The Statutory Residence Test – working full time abroad.
By Kevin McDaid, Aug 3 2016 03:14PM
Since April 2013, the Statutory Residence Test (SRT) has provided a comprehensive method of assessing whether an individual is regarded as resident (or not) in the UK for tax purposes.
The test applies three stages as follows:
• Meet the criteria in stage 1 and you are NON RESIDENT. No need to look at later stages.
• Meet the criteria in stage 2 and you are RESIDENT. No need to look at stage 3.
• Only if it has not been possible to determine whether non resident under stage 1 or resident under stage 2, will stage 3 need to be considered. Residence will then be determined by UK ties and visits.
As the HMRC guidance https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt runs to 105 pages, it is not possible to comment on every aspect of the guidance. Instead, based on a recent job I undertook, I am going to limit myself to considering the UK resident individual who goes to work abroad full time. This may be employment or self-employment. In this instance, I am looking at a worker who is employed.
Let us first of all consider what being resident or non resident means: -
• Resident – you are liable to UK tax on your worldwide income regardless of where it is earned.
• Non resident – you are only liable to UK tax on the income earned in the UK.
There is a third category – being resident but not domiciled. This allows the individual to avoid being subject to UK tax on income earned abroad so long as it is not remitted to the UK.
Just because you are resident in the UK does not mean that you will not also be resident in another tax jurisdiction. In fact, this is quite common. This is where double taxation agreements https://www.gov.uk/government/collections/tax-treaties come into play to determine which country gets ‘the 1st bite of the cherry’. In the case of my client, Dave, he lived in the UK and was resident here for tax purposes but he was also resident in Australia, where he worked. The double taxation agreement between the UK and Australia determines that an individual with dual residency would pay tax on his/her earnings in Australia first (because that is where the money is being earned) but because he/she is liable to UK tax on his/her worldwide income, would receive a credit in the UK for the tax already suffered in Oz.
The only way that a UK resident will cease to be UK resident (and, thus, avoid paying tax on income earned elsewhere in the world) is if:
• Visits to the UK are less than 16 days per annum for the first 3 tax years and 46 days P/A thereafter.
• They work full time abroad without any ‘significant breaks’, spend fewer than 91 days in the UK and work < 31 days in the UK for > 3 hours per day. This is the 3rd automatic overseas test.
For many people going abroad, they will have ties in the UK that will mean that their visits to the UK will be greater than 16 days per annum for the first 3 tax years. Consequently, the only way that they will become non resident will be if they meet the 3rd automatic overseas test.
So what does ‘working abroad full time’ mean?
You have to work an average of 35 hours or more per week over the course of the year. This does not necessarily have to be for the same employer, so chopping and changing jobs will not necessarily jeopardise non residence.
1. Calculate the total number of hours actually worked (not hours specified in the contract).
2. Disregard any days that you worked in the UK for > 3 hours.
3. Calculate the reference period which is 365 days (366 for a leap year) less the disregarded days (mentioned at 2 above) less days that were ‘allowable’ gaps between employments and less ‘other days’ (annual/sick leave etc).
Let us break this down by way of an example:
Dave lives in the UK and has been UK resident here all his life. He obtains employment in Australia which is on a 6 month contract where he will work 5 x 12 hour days (60 hours) then have 3 days off. He has 30 days annual leave (so he receives 15 days for 6 months) and he is off sick for 3 days. He does not return home to the UK at all in this contract.
Once this contract ceases he returns to the UK to visit family. He does not work in the UK and after 30 days he returns to Australia and immediately starts a new contract of employment which mirrors the first contract. He has 2 days sick and does not return to the UK until this contract ceases after 6 months.
Over a 365 day period Dave would have to work just over 1,820 hours to qualify as working an average of 35 hours per week. His annual leave and days off sick are disregarded so that his ‘reference period’ reduces to 330 days. Dave is then required to work 1,660 hours to average 35 hours p/w. Dave actually does 2,700 hours in his 2 contracts that span just over a year (because, remember, Dave had 30 days back in the UK when he was between jobs). We can conclude that Dave has met the 35 hour per week condition.
He has also been in the UK for < 91 days. Therefore, the only hurdle that he has to overcome to ensure that he loses his UK residency and, therefore, does not pay UK tax on his Australian income is, to ensure that he has not had ‘any significant breaks during the tax year from the overseas employment’
On page 40 (3.20) of the guidance there is an explanation of what is meant by a significant break:
‘You will have a significant break from overseas work if at least 31 days go by and not 1 of those days is a day on which you:
work for more than 3 hours overseas, or
would have worked for more than 3 hours overseas but you do not do so because you are on annual leave, sick leave or parenting leave.
If you have a significant break from overseas work you will not qualify for full-time work overseas’.
When Dave returned to the UK between his contracts he had 30 days here, therefore, and immediately started his new contract on his return to Australia. This does not constitute a significant break. Had he spent just one more day away from work this would, potentially, have made him continue to hold UK residence for tax purposes. That said, he could have taken longer off work by storing up his leave from the first employment. For instance, he could have been away from work for 40 days if he had 10 of them covered by annual leave.
On page 11 (1.1) of the guidance there are further details of how to treat gaps between employments. Ultimately, any such gap will be allowed up to 15 days when calculating the ‘reference period’ (a maximum of 30 days reduction over a year) which means that less hours need to be worked to meet the 35 hour per week average.
However, the big stumbling block, particularly when you are considering employment as far away as somewhere like Australia, is that if you want to take time off work (potentially to return to the UK) you must be extremely careful not to trigger the ‘significant break’ clause by taking off more than 31 days where the excess is not covered by annual leave, such as when you are between contracts.
Very briefly, the other issue that may jeopardise becoming non UK resident when working abroad is the 91 day rule back in the UK. Can this be avoided by spouse and family coming to visit you in the country where you are working or at a half way point?
As ever, knowing the tax rules allows you to plan in advance how you want the cards to fall so that you can obtain the most favourable tax treatment.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
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