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 5th 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, in a ruling that is expected to have wider ramifications for the growing number of Britons working abroad, 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.” Non-residents are generally speaking only liable to UK income tax on income derived from:

Property situate 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. The new rules for taper relief have made this provision almost irrelevant, in fact.

Non-resident entertainers and sports personalities will have been 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. 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 that Chancellor Gordon Brown would not be delaying the implementation of the measures over the lawyers' concerns.

Version date: 07.05.06