Generally speaking an individual is assessed to income tax in the United Kingdom if he is deemed to be UK resident for fiscal purposes. Unlike the United States citizenship is not a basis for levying income tax. Generally speaking a person is deemed UK resident for fiscal purposes:
- in any tax year in which he lives in the UK for more than 182 days or
- if his visits to the UK exceed 91 days per tax year for 4 consecutive tax years in which case he is tax resident in the 5th year or alternatively from the commencement of the tax year in which he first stated his intention to make such visits to the UK
- if he makes regular visits which are substantial, habitual and obligatory: Such visits may indicate residence provided they exclude an element of chance and occasion and provided they follow an almost mechanical regularity.
An existing resident of the UK can become non-resident for tax purposes by being out of the country for at least one period of 365 days, during which he did not spend more than 91 days in the country, with days of arrival and departure not being counted.
In July, 2005, however, the Special Commissioners in the case Shepherd v HMRC, decided that the 90-day rule was not the only factor determining whether a person is a UK-resident.
The Commissioners ruled that despite Mr Shepherd, a professional pilot, spending 180 days in the tax year out of the UK on flights, 77 days in Cyprus where he rented a furnished flat, and 80 in the UK in the family home, he had not made a distinct break with his former life and therefore remained resident for UK tax purposes.
“There is no doubt that this is the next stage of the Revenue’s clampdown on those individuals who are benefiting from favourable tax rates by basing their claim on the 90-day rule,” commented Narinder Paul, tax partner at KPMG in Birmingham.
Mr Paul went on to add that: “With increasing ease of travel and homes overseas becoming increasingly common, it is likely that more people may be considering that they could be a non-UK resident for tax.
“Many may have been led by Inland Revenue guidance notes into thinking that the important thing is to count days. However, as this case shows, this on its own is not enough to exempt an individual from paying tax within the UK.”
In January 2007, HM Revenue and Customs (HMRC) felt the need to clarify its position on tax residence in the UK thus:
“The recently published decision of the Special Commissioners in Robert Gaines-Cooper v HMRC (SpC 568) has attracted some attention from tax practitioners and their clients. In particular, some commentators have suggested that the decision in Gaines-Cooper means that HMRC has changed the basis on which it calculates the ‘91-day test’. This is incorrect.”
“The ‘91-day test’ is set out in Chapters 2 & 3 (‘Leaving the UK’ and ‘Coming to the UK – Short term visitors’) of the booklet IR20: Residents and non-residents. This guidance is clear that the ‘91-day test’ applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis. Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first.”
“Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years. HMRC’s normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the ’91-day test’.”
“In considering the issues of residence, ordinary residence and domicile in the Gaines-Cooper case, the Commissioners needed to build up a full picture of Mr Gaines-Cooper’s life. A very important element of the picture was the pattern of his presence in the UK compared to the pattern of his presence overseas. The Commissioners decided that, in looking at these patterns, it would be misleading to wholly disregard days of arrival and departure.”
“They used Mr Gaines-Cooper’s patterns of presence in the UK as part of the evidence of his lifestyle and habits during the years in question. Based on this, and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK. From HMRC’s perspective, therefore, the ’91-day test’ was not relevant to the Gaines-Cooper case since Mr Gaines-Cooper did not leave the UK.”
“HMRC can confirm that there has been no change to its practice in relation to residence and the ‘91-day test’. HMRC will continue to:
- Follow its published guidance on residence issues, and apply this guidance fairly and consistently;
- Treat an individual who has not left the UK as remaining resident here;
- Consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, in deciding whether or not an individual has left the UK;
- Apply the ‘91-day test’ (where HMRC is satisfied that an individual has actually left the UK) as outlined in booklet IR20, normally disregarding days of arrival and departure in calculating days under this ‘test’. “
Gaines-Cooper was again in the news in October 2008, when it emerged that he had failed to convince Court of Appeal judges in London that he was non-domiciled for tax purposes.
The ruling left the globe-trotting businessman with a huge tax demand for the years 1993-2004.
The judge dismissed the appeal as “nothing more than an illegitimate attempt to reargue the facts”.
Non-residents (as opposed to domiciled non-residents, who are now subject to slightly different rules) are generally speaking only liable to UK income tax on income derived from:
- Property situated in the UK
- Any trade or profession carried on through a branch or agency in the UK
- Any employment the duties of which are performed in the UK
This rule has led to many UK nationals seeking to become non-resident by moving abroad. In the United States, by contrast, the mere fact of citizenship means that a US national living in a foreign country is still liable to pay income tax in America on his worldwide earnings with a credit being given for any taxes already paid or due in a foreign country.
UK non-residents do not pay tax on:
- Interest from certain UK Government securities
- Interest from UK-situate bank and building society deposits
However, it is no longer possible to avoid capital gains tax by arranging for a gain to crystallise during a short period of overseas absence: five years’ of non-residence is required before a gain on an asset acquired during residence is exempt from UK capital gains tax. Updated rules for taper relief have made this provision almost irrelevant, in fact.
Non-resident entertainers and sports personalities were disappointed by a High Court ruling issued by Mr Justice Lightman in March, 2004, regarding a tax bill presented to tennis star Andre Agassi for earnings from sports companies, Nike and Head.
Mr Agassi had appealed against a decision by the Special Tax Commissioners in favour of the UK’s Inland Revenue (now HMRC). The tax authority had argued that the fact that he was playing in the UK whilst endorsing products for Nike and Head represented a “relevant activity”, and that he should therefore pay UK tax on the payments that he received from the companies.
Handing down his ruling, Justice Lightman explained that:
“It is common ground that section 556 of the 1988 [Income and Corporation Taxes] Act subjects non-residents to tax, if the payment is made by an English company or a foreign one with a tax presence here. The question raised is whether they are intended to be excused from liability if, instead, they are paid by a foreign company with no tax presence here.”
He went on to observe that: “In my judgment it would be absurd to attribute to the legislature the intention that liability could in any and all cases be avoided by channelling the payment through a foreign company with no tax presence here. If this were the case, the tax would effectively become voluntary,” and concluded that: “As it seems to me, the plain and obvious intention of the legislature was to impose an obligation on the person making the payment irrespective of his tax presence here.”
With HM Revenue and Customs (HMRC) using an ever-broadening test to establish whether someone is resident in the UK for tax purposes, British-born expats are having to go to greater lengths to sever their ties with the land of their birth.
HMRC’s recently rewritten guidance on these matters – booklet HMRC 6 – explicitly emphasises the broader criteria employed in HMRC’s investigations of residence status. What’s more, you have to do much more than merely count the days that you spend in and out of the UK every year to qualify as a true non-resident, as evidenced by the long-running Gaines-Cooper legal case.
“It is all too common for people to go to live abroad only to find out later that they have not in fact left the UK as far as UK tax rules are concerned. This leaves the ill-informed vulnerable to attack from HM Revenue & Customs and could lead to hefty tax bills, plus interest and penalties,” warned Matt Coward Director of Private Client Tax Services at PKF Accountants, in August 2009.
Besides income tax, there are a number of other tax traps that could ensnare the unwary expat, even if they have been abroad for some considerable time. These include National Insurance contributions, which can continue for a year after leaving the UK; capital gains, which can be captured upon a temporary resident’s return to the UK if they have been out of the country for less than five years; and inheritance tax, for which an emigre remains liable for three complete calendar years after they have left the country.
“Recent Court decisions on residence have generally gone against the taxpayer and HMRC is actively pursuing cases where, in its view, the taxpayer has not done enough to demonstrate that they have ceased to be UK resident,” Coward continues. “The key to proving that you have become non-resident for tax purposes is to sever as many ties with the UK as possible – just staying overseas and counting days spent in the UK is not enough. It’s essential to be able to demonstrate a decisive break.”
PKF recommends that expats take the following measures to ensure that they truly sever their ties with Blighty as far as the Revenue is concerned.
- Sell your UK property or let it out for at least 12 months.
- Do not leave your property empty.
- Ensure your property is not available for your use when you visit the UK.
- If you are letting the property, ask a UK agent to deal with the property on your behalf.
- Pay all property bills before you depart from the UK.
- Notify your house insurers.
- Notify your mortgage lender as appropriate.
- Notify your local council that you have left the property.
- Consider resigning from any UK company directorships or company secretarial positions.
- Consider disposing of your UK business interests altogether.
- Ensure that official paperwork such as Companies House filings are completed.
Other UK connections
- Notify your UK doctor and dentist that you have left the UK.
- Cancel your UK sporting and social club memberships.
- Consider appointing an attorney in the UK who is empowered to deal with your UK affairs.
- Send form P85 to HMRC, declaring that you have become non-resident.
- Ideally, do not return to the UK for an entire tax year to emphasise the break in residence.
- Do not return to the UK for more than 90 days a year in subsequent tax years.
- Cancel your UK credit cards and reduce the balances in your UK bank accounts.
- Ensure any outstanding bills are paid in the UK.
- Consider transferring pension arrangements overseas.
- Sell your car and cancel your car insurance and subscriptions to motoring organisations.
Your new country of residence
- Establish employment or business links in the new country.
- Obtain a residence permit, where necessary.
- Contact the local tax authorities to inform them that you have become resident.
- Purchase or rent on a long lease a property in your new jurisdiction and buy a car there.
- Register with a doctor and dentist in your new jurisdiction and open a local bank account.
- Move with your family to the new country.
- Establish social and cultural connections in your new homeland.
- Have a will drawn up dealing with your property in the new country.
Coward concludes: “The overall pattern of your life must reflect your declared non-resident status and the fact that you have left the UK for the foreseeable future. Maintaining significant links with the UK is dangerous and could prove costly, as HMRC will argue that you have not quit the UK. The best way to keep your taxes down is to cut most UK ties when you go overseas. That doesn’t mean you can never come back for events or to see your family, but just that you need to establish yourself conclusively as non-resident before you start making such visits.”
The EU Savings Tax Directive
If you are an individual (natural person) who is resident in an EU Member State, and earn bank interest or other savings income on deposits or investments held in your own name in another EU Member State, third country or territory covered by the Directive, then it is likely that you have been affected by the STD.
The Directive does not apply to persons (including EU Nationals) who are resident outside the Member States of the EU or the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man). Any new countries joining the EU will be obliged to accept the information-sharing variant of the Directive, and their residents will be caught by the STD as and when those countries accede to the EU.
The Directive came into operation on 1st July, 2005.
There are four main categories of savings income under the scheme:
- Interest paid out on debt-claims or credited to accounts;
- Interest rolled-up and paid out when a debt-claim is repaid or sold;
- Distributions made by certain unit trusts and other collective investment funds which have invested more than 15% of their investments in debt-claims;
- Accumulated income paid out when units in certain collective investment funds that have invested more than 40% of their investments in debt-claims are redeemed or sold.
In simpler language, savings income is therefore essentially interest earned on bank deposits, interest from, and proceeds on the sale or redemption of, certain bonds and income from certain types of investment funds (principally open-ended money market retail funds).
Most other types of income (for example, dividends on ordinary or preference shares of companies, salary and pension payments) fall outside the definition and are therefore outside the scope of the STD.
You will be paid the interest on your savings gross, ie without deduction of tax, but the bank or other financial institution which you patronise (known as a ‘paying agent’) will be required to provide details of your tax residence.
You may be asked for your Tax Identification Number (TIN). This is your tax registration number in your country of residence. The STD requires banks and other paying agents to obtain customers’ TINs where possible. Whatever information the banks have, they will pass on to the tax authorities in your country of residence, along with information about the income you have received (as defined above).
Double Tax Treaties
In April, 2003, representatives from the United States and Britain signed a new tax treaty between the two nations.
It was the first update of the bilateral tax arangement for thirty years, and the most significant act of the treaty was to abolish the 5% withholding tax levied on the dividends of UK companies’ American subsidiaries. This was expected to save many British firms millions of dollars a year.
US Treasury Secretary at the time, John Snow, who signed the agreement on behalf of the United States, acknowledged that British firms play a significant role in the US economy, and are responsible for around 1 million jobs in the United States.
Additionally, the Anglo-US treaty simplified the regulations relating to the taxation of pensions in both countries. A 15% withholding tax on British pension funds’ dividend payouts was also scrapped.
Commenting following the signing of the treaty, Snow explained that the new tax regime would allow “individuals the freedom to move between our two countries for employment and advancement opportunities without fear that such moves will mean adverse tax consequences for their pension benefits.”
In December 2011, the United Kingdom had 119 tax treaties in place.
The UK’s double taxation convention priorities are reviewed by the government each year to ensure that the treaty network continues to meet the needs of the businesses and individuals receiving income from abroad.
In August 2011, HM Treasury announced the initialling of a tax agreement with Switzerland. The official statement announced that: “The agreement will resolve the long-standing abuse of Swiss banking secrecy by those who seek to conceal the proceeds of tax evasion and is expected to secure billions of pounds of unpaid tax for the UK exchequer from 2013.
Under the terms of the agreement, existing funds held by UK taxpayers in Switzerland will be subject to a significant one-off deduction of between 19% and 34% to settle past tax liabilities, leaving those who have already paid their taxes unaffected. As a gesture of good faith Swiss banks will make an up-front payment from Switzerland to Britain of CHF 500m.
From 2013, a new withholding tax of 48% on investment income and 27% on gains will ensure the effective future taxation of UK residents with funds in Swiss bank accounts. This will be accompanied by a new information sharing provision which will make it easier for HM Revenue and Customs to find out about Swiss accounts held by UK taxpayers. The new charges will not apply if the taxpayer authorises a full disclosure of their affairs to HMRC.
The agreement with Switzerland is the latest step in HMRC’s crackdown on offshore tax evasion, which includes the agreement of the Liechtenstein Disclosure Facility, the creation of a new dedicated team of investigators to catch those hiding money offshore and ongoing work to put in place information sharing arrangements with other countries.”
David Gauke, Exchequer Secretary to the Treasury, said:
“I am delighted that, through our constructive discussions with the Swiss Government, we have secured the best possible deal for UK taxpayers. This historic agreement will enable us to collect billions of pounds from those who have for too long evaded their responsibility to pay UK tax by abusing Swiss banking secrecy. The message is clear: there is no hiding place for tax cheats.”
In November 2011, the European Commission (EC) announced that it planned to challenge the tax deals struck by Switzerland with the UK and a similar deal struck with Germany. The EC asserts that the treaties are not compatible in their current form with European law. The Commission argues that the tax deals undermine the objective of the Savings Tax Directive, a mechanism which allows member states to tax certain investments held by residents in other member states and certain third countries, including Switzerland. Opposed to the anonymity provision, the Commission is continuing to strive for an automatic exchange of tax information.
Offshore Disclosure Programmes
HMRC has employed various means to winkle out what it takes to be a mass of undisclosed offshore accounts. In the latest attempt, Dave Hartnett, the head of the UK’s HM Revenue and Customs (HMRC), revealed in August 2009 that further country-specific disclosure facilities would be negotiated in 2010 and later years.
PKF Accountants and business advisors warned however that such jurisdictional agreements blur the issues facing individuals with undisclosed offshore accounts.
John Cassidy, tax investigations partner at PKF, said: “The current New Disclosure Opportunity (NDO) applies to offshore accounts or other assets anywhere in the world, but the principles have already been tainted by the Liechtenstein Disclosure Facility (LDF). The suggestion of yet more amnesties on a country-by-country basis not only makes matters even more complicated, but also makes it more likely that some tax evaders will wait to come clean on their UK taxes.”
The NDO was first announced in the 2009 budget in April and the notification period ran from September 1 to November 30. This scheme capped penalties at 10% in most cases, but had a recovery period going back 20 years. The LDF agreement, signed by the UK and Liechtenstein governments on August 11 alongside a broader tax and information exchange agreement, is aimed specifically at those with accounts in Liechtenstein and commenced on the same date as the NDO. The LDF also caps penalties at 10%, but has a shorter recovery period of 10 years.
Making a speech in Madrid to the International Bar Association’s conference, Dave Hartnett, Permanent Secretary for Tax at HMRC, said that he expected further disclosure facilities to be agreed in the coming years.
Cassidy added: “HMRC clearly sees the LDF as a model worth pursuing with other jurisdictions which are viewed as secretive or tax havens. It seems to accept that to get details of account holders in the future, it will have to offer a tax amnesty for each country to clear the backlog of past tax evasion. I fear that some individuals might wait for a specific amnesty rather than using the more general NDO. More determined tax evaders may simply move money around the world as each jurisdiction moves into line with HMRC’s policies. In my view, this is a naive stance as HMRC will gradually build up huge swathes of data on accounts held outside the UK and people will be caught out eventually and could face far more substantial penalties and maybe criminal proceedings.”
Cassidy concluded: “Waiting for further amnesties just gives HMRC time to discover your tax irregularities in more traditional ways and bring the full force of its investigative powers and penalties down on you. If you have an offshore account, no matter where it is based, using the NDO to put things right at a low cost now is highly likely to be the lowest risk and most cost-effective option in the long run.”
At the same time as the initialling of a DTA with Liechtenstein, HMRC announced in early February 2012 that the LDF would be extended by one year to 2016.
John Cassidy commented that the extension was “a sensible move by the Government that will be welcomed by advisers and their clients”.