UK Update - Important changes to Residency Determination, Workday Relief and Payroll Reporting

GMT Client Alert Series - 2013/07




Jul 5, 2013

Key legislative measures by the UK’s HM Revenue & Customs (HMRC) per Finance Bill 2013 are being implemented over the next couple of years with several important provisions implemented within the last few months. The combined effect of these provisions is to tighten previously loose payroll and tax requirements that may have a direct impact on your UK employee population. 

SRT – Statutory Residence Test

Effective April 6, 2013 with further revisions released in May, new objective test guidelines will generally replace previous court decisions as the law of the land regarding residency determinations allowing for more certainty to taxpayers. The net effect is that UK residency may now be more difficult to break or avoid than ever before.

The SRT has three main components: the “automatic overseas test”, the “automatic residence test”, and the “sufficient ties test”. Passing either the “overseas” or “residence” tests ends the debate, but if not settled, then the “sufficient ties test” will be determinative.

The below tests describe how the tests in combination generally work although there are other complexities not noted here that should be further analyzed by a UK tax advisor.

In order to determine if an individual is a UK resident, will require one of the following tests to be met in the following order:

  1. Automatic Overseas Tests

    a. First automatic overseas test: Resident in the UK for one or more of the three tax years preceding the UK tax year, and spends fewer than 16 days in the UK during the UK tax year. If an individual dies in the tax year, then the test does not apply.

    b. Second automatic overseas test: Resident in the UK for none of the three tax years preceding UK tax years and spends fewer than 46 days in the UK during the UK tax year.

    c. Third automatic overseas test: Individual worked full-time overseas for the tax year (generally requires “sufficient hours” or about 35 hours worked per week while abroad) without any significant breaks from that overseas work, and:

         i. Spends fewer than 91 days in the UK during the UK tax year, excluding deemed days (if an individual is not present in the UK at the end of the day that day will not count as a UK day), and

         ii. The number of days in the tax year on which the individual worked for more than 3 hours in the UK is fewer than 31.

  2. Automatic Residence Tests

    a. First automatic residence test: Individual spends more than 183 days in the UK during the UK tax year.

    b. Second automatic residence test: Person will meet the test if:                                                   

         i. Have a home in the UK for a period of more than 90 consecutive days with at least 30 of those days in the UK tax year and

         ii. Present in that UK home on at least parts of 30 separate days during the UK tax year, and 

         iii. In the period when the individual has a UK home there are 91 consecutive days when the person does not have a home overseas or has one or more homes overseas but not present in the aggregate fewer than 30 days in these home(s) during the UK tax year.

    c. Third automatic residence test: Individual works full-time (generally requires “sufficient hours” or about 35 hours worked per week) in the UK for 365 days or more with no significant break from UK work and:

         i. All or part of that work period falls within the tax year, and

         ii. More than 75% of the total number of days in the UK tax year you work more than 3 hour workdays in the UK.

  3. Sufficient Ties Tests

    When an individual doesn’t meet any of the automatic tests above, ties to the UK in the following areas need to be taken into consideration:

    a. Family
    b. Accommodation
    c. Work
    d. Number of days spent in the UK
    e. Where individual spend more time.

The number of days present in the UK during the year will determine the number of the above “ties” that are required to make someone a UK resident for that year. The above Sufficient Ties Test can also apply to a deceased person.

Split Year Treatment: According to the law, a person is either a UK resident or non-UK resident for a full tax year. Nevertheless, if an individual leaves the UK to live or work abroad or go to the UK to live or work, one may usually elect to split the tax year into:

  • Part year as UK resident
  • Part year as non-UK resident

In order to be eligible for the split year treatment for a tax year, the person needs to be considered UK resident under SRT for that UK year. There are now 8 different scenarios under which a Split Year Treatment can be obtained.

Overseas Workday Relief (OWR)

Under the new OWR rules, non-UK domiciled individuals commencing work in the UK after April 6, 2013 will be able to claim relief on those earnings which relate to non-UK workdays for up to three UK tax years (including split years) regardless of their intended length of stay (subject to some further conditions) as long as those earning are not remitted back to the UK. A new bank account to ensure the prevention of excessive remittances to the UK related to these non-UK workdays will be required.

The number of tax years an employee can be eligible for OWR in their lifetime is not limited as long as there is a period of three consecutive tax years where the individual was not a UK resident even if the individual already took advantage of the benefit in previous years.

Those already claiming overseas workday relief based on the former rules where long-term intentions are determinative may continue to do so under those rules.

RTI – Real Time Information

UK employers started payroll reporting under RTI in April 2013, a major change to the Pay-As-You-Earn (PAYE) system. The general premise is that payments made to employees need to be reported “on or before” the date of payment to the employee. Previously, employers would submit the income and national tax to the HMRC with any discrepancies being adjusted at year end. With this new system the employers will have to be able to supply accurate and timely information about their payroll.

This change in methodology will be challenging for employers with international mobile payrolls that need to report data gathered from multiple sources in the time frame that is required. Employers need to make sure that payroll providers are going to be able to comply with these requirements because ultimately it is the employer’s responsibility.

For small employers with less than 50 employees until October 5, 2013, the employer may send information to the HMRC by the date when they run their regular payroll, but no later than the end of the tax month (the 5th of each month). Therefore, these employers will only report monthly rather than every pay cycle.

Late filing penalties will be determined by the number of employees on the PAYE scheme. Each scheme will be subject to only one late filing penalty per month.

GMT recommends the following actions on the part of companies with international assignees to/from the UK:

  1. Companies need to confirm with their payroll providers that they are in compliance with the new RTI payroll reporting rules and that information gathered from different sources will be received timely. There are ways to also reduce the number of reportings related to certain taxable benefits/expenses, such as housing leased by the company for the assignee.

  2. Companies will no longer need to plan for new assignees to be in the UK for less than three years to obtain overseas workday relief. However, bank account consideration and remittances will be important.

  3. Companies should analyze their assignees going to/from the UK in terms of the new SRT rules. Unexpected assignment tax costs may inure due to these changes designed to extend UK residency periods. Trailing tax liabilities may also increase due to these new rules. Now is a good time to check with your GMT advisors!