An increasing number of British businesses are setup and run by people who may soon be defined as non-resident by new legislation due to come into force in April 2012. Andy White, a partner at accountancy firm CBW, explains how the new rules on residency will impact on UK entrepreneurs, and not just those that run their businesses from abroad.
We are all familiar with the phrase “moving the goalposts”, but how would you feel if you were asked to play in a football match and weren’t even told where the goals were? This is the current situation with the rules on tax residence. For years UK law has worked on the principle that an individual’s entire tax liability can depend on his country of residence; yet there is no statutory definition of what residence is. So determining the position with any certainty has become an exercise fraught with uncertainty.
This highly unsatisfactory state of affairs reached a nadir in the infamous case of entrepreneur Robert Gaines-Cooper, which concluded last year. Mr Gaines-Cooper, having closely followed the guidance in HMRC’s own publication, claimed that he was not resident in the UK. H M Revenue & Customs thought otherwise. In the course of the hearing, HMRC argued, amongst other things, that their own internal publication on the matter could not be relied upon in determining Mr Gaines-Cooper’s country of residence.
It is therefore to be welcomed that the government now intends to introduce legislation which will clearly define the issue of residence, and set out a number of clear tests designed to resolve the position. Consultation on the proposed statutory rules closed on September 9 2011, and the rules are expected to come into effect on April 6 next year.
While the new rules are principally targeted at individuals who have repeatedly used the lack of a statutory definition to avoid paying tax, the proposals will also make it increasingly difficult for entrepreneurs to take out funds from their companies in this way.
The government legislated in 1998 that individuals had to be non-resident in the UK for five years to gain exemption from capital gains tax. But the opportunity has remained for income tax exemption.
Many entrepreneurs can (and do) go abroad for a year, during which time they extract large dividends from their UK companies which are free of UK income tax. Although dividends may not be as large as those drawn by Tina Green, wife of Philip Green, owner of Arcadia, they are still of sufficient size to make the tax saved more than worthwhile.
The consultation paper makes it clear that the Government intends to block this loophole by introducing a similar five-year non-residency rule for income tax, instead of the current one-yearrule. For entrepreneurs intending to make use of this planning opportunity, there is no time to lose.
Furthermore, determination of residence will henceforth be based largely on the number of days spent in the UK in the relevant year; in this connection, the relevant year is not just the tax year in question. The idea is to make it more difficult for someone who is already UK resident to lose that status than it should be for a non-resident to become resident.
Therefore, entrepreneurs wishing to become non-resident in the United Kingdom (or wishing to avoid becoming resident) should not simply assume that they need to abide by the new rules from April 6 2012.
It is important to take advice on this issue and to take it as a matter of urgency. The door is closing – make sure you squeeze through before it shuts forever.
Andy White is a partner with accountancy firm Carter Backer Winter LLP ("CBW") www.cbw.co.uk. Andy can be reached at andy.white@cbw.co.uk.