the uk's inland revenue ir20 booklet sets out residence rules for tax purposes
'Residence is a question of fact. There are few rules. Cases are decided as and when they arise and without much reference to any other decision. The decisions might conflict with each other but that's just tough luck and there is nothing anybody can do about it.' This is the view expressed by the editor of a leading tax journal and represents, in the opinion of a leading tax counsel, 'a precise statement of the law'!
One reason for this situation is residence and ordinary residence are not defined by statute in the UK. Whether an individual is resident and/or ordinarily resident in the UK is a matter of fact and degree, which is ultimately decided by the General Commissioners, a body of laymen to whom either the Revenue or the taxpayer can appeal if they cannot reach agreement between themselves.
The UK courts have decided the word 'residence' when used for tax purposes has its 'common sense' meaning and in various cases concerning residence over many years the courts have examined and developed that common sense meaning. The Revenue booklet IR20 sets out the rules the Revenue will apply when ruling on an individual's residence position and in practice the rules in IR20 can only be avoided by appealing to the General Commissioners.
However, the Revenue's guidance in IR20 should be viewed with some caution for the following reasons:
• IR20 states throughout what 'normally' or 'may' be the case. Indeed it says itself that it is not binding in law and does not affect rights of appeal about individual cases.
•The preface to IR20 states that the concessions included in it will not be given in any case where an attempt is made to use them for tax avoidance.
•IR20 uses a test of present intention regarding future residence (which readers will recall is one of the domicile tests). But the courts have said 'ordinary residence lays emphasis not on intention or expectation for the future...but on immediately past events, namely the usual order of the individual's way of life...'
• IR20 uses a four-year averaging basis for the 91-day test. Four years is an arbitrary length of time, which has no special significance in law.
• IR20 does not identify the specific statute, case law or practice on which its guidance is based.
The conclusion must be IR20 is only one of the reference sources to consider when determining an individual's UK residence position and, if a significant tax liability is at stake, professional advice should always be sought.
An individual who has been permanently resident in the UK who seeks to break his resident/ordinarily resident status must rely upon one of the following:
• IR20 paragraphs 2.2 ' 2.3: for example, be working full-time abroad under a contract of employment for at least a whole tax year, limiting visits to the UK to (1) less than 183 days in any one tax year and (2) an average of less than 91 days a tax year. The Revenue have said 'full-time' entails no fixed minimum number of hours, but 35-40 hours is obviously a typical UK working week. The Revenue extend this rule to an accompanying non-working wife.
• Following the case of Reed vs Clark (the drummer in The Dave Clark Five), you might move the centre of your life outside the UK for an entire tax year and not visit the UK at all during that tax year. However, this case is viewed as precarious and should only be relied upon in extremis. Its law is not included in IR20.
• Following IR20 paragraphs 2.7 ' 2.9, you could leave the UK permanently for three complete tax years and limit visits to the UK as in (1) and (2) above ('the three year rule').
In each of these cases the individual will be considered to be not resident/not ordinarily resident from the day after the date of his departure under the 'split year concession,' although the Revenue will initially only give a provisional residence ruling until the individual has been abroad for three complete tax years under the three-year rule. The split year concessions for income tax and capital gains tax were identical up until 17 March 1998 when the capital gains tax concession was significantly limited.
IR 20 states that an individual is always resident in the UK if he is physically present there for 183 days or more in a tax year. There are no exceptions to this. If an individual is resident in the UK year after year he is treated as ordinarily resident there. It is possible to be (1) resident and ordinarily resident, (2) resident but not ordinarily resident, (3) not resident but ordinarily resident and (4) not resident and not ordinarily resident (a useful test of one's knowledge of IR20 would be to work out the circumstances giving rise to each of these rulings!). It is important to note an individual's residence and ordinary residence positions are decided for each tax year, although the previous years' positions can have a bearing on the current year.
For individuals coming to the UK for the first time or returning to the UK after breaking their residence/ordinary residence status the guidance offered in IR20 is summarised in the table. It should be noted 'living permanently' in the UK is not defined by IR20. It should also be noted that although the available accommodation rule was ended for tax years from 1993/94, the availability and type of accommodation in the UK does still have a bearing on a visitor's residence position.
In 1988 the Revenue attempted to reform the residence rules to make them 'more simple and objective'. That attempt failed and so, by implication, we are left with rules that are 'complicated and subjective'. Individuals moving out of or into the UK must therefore (1) keep accurate records of their visits to the UK, (2) be clear in their own minds of their intentions regarding their visits to the UK, (3) be prepared to provide evidence for both (1) and (2), and (4) consider the implications of owning or leasing accommodation in the UK, especially if they do not have full-time employment abroad.
It is important not to drift into or out of residence in the UK but, based upon the rules in IR20, make a decisive, evidenced cessation or commencement of residence. Under the UK's tax system individuals must self assess their residence and domicile positions when completing their self assessment tax returns and therefore, especially since the ending of the 365 day 100% foreign earnings deduction (IR20 paragraph 5.10), it is essential that individuals coming to or leaving the UK can determine their current and historical residence and domicile positions accurately. These should form the basis of the financial adviser's fact find.
The guidance in this article does not constitute professional advice and is intended only as an informal introduction. Professional advice should always be sought before undertaking tax or estate planning.
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