Testing times

The UK government is in the process of finalising a new statutory residence test which will officially determine where Brits living abroad are liable for tax. Bill Blevins takes a look at the fine print

The first step in any tax planning exercise in France is to establish where you are tax resident. In other words, should you be paying tax in the UK or France? Both countries have rules to determine whether or not someone is tax resident there. The problem has been that the UK has only had guidelines on residency rather than law. This has caused much uncertainty for British expatriates in France (and elsewhere), especially if they retain ties with the UK or spend a lot of time there.

This will change this year when the UK finally introduces a new statutory residence test. Barring any unforeseen delays, it is scheduled to come into effect on 6 April 2013.

This article summarises the key elements of the new residence test. At the time of writing a few details have not yet been finalised but we are not expecting any major changes at this point.

The statutory residence test classifies individuals as follows:

Leavers – UK resident in the previous three tax years

Arrivers – not resident in all the previous three tax years

Working full-time abroad (35 hours a week).

It is important to be sure which category you fall into as there are different rules for each one.

The test breaks down into three parts. The number of days referred to is per UK tax year (a 12-month period starting on 6 April and ending on 5 April the following year), and a day is counted when you spend a midnight in the UK.

Part A lays out a conclusive position whereby an individual will always be non-UK resident:

* You are a leaver and spend fewer than 16 days in the UK in the current year, or

* You are an arriver and spend fewer than 46 days in the UK in the current year, or

* You left the UK to carry out full time work abroad and spend less than 90 days a year in the UK, of which no more than 20 are working days (this may be increased to 25). There are detailed rules for those working abroad which are not covered in this article.

Part B lists the circumstances under which you would always be considered UK tax resident:

* Your only home (or homes) is in the UK, or

* You spend 183 or more days in the UK a year, or

* You are working full-time in the UK, covering a continuous period of nine months and 75% or more of your duties are carried out there. The Treasury is consulting on increasing this period to 12 months.

If neither test is conclusive, Part C will determine whether or not you are UK resident for tax purposes. The test outlines five connecting factors which are combined with day counting into a “scale” to determine your residence status.

For example, if you are an arriver and have two connecting factors, you can spend up to 120 days in the UK without being UK resident. If, however, you are a leaver, you can only spend up to 90 days there.

The connecting factors are:

* Family in the UK – spouse/civil partner and/or minor children.

* Available accommodation in the UK.

* Substantive employment in the UK (40 or more days).

* UK presence in previous years; ie if you have been UK resident for more than 90 days in either of the previous two UK tax years.

* More time spent in the UK in the tax year than any other single country.

The more connecting factors you have, the less time you can spend in the UK without being caught out for UK tax. Each factor is subject to its own specific criteria and can be complex, so you should take professional advice.

The government will allow days in the UK to be disregarded under exceptional circumstances. This is where you are in the UK for reasons beyond your control, such as national or local emergencies or sudden or life-threatening illness or injury. It does not mention what happens if your spouse suffers an illness, nor does it include cases where you choose to undertake medical treatment or look after a sick relative in the UK.

In its last consultation documents, the Treasury said that the government was considering a supplementary rule to apply to anyone who spends a large number of days in the UK but always leaves before midnight. This has not been confirmed at the time of writing.

There will be an online assessment tool, but the government says it will not be binding “as each case will ultimately turn on its own facts”. You therefore cannot rely on it to provide certainty on your tax status and will still need professional advice.

[subhead]French residency rules

Besides the UK residence rules, you also need to familiarise yourself with the French regulations. Again, these are not based solely on day counting. In summary, you are deemed to be tax resident in France if at least one of the four following tests is fulfilled:

* France is your main residence or home (your foyer fiscal). The foyer is usually defined as the place where the family spouse and minor children habitually lives; in other words, where the family interests are based.

* France is your principal place of abode, your lieu séjour principal. This usually (but not always) means more than 183 days in France per calendar year.

* Your principal activity is in France; eg your occupation is in France.

* France is the country of your most substantial assets (centre of economic interests).

The UK residence rules can be overridden by its double tax treaty with France. It is possible to fulfill both the UK and French residence criteria simultaneously, in which case the UK/France tax treaty has “tie breaker” rules to establish where you are tax resident. You need to review the terms of the treaty to establish where you are tax resident. There are many cases where a British expatriate could be found to be UK rather than French resident.

Tax residency can be a very complex area, more so than appears on the surface. You should take professional advice from a firm, which operates in both the UK and France, to make sure you have the latest up-to-date information and apply it correctly to your circumstances.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.