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Finance Act 2008 contains new residence rule

13 October 2008

A new rule to determine whether a person is resident in the UK for tax purposes is contained in the Finance Act 2008.

Background

The new provisions only apply to determining the residence of persons in the UK temporarily, and apply to determine whether the 183 days requirement for residence is met. 

HM Revenue & Customs (HMRC) has said it will also apply the new statutory test to the 91 day test, which is used for determining ordinary residence.

Unfortunately, HMRC did not take the opportunity to introduce a wider set of statutory rules to deal with the issues of residency. These continue to be dealt with by way of a mixture of case law and HMRC practice.

New rules for tax years 2008/09 onwards

With effect from 6 April 2008, a person is deemed to be present in the UK if he is present in the UK at midnight on that date. Prior to 6 April 2008, HMRC, in practice, ignored days of arrival and departure, which gave considerable flexibility to non-residents in organising their affairs in the UK. 

However, it is clear that this practice has been under attack by HMRC for some time. In the recent case of Gaines-Cooper v IRC, HMRC suggested that the 183 day rule only applied once a person had actually left the UK; in other words, a person could not use the 183 day rule to argue that he was not resident in the UK if, in HMRCs eyes, he had not left the UK in the first place, and so continued to be resident. In practice, the change in the rule represents a considerable tightening in the rules.

Exemption

One exemption to the new rule is where a person is in transit.  This provides that a person's presence in the UK is ignored if:

• he arrives in the UK on one day
• he departs the UK on the next day 
• whilst in the UK does not engage in activities substantially unrelated to his passage through the UK

HMRC has said it will apply the test strictly, and has provided a number of examples of how it will apply the transit rules in practice. The sort of activities which will take a person outside of the transit exemption are where an individual:

• attends a business meeting with colleagues
• has an appointment with a consultant orthopaedic surgeon to carry out a number of tests
• visits his family
• stays in a hotel and takes part in a pre-arranged dinner and theatre trip with friends

Obviously, the retention of detailed records to support an individual's claim to non-residence has become, if anything, more crucial, since this is an area which HMRC will scrutinise carefully.

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