Time to review the residency of your far-flung employees? What with the new statutory residence test (SRT), Davyd Fisher, Expatriate Tax Specialist at Grant Thornton certainly thinks so.

A new statutory test to determine whether individuals are resident or non-resident in the UK for tax purposes came into effect from 6 April 2013. Although it is awaiting Royal Assent (expected in July 2013) it is already having significant implications for employers with employees who are globally mobile. The type and level of income which is taxable in the UK is driven by an individual's tax residency. It is therefore important that any internationally mobile employees are prudent. The new statutory residence test (SRT) aims to remove any grey areas when determining an individual’s residence status for UK tax purposes. Previously, tax residency was largely decided by case law, there was no legally binding set of rules, which meant that the guidance was open to interpretation and legal challenge.

The SRT will apply to individuals for income tax, capital gains tax and inheritance tax, but not for national insurance and non-tax purposes. The rules supersede all existing residence legislation, case law and guidance. They impact the UK tax planning of every British expatriate anywhere in the world to a greater or lesser degree. The new test adopts a mixture of objective tests (day-counting) and more subjective rules. These look at a sliding scale of how closely a taxpayer is linked to the UK. A working ‘day’ is now defined as anything over three hours. ‘Incidental’ work days, for training or activities subordinate to an employee's main role, are included within the 30 day limit. Previously, there was no limit to the number of incidental days someone from outside the UK could spend here.

The basic principles are: the automatic overseas test – if an individual meets any of these tests they will automatically be non-resident for the tax year. The automatic UK test, subject to not meeting the above, an individual will be resident in the UK if they meet any of the automatic UK tests. Sufficient ties test, subject to not meeting either of the above, an individual will need to determine whether they are sufficiently connected to the UK. Any ties to the UK, taken together with the number of days the individual spends in the UK, will be used to determine an individual's tax residency. For employers, the key automatic overseas test will be whether or not their employee is working full-time abroad. There is now a defined amount of time people can spend working in the UK before they become resident for tax purposes, with the threshold set at 30 work days. The key condition of note is, that any individual who comes to work in the UK, for a period of 12 months or more (and who spends 75 percent or more of their working time in the UK) will become a UK tax resident.

Previously, their residency would be based on whether or not they spend 183 days in the UK during the tax year. In addition, if an individual's “only home” is in the UK then they will also be a UK tax resident. This is a complete change from previous guidance and an indication of how personal ties can impact an individual's tax residency status. If the individual is not automatically UK resident or non-resident then the following connection factors will generally be considered: family, whether the individual has a UK resident spouse/civil partner/under 18 child; an accommodation tie – whether the individual has available accommodation in the UK; work tie – whether the individual has 40 or more UK workdays during the tax year; 90-day tie – whether the individual spent more than 90 days in the UK; country tie – whether the individual spent more time in the UK than any other country.

Employers need to track any globally-mobile staff, making sure they understand how much time people are spending in each country. The new rules have been introduced to provide clarity, but there are some areas that still require further explanation, particularly in terms of what constitutes a 'home’. Tax residency is a complex area, and the individual being non-resident does not mean that the employer will have no obligations, so people should take professional advice, or risk an unexpected bill from HM Revenue & Customs.