Statutory Residence Test – The trouble with becoming non-UK resident by working sufficient hours overseas

As a matter of fact, many individuals are now considering breaking UK tax residence. Many of these individuals will have one or more UK ‘ties’ under the Statutory Residence Test (SRT).

The issue

By way of recap, such ties can include:

1. Family resident in the UK. Family can include minor children or cohabitees, although the minor child will only be a tie if the individual sees the child in the UK on more than 60 days.
2. Accessible accommodation. This will be a tie if the individual has a house available for at least 91 continuous days and spends at least one night there during the tax year.
3. Working in the UK. This will apply if the individual works for over three hours a day in the UK for 40 days in the tax year.
4. If the individual has spent more than 90 days in the UK in either of the two previous tax years.
5. More time being spent in the UK than any other country.

If a leaver can limit the above ties to two, then they will be able to stay in the UK for 90 days without being UK resident. However, this reduces to 45 days for three ties and 15 days for four ties.

Therefore, it is easy to see how those with a higher number of ties may be tempted by the automatic overseas test for working sufficient hours abroad, which would mean that they could side-step the implications of the above ties altogether.

Working sufficient hours overseas

Under the SRT, an individual will automatically be treated as non-UK resident if they work sufficient hours overseas in the tax year. This test requires the individual to work an average working week of 35 hours or more with no ‘significant breaks’, provided they are present for fewer than 91 days in the UK in a tax year and work (for more than three hours in a day) in the UK on no more than 30 days.

A "significant break" is defined as 31 days going by where more than three hours was not worked in a day in either the UK or overseas. A helpful caveat to this is that none of those 31 days are days where they would have done more than three hours of work but for being on annual, sick or parenting leave.

The methodology for calculating whether 35 hours or more have been worked on average is very complicated and involves disregarding certain days (such as sickness or holiday) to get to a reference period. The reference period is then divided by seven to work out the weeks in the reference period. After this, total overseas hours worked are divided by the weeks in the reference period and if this calculation gives at least 35 then the test will be passed.

The record-keeping required for the above calculations is clearly extremely onerous. Although accountants may be used to preparing timesheets, other business owners or employees are not. Things may be easier for a formal employment with defined hours and a reasonable absence management system.

Getting back to the point, it is tempting for those with more than two ties to try to up their day count to 90 days by meeting the test for working sufficient hours overseas.

Hamilton Rose's view

If a private business owner seeks to achieve non-UK tax resident status by relying on the test for working sufficient hours overseas then they should expect possible HMRC scrutiny and have tip-top records of work carried out while overseas, including records of sickness and holiday.

Here, holiday allowance should be defendable based on holiday rules in the country where the individual resides.

We are generally nervous about "leavers" seeking to rely on this test due to the ease with which they can fall into traps and challenges from HMRC. For example, where is the evidence that a sole trader has taken time off sick? Who do they report this to? Should they go to a doctor every time they are sick?

Where possible, we advise these kinds of leavers to reduce their ties to get their maximum day count to a number that they can work with. For example, they could rent out their UK house and/or never stay in it to remove the accommodation tie, or they could structure things so that they see their minor child in the UK for less than 60 days.

Whichever route is chosen, they need a clear road map to stick to going forward.