed the rules about when a Briton becomes non-resident for tax purposes.
But as the Revenue has subsequently pointed out, none of the rules have changed, but people need to understand how the rules are applied and interpreted before they assume that they are non-resident for tax purposes in the UK.
So, if you’re wondering when does an expatriate become non-resident for UK tax purposes, we will endeavour to explain all for you in this straightforward article.
The very first points to clarify are the following: -
• This article is only about Britons leaving the UK. It is not about people entering the UK.
• The Revenue clearly states that the main factors taken into account when determining residence, ordinary residence or non-residence are defined, however a decision relating to the individual will depend on their particular case and situation. What this basically means is that we will show you the rules that the Revenue applies, but if you exploit these rules, skirt the guidelines or are in any doubt about your status, you should seek qualified legal advice about your status before you assume you are resident or non-resident. You should take nothing for granted when it comes to your tax status in case you are caught out by the taxman.
Having clarified those points let’s move on to look at what it generally takes to be classed as resident in the UK – and therefore liable to income taxation in the UK for example. If you are normally physically present in the UK at some point in a tax year you are likely to be considered resident. If you are in the UK for more than 183 days in one tax year you are always going to be considered resident, with no exceptions. These 183 days needn’t run consecutively. In terms of what counts as a day spent in the UK…before April 6th 2008 days of arrival and departure were not generally counted. From April 6th 2008 if you are in the UK at the end of a day that day will count as a day you have spent in the UK for residence purposes. That is unless it is a day spent in transit in an airport for example, where you arrive on one day and depart on the next. If you believe a day should be classed as a day in transit you must not do anything such as visit a property, attend a business meeting or engage in an activity such as that that is not related to your passage through the UK.
There is another class of residency that can affect your taxable status in the UK and that is if you are considered ‘ordinary resident’ – you may enter this status if, for example, you are usually classed as resident but you go on a long holiday and are in the UK for fewer than 183 days in the tax year in which you take your long holiday. Or, if you’re usually resident abroad but return to the UK for 183 days or more in one tax year you would become resident but not ordinary resident.
As you make the transition abroad and become an expatriate it may be the case that you are still classed as resident or ordinary resident in the UK whilst having become resident in your new nation for tax purposes. This is why the UK has double taxation agreements in place with many other nations. This prevents you being taxed twice. Additionally, for some people their tax liability will be split if, for example, they arrive in or leave the UK at some point within a tax year. This split year treatment is important for expats and it applies in the following situations: -
• You have been not ordinarily resident in the UK and you come to live in Britain permanently or to stay for at least two years. You are then taxed as a resident only from the date of your arrival.
• You have been resident in the UK and you leave to live abroad permanently or for a period of at least three years, and on your departure are not ordinarily resident in the UK. You are taxed as a resident only up to and including the date of your departure.
• You have been resident in the UK and you leave to take up full-time employment abroad, and you meet certain conditions. You are taxed as a resident only up to and including the date of your departure (and from the date when you return to the UK).
If you’re going to be living and working abroad and you have a full-time contract of employment then you may be treated as not resident and not ordinary resident from your point of departure but only if you fulfil all of the following criteria: -
Your absence from the UK as well as your employment contract last for at least a full tax year
During your period of absence you return to the UK for fewer than 183 days in one tax year OR fewer than an average of 91 days per tax year over a period of 4 years.
As soon as your contract ends and you return to the UK you will be classed as resident and ordinary resident again. Note, if during your period of residence abroad there is a break in your employment contract, HMRC will review your situation again. If you go from one contract to another you may still be classed as non-resident – but do bear in mind that HMRC can always review your status if you fail to meet or comply with any of their guidelines.
If you’re emigrating but you’re not going into a period of full time employment – perhaps you’re retiring abroad for example – then the rules differ once again. For example, if you are going to live abroad permanently then you must not spend an average of more than 91 days in the UK in a tax year otherwise you can be classed as resident. It is possible that HMRC will want to see some proof of intention when looking into your case – they will want to see that you intend to live permanently abroad and will assess this over a period of 3 years or more. The evidence you could show might be that you have bought or long-term rented a home abroad to live in, and if you do still have property in the UK for your own use, the reason is consistent with your stated aim of living abroad permanently or for three years or more.
If HMRC accept that you have indeed left the UK permanently or for at least three years, you will be treated as not resident and not ordinarily resident retrospectively from the day after the date of your departure date as long as your absence from the UK has covered at least one whole tax year, and any visits you have made to the UK since leaving have totalled less than 183 days in any tax year, and have averaged less than 91 days a tax year over an average of the last 4 years.
Note, you need to contact the Revenue if you are leaving the UK other than on short trips, you will probably have to fill in form P85 and this will help HMRC determine your residency status and allow you to move forward with living your new life abroad away from all the confusion of where you are or are not resident.
Finally, at the beginning of this article we mentioned a case called Robert Gaines-Cooper v HMRC, the ruling from which many assumed turned all of the above on its head. The person in court facing HMRC believed they were non-resident for UK taxation purposes because they were only ever in the UK for less than 183 days in a tax year or less than 91 days in a year over an average of 4 years. However, all that was basically irrelevant because the Revenue were able to prove that Robert Gaines-Cooper had never left the UK and become non-resident as far as they were concerned! So form P85 is critical because you need to be able to prove that you have left the UK – what’s more, you have to have a very good and efficient tax specialist such as an international accountant on your side when you’re an expatriate living and working and earning abroad. You need to get your status established and confirmed before you can make any assumptions or decisions about how to manage your money.
For more information please read document IR20 from HMRC which clarifies all of the above in even more depth. Please note we are NOT qualified taxation or financial advisers. This article is for information purposes only and does not therefore constitute advice.