UK rules for determining tax residency in the UK Background

The Inland Revenue (now HMRC) in the United Kingdom (UK) in the Gaines-Cooper case has clarified the rules in respect of determining tax residency in the UK.

The Decision

The case was not about the residence status of the taxpayers as such, but rather an application for judicial review on the basis HMRC had, in effect, “moved the goalposts” in the middle of the game by changing the rules for determining a tax payer’s residence status.

Over the years many taxpayers have relied on guidance set out in the Inland Revenue booklet 1R20. In Gaines-Cooper, the taxpayers argued that the Inland Revenue had, in effect sought to re-write these rules in their own favour upsetting what taxpayers had come to regard as established practice.

The Court of Appeal rejected this contention. The Court acknowledged that taxpayers were entitled to rely on 1R20:

“it does provide guidance as to particular circumstances in which the Revenue gives a binding and lawful assurance that it will treat a taxpayer, whose case falls within the circumstances described as not resident and not ordinarily resident.” (Per Lord Justice Moses).

However, the Court also held that while IR20 could be relied upon, the Inland Revenue had not sought to change how it interpreted the “rules” in IR20:

“The Revenue has not been shown to have altered its interpretation and application of IR20 to these appellants’’ cases.” (Per Lord Justice Moses).

There are thus three key points arising from this decision

(a) that I1R20 did have importance and could be relied upon by taxpayers (although I1R20 has now been replaced the same principles should apply to other HM1RC guidance of a similar nature).

(b) But I1R20 is only general guidance and has to be applied to the facts of a particular case. Each taxpayer has to satisfy himself he or she is within the ambit of the guidance (“unless the facts of the taxpayer’s case are beyond all reasonable dispute, the very terms of I1R20 provide no certainty of the outcome of any claim to resident or non¬resident status” per Lord Justice Moses). I1R20 is not a substitute for professional advice.

(c) The Inland 1Revenue have not changed the law or practice.

Income Accrue or Arise in India although earned outside India?

A look at what constitutes as Income on Indian soil and what is not from the perspective of the IT department. The IT department defines certain incomes as Accruing or Arising in India. This is the basis of calculating your income and income tax. Let’s know more. The IT department says that for any company or individual (resident or non-resident) who also has business in geographical locations outside India, only the part of income which can be reasonably attributed to have been earned in operations happening in India will be considered for calculation of Income tax.

RESIDENTIAL MATTERS:
There arises a question of who/what is a Resident of India and who/what is not a resident of India. The IT department has defined these entities. An Individual is defined as a resident in India in the previous year if he/she satisfies one of the following conditions:

1. He/she has spent a total of 182 or more days in India in the assessment year.
2. If he/she has spent a total of 60 days or more in the assessment year and has spent a total of 365 days in the previous four years. For example in case the assessment year is 2008-09, then if you have spent >60 days in India between 1st April 2008 and 31st March 2009 and a total of >365 days during 1st April 2004-31st March 2008.
3. For anyone who is in the merchant navy (but, on an Indian Ship) or has gone out of the country for employment, the above clause will become 182 days in the assessment year and 365 days in preceding four years. The IT department also states very clearly that if a person is deemed resident for one source of income, then, he will be counted as resident for all incomes in that particular year. A person is said to be not ordinarily resident in India if that person satisfies any one of the following criteria:-
a) Has been a non-resident in India in nine out of ten years preceding the year of assessment.
b)Has spent less than 792 days combined during a period of 7 years prior to the assessment year. Now that we have suitably understood who is defined as a Resident Indian for the purposes of Income tax, let’s look at which of their income is deemed Indian. The following are considered to be income accrued in India. Any income which is gained from or through any business connection in India. This could be directly or indirectly. Incomes which are received from a property which is situated inside Indian borders. Through or from any source based in India and from the sale of a capital asset inside India. Thus what the IT department says is that if they can clearly define that the source of the income is in India then the Income too is accrued in India. To put the above discussion into clearer terms:
1). Any salary paid in India is deemed to have accrued in India. Even any charges which are collected as payable for a service rendered in India is regarded as income earned in India.
2). If a government employee or citizen of India is reimbursed by the Government for rendering any service outside India then it is deemed as accrued in India.
3). Any dividend which is paid by an Indian company outside India to a resident as defined earlier will be considered as an income earned in India.
4). Interest payable by the government is considered as accrued in India. This would apply for all kinds of government securities and saving instruments like bonds.
5). Any interest received from a resident except if that person has borrowed money from you to pursue business activities outside India. The logic behind this could be that this would ensure positive cash flow into India.
6). If the interest is paid by a non-resident to you then it will be added to your income except if that person has used the money borrowed from you to use for business activities in India. The logic behind this would be to boost investments in India.
7). The same concepts of point 4, 5 and 6 are applicable for any income generated from Royalties or copyrights.
8). For any income from fees for technical services provided the IT department uses the yardsticks as mentioned in points 4, 5 and 6. Although at a cursory glance some of the ideas discussed above might sound to be the stuff that our Auditor/Financial Planner should be concerned with and not us, it is imperative that we understand the philosophy behind them so that we are more in control of our income tax assessments. With the increasing benefits of technology the tax man is becoming more and more competent in keeping track of your activities vis-à-vis your income tax implications. Thus it is highly advisable that we are very clearly aware of all the rules and regulation and ensure 100% compliance. After all it’s our hard earned money that will work hard for the Indian economy.