Tragedy of Greece overshadowed by expat tax proposal

Fiscal View What do you have to do (or not do) to convince HMRC that you have changed your lifestyle significantly by moving overseas?

British expatriates will have to prove to Her Majesty's Revenue & Customs that they don't live a UK-centric lifestyle if they want to avoid paying tax on their overseas earnings. Callaghan Walsh / TheShow more

I was going to write about the Greek debt crisis and its possible affect on investment portfolios, primarily because I have a great joke to introduce the subject. But there is a pressing need to deal with recent moves by Her Majesty's Revenue & Customs (HMRC) to deprive UK expatriates of their non-residency status and, hence, tax them on their overseas earnings.

But first the joke: did you hear that the Greek government is closing down all the country's taramasalata and hummus factories to avoid a double-dip recession?

Let's hope that it has raised your spirits for digesting the rest of this article, which, I have to say, in view of the subject matter, is a bit on the turgid side.

If you are a British citizen, but a resident in the UAE, the UK government is very generous to you by not taxing your overseas income. But to be eligible for this perk, you first need to be classified as UK non-resident. The rules for determining your residency are vague, but providing you are in full-time employment in the UAE, keep your UK visits below 90 days a year (averaged over the previous four years), do not work in the UK during your visits and do not lead a UK-centric lifestyle, then all is well.

The problem is the last bit. What do you have to do (or not do) to convince HMRC that you have changed your lifestyle significantly by moving overseas? Increasingly over the past few years, HMRC has been challenging residency status by reference to lifestyle and has won some significant court rulings.

All this is about to change as HMRC attempts to firm up on the existing vagueness. On June 17, HMRC published new proposals for the statutory test of UK residence. These proposals, subject to consultation, will become law in time for the 2011-2012 tax year. They will not affect this current tax year.

The text that follows is drawn primarily from a Tax Bulletin prepared by Squire, Sanders and Hammonds, who provide legal council on a worldwide basis.

The new proposal has a three-part test.

Part A says you will be conclusively a UK non-resident in the current tax year, if:

- You were not resident in the previous three years and spend fewer than 45 days in the UK during the current year; or

- You were resident in any of the past three years and you spend fewer than 10 days in the UK during the current year; or

- You are in full-time overseas employment and spend fewer than 90 days in the UK in the current year and no more than 20 days working in the UK.

If you satisfy any of these conditions, you will be judged to be a UK non-resident during the current tax year. Most UK expatriates working full-time in the UAE will fall into this last category and will, therefore, not have to proceed to Part B or Part C.

Part B says you will be conclusively a UK resident in the current tax year, if:

- You spend more than 182 days in the UK; or

- Your only home(s) is in the UK; or

- You carry out full-time work in the UK.

If you fail to satisfy any of the conditions above, in Part A or Part B, then you move to Part C.

In Part C, HMRC attempts to qualify your lifestyle: the more UK-centric it is, the less time you are allowed to spend in the UK before being judged to be a UK resident. The factors that determine your lifestyle are:

- Spouse or minor children being resident in the UK;

- Use of accessible accommodation in the UK;

- Substantive work in the UK (40 days or more);

- More than 90 days in the UK in either of the previous two years;

- More time in the UK than in any other single country (applicable to "leavers" only).

The use of these factors is further complicated by how many of the past three years you were a UK resident. If it was three or more, then you are classified as a "leaver"; if it less than three years, you are classified as an "arriver". HMRC is less generous to the latter category and will judge arrivers to be UK residents on fewer factors.

So, if you fail Part A because, for example, you are working full-time in the UAE, but spent more than 90 days in the UK, then you will be allowed to spend 90 days to 119 days in the UK and still retain non-residency status, providing that no more than three of the above lifestyle factors apply to you.

If four factors are relevant, then you will be classified as a UK resident and will pay UK tax on your worldwide earnings.

All of the above is under review by HMRC, but the word is that little will change when it comes into effect on April 6, 2012.

On the face of it, the proposed rules are basically unchanged for those individuals who are leaving the UK to take up full-time employment overseas, save for the introduction of a 20-day limit on days worked in the UK.

However, anybody who leaves the UK for any another reason, such as retirement, or a locally based person who spends substantive periods working in the UK, may find the new rules restrictive.

Bill Davey is a wealth manager at Mondial-Dubai. If you have any questions on this article or any other financial matter, he would be happy to hear from you at [e-mail]