UNITED KINGDOM: INDIVIDUAL NON-RESIDENT TAXATION

Generally speaking an individual is assessed to income tax in the United Kingdom if he is deemed to be UK resident for fiscal purposes. Unlike the United States citizenship is not a basis for levying income tax. Generally speaking a person is deemed UK resident for fiscal purposes:

• in any tax year in which he lives in the UK for more than 182 days or
• If his visits to the UK exceed 91 days per tax year for 4 consecutive tax years in which case he is tax resident in the 5^th year or alternatively from the commencement of the tax year in which he first stated his intention to make such visits to the UK
• if he makes regular visits which are substantial, habitual and obligatory: Such visits may indicate residence provided they exclude an element of chance and occasion and provided they follow an almost mechanical regularity.

An existing resident of the UK can become non-resident for tax purposes by being out of the country for at least one period of 365 days, during which he did not spend more than 91 days in the country, with days of arrival and departure not being counted.

In July, 2005, however, the Special Commissioners in the case Shepherd v HMRC, decided that the 90-day rule was not the only factor determining whether a person is a UK-resident.

The Commissioners ruled that despite Mr Shepherd, a professional pilot, spending 180 days in the tax year out of the UK on flights, 77 days in Cyprus where he rented a furnished flat, and 80 in the UK in the family home, he had not made a distinct break with his former life and therefore remained resident for UK tax purposes.

“There is no doubt that this is the next stage of the Revenue's clampdown on those individuals who are benefiting from favourable tax rates by basing their claim on the 90-day rule," commented Narinder Paul, tax partner at KPMG in Birmingham.

Mr Paul went on to add that: “With increasing ease of travel and homes overseas becoming increasingly common, it is likely that more people may be considering that they could be a non-UK resident for tax.

"Many may have been led by Inland Revenue guidance notes into thinking that the important thing is to count days. However, as this case shows, this on its own is not enough to exempt an individual from paying tax within the UK.”

In January 2007, HM Revenue and Customs (HMRC) felt the need to clarify its position on tax residence in the UK thus:

"The recently published decision of the Special Commissioners in Robert Gaines-Cooper v HMRC (SpC 568) has attracted some attention from tax practitioners and their clients. In particular, some commentators have suggested that the decision in Gaines-Cooper means that HMRC has changed the basis on which it calculates the ‘91-day test’. This is incorrect."

"The ‘91-day test’ is set out in Chapters 2 & 3 (‘Leaving the UK’ and ‘Coming to the UK – Short term visitors’) of the booklet IR20: Residents and non-residents. This guidance is clear that the ‘91-day test’ applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis. Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first."

"Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years. HMRC’s normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the ’91-day test’."

It continued:

"In considering the issues of residence, ordinary residence and domicile in the Gaines-Cooper case, the Commissioners needed to build up a full picture of Mr Gaines-Cooper’s life. A very important element of the picture was the pattern of his presence in the UK compared to the pattern of his presence overseas. The Commissioners decided that, in looking at these patterns, it would be misleading to wholly disregard days of arrival and departure."

"They used Mr Gaines-Cooper’s patterns of presence in the UK as part of the evidence of his lifestyle and habits during the years in question. Based on this, and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK. From HMRC’s perspective, therefore, the ’91-day test’ was not relevant to the Gaines-Cooper case since Mr Gaines-Cooper did not leave the UK."

"HMRC can confirm that there has been no change to its practice in relation to residence and the ‘91-day test’. HMRC will continue to:

Follow its published guidance on residence issues, and apply this guidance fairly and consistently;
treat an individual who has not left the UK as remaining resident here;
Consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, in deciding whether or not an individual has left the UK;
Apply the ‘91-day test’ (where HMRC is satisfied that an individual has actually left the UK) as outlined in booklet IR20, normally disregarding days of arrival and departure in calculating days under this ‘test’. "

Non-residents are generally speaking only liable to UK income tax on income derived from:

• Property situated in the UK
• Any trade or profession carried on through a branch or agency in the UK
• Any employment the duties of which are performed in the UK

This rule has led to many UK nationals seeking to become non-resident by moving abroad. In the United States, by contrast, the mere fact of citizenship means that a US national living in a foreign country is still liable to pay income tax in America on his worldwide earnings with a credit being given for any taxes already paid or due in a foreign country.

UK non-residents do not pay tax on:

• Interest from certain UK Government securities
• Interest from UK-situate bank and building society deposits

However, it is no longer possible to avoid capital gains tax by arranging for a gain to crystallise during a short period of overseas absence: five years' of non-residence is required before a gain on an asset acquired during residence is exempt from UK capital gains tax. Updated rules for taper relief have made this provision almost irrelevant, in fact.

Non-resident entertainers and sports personalities were disappointed by a High Court ruling issued by Mr Justice Lightman in March, 2004, regarding a tax bill presented to tennis star Andre Agassi for earnings from sports companies, Nike and Head.

Mr Agassi had appealed against a decision by the Special Tax Commissioners in favour of the UK's Inland Revenue (now HMRC). The tax authority had argued that the fact that he was playing in the UK whilst endorsing products for Nike and Head represented a "relevant activity", and that he should therefore pay UK tax on the payments that he received from the companies.

Handing down his ruling, Justice Lightman explained that:

"It is common ground that section 556 of the 1988 [Income and Corporation Taxes] Act subjects non-residents to tax, if the payment is made by an English company or a foreign one with a tax presence here. The question raised is whether they are intended to be excused from liability if, instead, they are paid by a foreign company with no tax presence here."

He went on to observe that: "In my judgment it would be absurd to attribute to the legislature the intention that liability could in any and all cases be avoided by channelling the payment through a foreign company with no tax presence here. If this were the case, the tax would effectively become voluntary," and concluded that: "As it seems to me, the plain and obvious intention of the legislature was to impose an obligation on the person making the payment irrespective of his tax presence here."

In 2004, the Treasury announced new rules under which professionals would have to report tax minimization schemes to the Revenue. After much agonizing over professional confidentiality, the Law Society stated that a solicitor disclosing the information required under the new regime was "likely to be disclosing the substance of privileged communications passing between him and his client for the purpose of obtaining legal advice".

Law Society sources suggested that lawyers were planning to provide the Revenue with details of tax schemes suggested by their clients, but not with any information on conversations relating to the schemes, or advice provided. However, this did not go far enough for the accounting industry's representative bodies, which called on the Chancellor to delay the start date for the new reporting requirements.

However, Treasury officials made it clear in October of that year that Chancellor Gordon Brown would not be delaying the implementation of the measures over the lawyers' concerns.

The EU Savings Tax Directive

If you are an individual (natural person) who is resident in an EU Member State, and earn bank interest or other savings income on deposits or investments held in your own name in another EU Member State, third country or territory covered by the Directive, then it is likely that you have been affected by the STD.

The Directive does not apply to persons (including EU Nationals) who are resident outside the 25 Member States of the EU or the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man). Any new countries joining the EU will be obliged to accept the information-sharing variant of the Directive, and their residents will be caught by the STD as and when those countries accede to the EU.

The Directive came into operation on 1st July, 2005.

There are four main categories of savings income under the scheme:

• Interest paid out on debt-claims or credited to accounts;
• Interest rolled-up and paid out when a debt-claim is repaid or sold;
• Distributions made by certain unit trusts and other collective investment funds which have invested more than 15% of their investments in debt-claims;
• Accumulated income paid out when units in certain collective investment funds that have invested more than 40% of their investments in debt-claims are redeemed or sold.

In simpler language, savings income is therefore essentially interest earned on bank deposits, interest from, and proceeds on the sale or redemption of, certain bonds and income from certain types of investment funds (principally open-ended money market retail funds).

Most other types of income (for example, dividends on ordinary or preference shares of companies, salary and pension payments) fall outside the definition and are therefore outside the scope of the STD.

You will be paid the interest on your savings gross, ie without deduction of tax, but the bank or other financial institution which you patronise (known as a 'paying agent') will require to provide details of your tax residence.

You may be asked for your Tax Identification Number (TIN). This is your tax registration number in your country of residence. The STD requires banks and other paying agents to obtain customers' TINs where possible. Whatever information the banks have, they will pass on to the tax authorities in your country of residence, along with information about the income you have received (as defined above).

Double Tax Treaties

In April, 2003, representatives from the United States and Britain signed a new tax treaty between the two nations.

It was the first update of the bilateral tax arangement for thirty years, and the most significant act of the treaty was to abolish the 5% withholding tax levied on the dividends of UK companies' American subsidiaries. This was expected to save many British firms millions of dollars a year.

US Treasury Secretary at the time, John Snow, who signed the agreement on behalf of the United States, acknowledged that British firms play a significant role in the US economy, and are responsible for around 1 million jobs in the United States.

Additionally, the Anglo-US treaty simplified the regulations relating to the taxation of pensions in both countries. A 15% withholding tax on British pension funds' dividend payouts was also scrapped.

Commenting following the signing of the treaty, Snow explained that the new tax regime would allow "individuals the freedom to move between our two countries for employment and advancement opportunities without fear that such moves will mean adverse tax consequences for their pension benefits."

In January 2007, the United Kingdom had more than 115 tax treaties in place.