Clause 215 - Statutory residence test

Finance Bill – in a Public Bill Committee am 4:15 pm ar 18 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

With this it will be convenient to discuss the following:

Government amendments 125 to 135.

That schedule 43 be the Forty-third schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 215 introduces schedule 43, which provides a statutory residence test for individuals. That new test will provide greater clarity and certainty for individuals when determining their resident status for tax purposes in the UK.

Until now, there has been no formal statutory definition of tax residence. There is very little relevant legislation, so the definition has largely rested on legal cases decided in the courts over a long period of time. Many of the cases were very old and did not reflect modern technology and travel patterns, which have changed the way people live their lives. The result is that the previous residence rules were vague and complicated. Knowing a person’s tax residence is essential for determining their tax liability. Tax and professional bodies have long argued that this lack of certainty is unsustainable and unfair to the taxpayer. In Budget 2011, therefore, the Government announced that they would introduce a statutory definition of tax residence to provide greater certainty and clarity for people moving between countries. The test will replicate as far as possible the residence outcomes delivered by the current rules, but will provide greater certainty for the taxpayer.

The test takes into consideration the days spent in the UK and connections to the UK. It is structured in three parts. First, the automatic overseas tests determine whether the individual is automatically non-resident; if so, that is conclusive. Secondly, for those not automatically non-resident, the automatic UK test determines whether an individual is automatically resident; if so, that is conclusive. Thirdly, for those whose position is not decided by one of the automatic tests, a sufficient ties test determines residence based on a combination of the amount of time spent in the UK and the number of ties with the UK that a person has.

The test also allows an individual who meets certain situations when coming to or leaving the UK to split the tax year so that they are taxed for most purposes as if resident for the UK part of the year and non-resident for the overseas part of the year. Finally, the test includes anti-avoidance provisions, which treat certain income and gains arising to individuals who leave the UK temporarily as accruing in the period of return; tax is then levied at that point.

I shall now provide an outline of the Government amendments. Amendment 132 has been tabled to the rules for individuals who come to or leave the UK part way through the tax year. There are eight different circumstances in which the tax year can be split into an overseas part and a UK part. At present, the legislation ensures that the case that maximises the UK part of the  year should be applied when an individual qualifies under more than one case. However, stakeholders have told us that in some situations the legislation will result in outcomes that would be unexpected and illogical. To address that issue, we have included a replacement rule, which provides an order of priority for the split-year cases. Amendment 132 will ensure that the legislation delivers a fairer result.

Government amendment 135 has been tabled to introduce a transitional rule for individuals and their spouses who return to the UK in 2013-14 from working full time overseas. Government amendment 125 corrects a technical oversight in the legislation whereby an individual who finishes working in the UK just before the start of a tax year could become UK tax resident by spending only a day working in the UK in that tax year.

Government amendment 126 ensures that people who leave the UK but keep a home here and who happen to die while living overseas will not be treated as being resident here as long as they have spent sufficient time in the tax year up to the date of death in an overseas home. Finally, other Government amendments have been tabled to correct minor drafting errors in the legislation.

The statutory residence test has been developed in conjunction with the reforms to ordinary residence and in part with the reforms to statement of practice 1/09. Both those other reforms form part of the 2013 Finance Bill. HMRC has recently published full customer guidance on the test along with a pilot version of a new online tool to help customers determine their residence status by answering the relevant questions about their time spent in the UK and other circumstances. Around 4,000 people visited the tool in the first week it was available.

The statutory residence test applies clear and objective rules that test the time spent in the UK and the connections that a person has to it. The test will be simple for the vast majority of people to apply, although there are more detailed rules for those in more complicated situations. Overall, the test will bring greater certainty and clarity to all taxpayers, in particular those who move between countries and whose present status may be uncertain.

Sheila Gilmore (Edinburgh East) (Lab) rose—

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank you, Mr Amess, and thank the Minister for his explanation. I am sure that when he responds to the queries I am about to raise, my hon. Friend the Member for Edinburgh East will be able to pose an additional question to him. As the Minister has explained, clause 215 and the incredibly long schedule 43 introduce a statutory residence test, made up of a series of tests, which will determine an individual’s residence for tax purposes with effect from 6 April 2013. The statutory residence test introduces a definition of residence for tax purposes, but does not apply to social security or benefits entitlement, so there are still multiple rules for residence. One of the professional bodies, the Chartered Institute of Taxation, described that as “disappointing” and “needing attention”, so I would be grateful if the Minister could address such concerns in his closing remarks. For the first time, the  new rules lay down a statutory definition of residence, which has been looked at for a good number of years, but they remain “far too complex”, in the view of the same professional body.

The Institute of Chartered Accountants in England and Wales, because of the sheer length and complexity of the legislation, stated:

“It is doubtful that an unrepresented individual will be able to navigate the legislation correctly particularly if they are not definitely resident and not definitely non-resident but in the middle ground.”

The Low Incomes Tax Reform Group, too, has shared some of its concerns, highlighting:

“Migrants to and from the UK are a mixture of people with varying personal circumstances, but a great many are migrant workers and students on low incomes. These are unrepresented taxpayers who cannot afford professional fees and for whom sources of tax advice are limited or non-existent.”

Returning to the concern that several different definitions of residence remain, depending on the area of government policy, the LITRG goes on to state:

“We stress again that it would be far clearer if all government rules relating to residence were to follow the same definition as closely as possible. The low-income migrant will struggle with rules concerning: their right to live and/or work in the UK; tax; social security contributions; entitlement to healthcare; entitlement to benefits; and, very likely, how the UK rules interact with those in their country of origin. And all without being able to afford advice.”

That is obviously an important concern, and I would be grateful if the Minister could explain how the welcome but complex new rules will be understood by those who are not in the fortunate position of being able to afford tax advice. How will low-income migrants be informed of the need to keep detailed records of their movements in order to prove their position under the new rules?

Furthermore, records need to be kept not only by employees, but by employers. In cases where people are defined as being resident and therefore taxable in the UK and subject to PAYE, but with the penalty regime applicable to PAYE errors—coupled with the recent introduction of PAYE real-time information or RTI—all but the smallest employers will be concerned. Most do not have the benefit of in-house tax teams. Will the Minister outline what support the Government have committed to HMRC to guide employers through the changes?

The commencement date of 6 April 2013 is also a concern. People will be arriving in and leaving the UK during this tax year, but before Royal Assent. Although the draft legislation has been in existence for some months, and its likely shape has been known for some time, in some cases people might have made mistakes before the rules were formally published. Will the Minister therefore outline how such people are likely to be treated, if they fall foul? Can they elect to be treated as resident or not, under the old rules, for the transition year?

On a separate note, can the Minister explain what will happen to people when they cannot leave the UK for reasons beyond their control? Will he confirm that they will not become resident if they are unable to leave the UK, because of—for example—an airport closure, transport delays or some other reason? Will the Minister give some clarification on how such people might be treated?

Finally, given the complexity and length of the new rules, what steps does the Minister intend to take to ensure that they are kept under review, and simplified wherever possible? Will he commit to a date by when the rules will be reviewed, as they are a significant change from the centuries of case law relied on up to this date? In particular, the ICAEW has indicated that

“the stated aim of the legislation is to provide certainty but because of the complexity and the provision that the rules can be changed by statutory instrument, possibly without consultation, it does not achieve that aim.”

If the Minister can also address those concerns, I will be grateful.

Photo of Sheila Gilmore Sheila Gilmore Llafur, Edinburgh East

My question is relatively simple: will the Minister explain exactly how the measure will work for people claiming child benefit? Will exactly the same rules apply?

Photo of David Gauke David Gauke The Exchequer Secretary

Before dealing with the particular questions that have been raised by Opposition Members, for which I am grateful, it is worth reminding the Committee that we currently have a test based on case law. That in itself creates a great deal of confusion and uncertainty. Tax professionals have been calling for a statutory residence test for some years. There have been attempts to deliver such a test in the past, but they have not succeeded. It is therefore something of an achievement finally to have before us a statutory residence test.

I know that the rules are long, and I appreciate that a lot of legislation is included, but it is perhaps worth pointing out that the test has been welcomed, to some extent. In its press release of 11 December following the publication of the most recent consultation documents, the Chartered Institute of Taxation said:

“It is on the surface disappointing that the legislation has grown ever longer but this is a case where longer is better. We need the rules to bring certainty to as many taxpayers as possible and that means spelling out the rules in the law.”

I accept that the legislation is of considerable length, but that reflects the fact that the test is comprehensive, considers a wide range of circumstances and is able to come to the right conclusion.

I do think that the new legislation will be easier to apply than the old rules. The statutory residence test will replace the current uncertain and complicated rules with a test that is more transparent, mechanical and objective. I accept that the new rules will take a little getting used to because they look rather different from the old ones, being much more mechanical, but once users become familiar with the mechanics, they should be more straightforward to apply and result in fewer residence disputes with HMRC.

On the specific question of complexity in the context of migrant workers in low income bands who will not be able to afford expert tax advice, it is worth highlighting the online tool that HMRC will be providing. It takes customers through a series of simple yes or no questions to establish their residence status. That is available to everyone, including unrepresented taxpayers, of course, and it is an advance on what we have had in the past.

In terms of the application to national insurance contributions, we gave careful consideration to including them, but concluded that annual tests for national insurance contributions would require significant structural  change and upheaval for employers. It is sensible, at least initially, to keep the existing national insurance residence tests and liabilities aligned with the rest of the social security system. The longer term position will depend in part on the Government’s consideration of greater integration of income tax and national insurance contributions.

As for the application of the rules to other Government Departments, it is true that some Departments look at residence in different ways. In establishing entitlement to pension credit, for example, the Department for Work and Pensions requires customers to have the right to reside and to be habitually resident in the UK, the Republic of Ireland, the Channel Islands or the Isle of Man. Aligning the different residence rules across all Departments would inevitably lead to different residence outcomes for the sections of the public affected, which would have significant Exchequer and other impacts. We need to be careful before we can commit to going down that route.

On whether we will consult on future changes by statutory instrument, it is of course the case that all taxes are kept under review. Clause 215 contains a provision for further consequential or transitional provisions to be made by statutory instrument. We have no plans at present to use that power, but we will follow the usual consultation process if we do.

A question was asked about aeroplane delays or travel disruption of some sort and whether there was any flexibility within the regime. There is flexibility in exceptional circumstances, but whether a situation constitutes an exceptional circumstance will depend on the facts and the circumstances of each. The event in question must be both beyond control and exceptional, and the individual would need to be able to demonstrate that they made every possible effort to get out of the United Kingdom by any means. Adverse weather conditions that tend to happen frequently in winter will not usually fall under the definition, but it is at least in theory possible for them to apply.

I was asked whether it was fair to charge interest on tax unpaid because the rules have not allowed a person to establish their taxable position in time. Interest of course does not penalise; it merely puts the individual in the position they would have been had they paid the correct amount of tax on time.

On whether penalties will result from the submitting of amended self-assessment returns, penalties will arise from the late filing of a return. A fixed penalty of £100 applies if a return is not filed by the appropriate deadline. People normally have 12 months from 31 January after the end of the tax year to correct a return they have submitted. There will be no penalty attached to additional tax paid as a result of an amendment provided that the individual has made their best endeavours to submit complete and correct information, but interest will be due in accordance with the late payment interest rate, which is currently 3% for all the main taxes.

On the question about child benefit, we have not extended the statutory residence test beyond tax for the reasons I outlined earlier.

I hope that I have provided clarification to the Committee in response to some detailed questions. The reform is significant and will make our tax system more comprehensible and clearer to many people.

Question put and agreed to.

Clause 215 accordingly ordered to stand part of the Bill.

Amendments made: 125, in schedule 43, page 497, line 40, leave out ‘in’ and insert

‘which falls in both that period and’.

Amendment 126, in schedule 43, page 498, line 38, at end insert

‘, and

(e) if P had a home overseas during all or part of year X, P did not spend a sufficient amount of time there in year X.

‘(2) In relation to a home of P’s overseas, P “spent a sufficient amount of time” there in year X if—

(a) there were at least 30 days in year X when P was present there on that day for at least some of the time (no matter how short a time), or

(b) P was present there for at least some of the time (no matter how short a time) on each day of year X up to and including the day on which P died.

(3) In sub-paragraph (2)—

(a) the reference to 30 days is to 30 days in aggregate, whether the days were consecutive or intermittent, and

(b) the reference to P being present at the home is to P being present there at a time when it was a home of P’s.

(4) If P had more than one home overseas—

(a) each of those homes must be looked at separately to see if the requirement of sub-paragraph (1)(e) is met, and

(b) that requirement is then met so long as it is met in relation to each of them.’.

Amendment 127, in schedule 43, page 508, line 18, after ‘even’ insert ‘if P’.

Amendment 128, in schedule 43, page 514, line 38, after ‘taxpayer’ insert

‘—

(a) ’.

Amendment 129, in schedule 43, page 514, line 40, at end insert

‘, but

(b) was resident in the UK for one or more of the 4 tax years immediately preceding that year.’.

Amendment 130, in schedule 43, page 517, line 12, after ‘in the’ insert ‘part of the’.

Amendment 131, in schedule 43, page 517, line 37, leave out from ‘is’ to end of line 40 and insert

‘the part of that year defined below—

(a) for the Case in question, or

(b) if the taxpayer’s circumstances fall within more than one Case, for the Case which has priority (see paragraphs 53A and 53B).’.

Amendment 132, in schedule 43, page 518, line 22, at end insert—

‘Priority between Cases 1 to 3

53A (1) This paragraph applies to determine which Case has priority where the taxpayer’s circumstances for the relevant year fall within two or all of the following—

Case 1 (starting full-time work overseas);

Case 2 (the partner of someone starting full-time work overseas);

Case 3 (ceasing to have a home in the UK).

(2) Case 1 has priority over Case 2 and Case 3.

(3) Case 2 has priority over Case 3.

Priority between Cases 4 to 8

53B (1) This paragraph applies to determine which Case has priority where the taxpayer’s circumstances for the relevant year fall within two or more of the following—

Case 4 (starting to have a home in the UK only);

Case 5 (starting full-time work in the UK);

Case 6 (ceasing full-time work overseas);

Case 7 (the partner of someone ceasing full-time work overseas);

Case 8 (starting to have a home in the UK).

(2) In this paragraph “the split year date” in relation to a Case means the final day of the part of the relevant year defined in paragraph 53(5) to (9) for that Case.

(3) If Case 6 applies— If Case 7 (but not Case 6) applies— If two or all of Cases 4, 5 and 8 apply (but neither Case 6 nor Case 7), the Case which has priority is the one with the earliest split year date.

(a) if Case 5 also applies and the split year date in relation to Case 5 is earlier than the split year date in relation to Case 6, Case 5 has priority;

(b) otherwise, Case 6 has priority.

(c) if Case 5 also applies and the split year date in relation to Case 5 is earlier than the split year date in relation to Case 7, Case 5 has priority;

(d) otherwise, Case 7 has priority

(6) But if, in a case to which sub-paragraph (5) applies, two or all of the Cases which apply share the same split year date and that date is the only, or earlier, split year date of the Cases which apply, the Cases with that split year date are to be treated as having priority.’.

Amendment 133, in schedule 43, page 558, line 14, leave out ‘or 2015-16’ and insert ‘2015-16, 2016-17 or 2017-18’.

Amendment 134, in schedule 43, page 558, line 40, at end insert

‘, and

(c) paragraph 49 of this Schedule has effect in relation to that year as if in sub-paragraph (2) for the words from “because” to the end there were substituted “in circumstances where the taxpayer was working overseas full-time for the whole of that year.”’.

Amendment 135, in schedule 43, page 559, line 17, at end insert—

(1) Sub-paragraph (2) applies in determining whether the test in paragraph 50(3) is met where the relevant year is the tax year 2013-14.

(2) The circumstances of a partner of the taxpayer are to be treated as falling within Case 6 for the previous tax year if the partner was eligible for split year treatment in relation to that tax year under the relevant ESC on the grounds that he or she returned to the United Kingdom after a period working overseas full-time.

(3) Where the circumstances of a partner are treated as falling within Case 6 under sub-paragraph (2), the reference in paragraph 50(7)(b) to the UK part of the relevant year as defined for Case 6 is a reference to the part corresponding, so far as possible, in accordance with the terms of the relevant ESC, to the UK part of that year.

(4) “The relevant ESC” means whichever of the extra-statutory concessions to which effect is given by Part 3 of this Schedule is relevant in the partner’s case.’.—(Mr Gauke.)

Schedule 43, as amended, agreed to.