Check your new tax residence or pay the penalty

WHAT does 6 April 2012 mean to you? You’re probably aware that it’s the beginning of the new tax year. But you might not know that from this date the UK law on tax residence is set to change in a way that could well affect you far more than you realise.

That’s the date from which new UK tax residence tests are going to put into effect, following a consultation by HM Revenue & Customs (HMRC) this year. The changes outline the criteria for determining whether or not an individual is UK resident. It aims to create clear and simple residency rules to classify an individual’s tax status.

The new legislation will affect anyone entering and exiting the UK. It may even impact on those who have already left.

At the moment, those spending an average of 90 days or less inside the UK generally expect to be classified as non-UK resident, allowing them to avoid British taxes on certain income. But all this could change, because the new law means individuals could be subject to UK tax rules after spending just ten days in the country.

Under the previous guidelines, many people who moved overseas will have retained their UK homes. But to remain non-UK resident under the new law, it is likely that these individuals will have to sell up or spend fewer days in the UK.

It is a balancing act and UK associations will also be taken into account. For example, the existence of UK-based family, property owned in the UK and residency history will be considered, as will the number of days spent in the country each year.

Clearer legislation is a step in the right direction as people need a simple, definitive UK tax status. It will transform the ambiguous guidelines we currently have into a transparent and authoritative statutory test. But there is a worrying lack of awareness among people who could be affected by the change.

Individuals who previously regarded themselves as non-UK residents might be thrown unwillingly or unknowingly into the UK tax arena. Some will see their UK tax status shift overnight. The problem is that the first most people will know about it is when the taxman comes knocking at their door – and who knows how much debt might have built up by then.

A taxpayer with an £80,000 salary from an overseas company and taxable rental income of £9,500 from a holiday house in France, for example, could face an unexpected UK tax bill of at least £25,000.

This comes before considering any double tax relief available if they are found to be UK resident and, therefore, taxable on worldwide earnings. Even with new legislation, residency tax is not a straight-forward issue. When April 2012 arrives, there will be many questions.

So, how can you prepare?

Firstly, make sure that you have all the facts so you know how these changes might affect you. In order to plan ahead, check the HMRC website for clarification of the exact dates, figures and rules. The details can be complex, so do not be put off if they are difficult to understand. Ideally, make an appointment with a trained accountant to help explain your tax liabilities.

A lack of awareness about the potential problems caused by the change in law is likely to create unnecessary confusion and distress next year. Individuals must review their positions now; April is too late. Visit www.hmrc.gov.uk for more information about the upcoming changes.

• Aileen Scott is partner and head of tax at Scottish-based accountancy firm Campbell Dallas

KEY POINTS

THE final details of the new statutory residence test are expected to be published early next year. Key points have been identified by HMRC, giving the tax profession an opportunity to respond to the proposed changes.

Under the new rules, an individual is NOT a UK resident if they:

• Spend fewer than ten days in the UK during a tax year

• Have not been a UK resident for at least three years and spend less than 45 days during a tax year in the UK

• Leave the UK to work full-time abroad for a tax year, work in the UK for no more than 20 days per year and spend less than a total of 90 days in the UK in the year.

An individual IS a UK resident if:

• They spend 183 or more days in the UK in a tax year (as per the current rules)

• Their only home is in the UK or they have more than one home and all of these are in the UK

• They work full-time in the UK

For the less conclusive cases, a combination of UK ‘connecting factors’ and days in the UK will be considered.