After hearing of two recent cases where businessman have lost fights against HMRC regarding their residential status in the UK, KinsellaTax thought it best to lay out who is liable to pay what and who is, or isn’t, classed as a UK resident.
On Tuesday, 16th February 2010, Robert Gaines-Cooper lost a battle against HMRC in the High Court after judges denied that he had been wrongly deprived of non-resident status in the UK.
Although Gaines Cooper has lived in the Seychelles for the past 30 years, and stuck to HMRC’s rules about spending less than 91 days in the UK per year, the High Court ruled that England had remained ‘the centre of gravity of his life and interests’.
In a similar case a corporate banker from Austria, Andreas Tuczka, also lost a long running dispute with HMRC over his ‘not ordinarily resident’ tax status.
The rulings come as a blow for up to 30,000 Britons who primarily work abroad and for foreign workers in Britain.
Under current residency rules, people can avoid tax liabilities on their foreign earnings if they leave the country before the third anniversary of their arrival.
Professionals have warned however that targeting high earners will discourage people from working in Britain and will force businesses to look abroad where tax systems are more encouraging.
One of the main concerns is in the City as it is widely believed that as many as two thirds of non-domiciled employees work in the financial sector.
Hoards of people come to Britain on temporary contracts believing that they have up to three years before they become liable to tax on their earnings worldwide. However, it seems that HMRC are now saying that as soon as you come to Britain to work then you are an ordinary resident and are therefore liable to tax on everything, not just UK earnings.
HMRC recently launched an effort to claim back money from ‘non-domiciles’, whose families originate from overseas and retain connections with their home country. It is estimated that around 65,000 people in the UK fall into that category and enjoy the same tax advantages to non-residents.
However, HMRC have denied they have launched a crackdown on residency and said:-
“There is no crackdown on residency or domicile. The rules… are complex and are approached on a case-by-case basis… We ensure that all those who are resident in the UK pay the tax that is due and this judgement will support that work.”
So… what are the different residency statuses and what does that mean?:-
Residents or ordinarily residents are those who reside or are domiciled in Britain and pay UK tax on their worldwide income and capital gains. Anyone who comes to Britain is treated as a resident from the date they arrive if they are planning to live her permanently or for longer than three years.
Non-residents to the UK are not liable for tax on their worldwide earnings or capital gains; only income earned in Britain. They are also liable for National Insurance contributions. British people can become non-residents if they leave Britain permanently or live abroad for three years as long as they do not return to Britain for more than 183 days within a single tax year and, on average, spend less than 91 days a year in the UK.
Those who are not-ordinarily resident in the UK are only taxed on their income from the UK, and are not taxed on any income earned overseas. However, the person must leave the UK after three years in order to retain that status.
People whose families originate from abroad and keep connections with their home country are known as non-domiciles. Anyone born in Britain whose father originates from abroad can claim the non-dom status. Non-domiciles can avoid UK tax on money earned abroad and brought back in the UK as long as they pay the Government a lump sum of £30,000 a year.