Dealing with Residency Disputes with HMRC
Sykes Anderson LLP Solicitors and Chartered Tax Advisers in London, England.
Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
As has been widely publicised in recent years, one particular issue, which has been targeted by HMRC is individuals claiming to have become non-UK resident. High profile cases such as that involving Gaines-Cooper have demonstrated the difficulties involved when claiming non-UK residency. Contrary to a widely held belief, it is not simply a case of spending less than 90 days in the UK every year. HMRC will look at all circumstances surrounding your life after you claim to leave the UK, including the ties you have retained with the UK (business interests, home, family) to determine whether you are still UK resident. There is no fixed amount of time which you can spend in the UK whilst remaining non-resident.
The Government is seeking to resolve the uncertainty caused by this approach by introducing a statutory residency test. This test will mean that you can spend a set number of days in the UK whilst remaining non-resident. The number of allowable days is reduced when you have more connections to the UK, such as family, available property, employment etc.
Although this test is helpful in terms of increasing certainty, individuals may still consider that it does not allow them to spend as much time in the UK as they would like. Individuals with business interests in the UK may for example need to spend more than 91 days a year in the UK. This is a problem for individuals who reside in tax havens such as Monaco, The Seychelles or the BVI. However for individuals residing in countries which have a tax treaty with the UK, such as Switzerland, it is not the end of the story.
We have seen, in recent times, challenges from HMRC to the residency of individuals who have moved to tax treaty jurisdictions. These individuals have spent substantial time in the UK during their periods of non-residency and have also retained a number of connections to the UK. For example, the family home has been retained or the individual’s business has been retained.
In our experience, HMRC has insisted on non-residents continuing to file UK tax returns on which they must disclose the number of days they have spent in the UK during the previous tax year. When the number of days disclosed is high, this will almost certainly result in an enquiry from HMRC. These tend to be aggressive with demands for copies of bank statements and details of the individual’s whereabouts on every day throughout the non-residency period. Often the facts involved will point towards the individual continuing to have a UK residency under the UK approach. When this is the case and the individual has moved to a treaty country, there is a secondary argument that, even if they remain UK resident under UK Law, they must be taxed as a resident only in the other country in which they are resident. In almost all double tax treaties there is a tie-breaker test to determine in which country the individual is to be treated as resident. This test applies only if the individual satisfies the internal test of residency in both the UK and the other country. It is essential therefore to demonstrate that you have established residency in the other country so that the test applies.
From an evidential perspective it is helpful to obtain an opinion from a lawyer in that jurisdiction setting out the requirements for being resident in the country and providing an opinion as to whether the individual satisfies these requirements. This opinion must be comprehensive and should include reference to case law if possible.
It is also helpful to obtain certificates from the local tax authorities confirming that you have registered as a resident in the country and have paid tax on that basis since becoming resident.
The tie breaker test is a step by step process. The first question to be asked is where does the individual have a permanent home available to them. In a lot of cases, the individual has continued to have access to their UK home even when they have moved abroad. Assuming that they also have a home in the country they have moved to, it is necessary to proceed to the next step. This looks at where the individual’s centre of vital interests is. This tends to be the determining step. This requires a balance sheet to be drawn up along the lines of the below:
|Factor||Considerations||UK or Other Country?|
|Business interests||These can be measured in financial terms. Where do you carry on business?|
|Economic interests||Where are your assets situated? What is their value? Again, this can essentially be decided in financial terms.|
|Social activity||Where are your friends, clubs and main social activities situated?|
|Spouse and family||Where have your spouse and your children been during this period? Have they been coming to the UK with you or have they remained in the other state at all times?|
|Parents||Do you have any surviving parents? Where do they live? What are they doing? How often do you see them?|
|Time spent||On a simple day count, does time spent in the other country exceed time spent in the UK?|
|Will||Have you made a will or wills disposing of your UK/worldwide assets?|
It is necessary to assess all of the above factors and consider which country they point towards. If this in favour of the other state, you can consider whether to base your claim purely on the application of this test. This is a risk as it essentially accepts that you have remained resident in the UK under the internal approach. This may be unhelpful depending on the terms of the treaty and the type of income and gains you have received.
You can consider at this stage making an application in the other state for them to commence a “mutual agreement” procedure with HMRC. This is a procedure under which the authorities arbitrate to determine in which state you ought to be considered resident. This does of course carry risks but, if successful, will result in a conclusive decision determining that you are to be taxed as resident of the other state for the purposes of the treaty.
If you have moved to a state which does not have a treaty with the UK, there may still be steps which can be taken to defend your position. You will have to demonstrate here that you have satisfied HMRC’s requirements for establishing non-residency. You will not be able to rely upon any tie-breaker test. It may be possible to negotiate with HMRC depending on the facts of your case.
It is best practice to obtain advice before changing your tax residency to determine the practical steps you should take to avoid an enquiry from HMRC. If however you have moved and received an enquiry from HMRC you should seek specialist advice from solicitors with experience of dealing with such enquiries.