UK measures to clarify rules on residency and define what is deemed to be abusive financial behaviour received a mostly positive reaction from experts at PricewaterhouseCoopers and Withers yesterday. 

The government has set out consultation documents - and its responses - on the 2013 finance bill, following last week’s annual autumn statement by finance minister George Osborne.  

In explaining suggested amended tests for residency, the government proposed, among other measures, to increase the qualifying period for an individual working in the UK to be treated as a UK resident to 12 months. The administration also proposes to abolish what is called "ordinary" residence. (An individual who has always lived in the UK will be ordinarily resident. Individuals who come to live in the UK will be ordinarily resident if it is clear that they intend to stay for longer than three years.)

Under the changes, the government said it will put what is called Overseas Workday Relief on a statutory footing. OWR will be available to individuals who come to the UK regardless of their intention to settle in the UK and will be available for the tax year that they become UK resident and the following two tax years. It will be restricted to non-domiciles who have not been resident in the UK in the previous three tax years prior to coming to work in the UK.

Clarifying rules about UK residency has been part of an attempt by the current coalition government to make the country more appealing to live in following complaints that the system is too complicated and lacks certainty.  

At present, there are four automatic tests and if a person meets any conditions, they are deemed “non-resident” for UK tax purposes. For instance, if a person was resident in the UK for one or more of the three previous tax years and spends fewer than 16 days in the UK, that person is a non-resident. So, if a person does not meet any of these tests, they are deemed a UK resident if they satisfy conditions such as spending at least 183 days in the UK during a tax year.

"We finally have a definitive test to see if an individual will be classed as a UK resident. This marks a fundamental change to the UK residence rules and significantly reduces the level of uncertainty for taxpayers and employers that has existed in recent years,” Ben Wilkins, international mobility partner at PricewaterhouseCoopers, said.

“Clearer residence rules will help attract internationally-mobile, skilled workers to the UK. Foreign executives and their employers will be much clearer on the extent of the executive's tax liability in the UK.  In particular, employers and executives working in the UK will be pleased that tax relief for days spent working abroad will now be available for a fixed period of up to three tax years,” Wilkins continued.

“However, the new test is less favourable for UK employers and their employees who leave the UK to work overseas. Such employees will be able to spend far less time in the UK than has been the case under previous HMRC practice.  Many Brits working overseas making business trips to the UK will need to consider whether they remain UK tax resident under these new rules,” he added.

Anti-abuse

The government also intends to push ahead with legislation to create a general anti-abuse rule, in a drive to stamp out financial structures that are set up solely for the purpose of not paying tax.

"Today's draft legislation and guidance notes have provided more clarity on the scope of the General Anti-Abuse Rule. The GAAR aims to counter contrived tax arrangements that are entered into simply to avoid UK tax. There are some useful examples of the type of arrangements that will, and won't be caught, however these may well change depending on whether the Interim Advisory Panel can reach a consensus.  While this is a good start, we're going to need many more examples, particularly showing the boundary between acceptable and unacceptable, and covering transactions that private individuals and private businesses might undertake,” Jon Richardson, tax partner at PwC, said.

"The GAAR is not intended to affect the way the profits of multinationals are allocated between the UK and other countries. Any review of these transfer pricing rules would involve international tax authorities and other organisations such as the OECD,” he added.

At Withers, the international law firm, partner Sophie Dworetzsky said the government's stance was a missed opportunity. 

“The idea of the GAAR of course is to have an over-arching rule that catches aggressive and 'unacceptable' tax planning (whatever that may be) but that doesn't catch anything else, and that helps to achieve a fair tax system. All laudable and good aims, but how does the GAAR measure up? Well, on today's showing, there is still a bit of work to do," she said.  

"A number of improvements have been made, especially removing the idea of a 'double reasonableness' test, but it remains the case that there is a risk that perfectly legitimate tax planning may end up being viewed as abusive if it generates normal tax advantages, and taxpayers then having to deal with a potentially lengthy series of debates with the GAAR advisory panel. In many ways, this is where the real opportunity has been lost. The GAAR advisory panel will not be independent of HMRC," she said, referring to the UK tax authority.

"Had the Advisory Panel been truly independent, this would be a huge step in adding a feeling of greater impartiality to the GAAR, and also likely make its decisions rather more democratic," she said.

“Taxpayers will also have to pay very close attention to guidance issued alongside the GAAR, and this will be a key factor in decision as to whether it applies or not. This leaves a rather unusual state of affairs where guidance seems almost to be being promoted to the same level as legislation, but of course guidance doesn't have the benefit of being reviewed by parliament.

“Finally, but by no means least, the GAAR will sit alongside all existing anti-avoidance legislation, although it takes precedence to this. Practically this means that individuals and businesses going about normal planning will face an additional burden in terms of factoring the GAAR and its potentially unexpected results into many normal business transactions, as well as having to continue to monitor the impact of existing rules. It is a real shame that where there could have been an opportunity to rationalise the existing medley of anti-abuse rules all that seems, for the moment at least, to be happening is that a further layer is being added. Let's hope that the GAAR does its job well enough that HMRC develops the confidence to remove some of the existing rules.”