By David Anderson
If you are UK resident and about to take up a position skippering a yacht, knowing what you need to do to be considered non-UK resident is likely to save you a lot of UK income tax. The rules have recently become a lot clearer and have particular application to yachting.
The statutory residence test (SRT) is in force in the UK, applying to the 2013-14 tax year onward. This has been widely publicized and there is substantial information available on how this test will be applied. Broadly, the test is welcomed as it helps to provide some certainty on the definition of who and who is not resident in the UK.
How SRT works
The intention of the SRT is for a step-by-step process to be followed to determine the residency of an individual.
The first step is to ask whether the individual has spent 183 days or more in the UK during the year. If yes, then in general they will be UK resident. If not, move to the second step.
The second step is to apply the automatic overseas tests. These break down into day counting (the level of which will depend upon the individual’s residence position in the three previous tax years) and whether the individual has worked full-time overseas. This is likely to be the test you should aim to satisfy. If one of these tests is met then the individual is automatically a non-UK resident. If none of the tests are met, you must move to the third step.
The third step is the automatic UK residency tests. These break down into whether the individual’s home is in the UK or whether they worked full time in the UK during the tax year. The rules to establish both of these are complex. Again, if either test is satisfied then the individual is deemed to be UK resident. If not, you move on to the 4th and final step.
This 4th step is known as the “sufficient ties” test. Each individual has to consider the number of connecting factors they have to the UK. Against the number of ties is a scale of days spent in the UK. The fewer ties you have, the greater the number of days you can spend in the UK whilst remaining non-resident.
Rules for international workers
There are some nuances and details applying in specific circumstances that are essential to bear in mind when applying the test. This applies in particular to individuals who work on board aircrafts or ships.
If you captain a ship and spend significant time at sea, an initial glance at the test might lead you to conclude that you are working full-time outside the UK and are therefore automatically non-resident.
But the rules are clear that the full-time work overseas test does not apply to individuals whose work consists of duties performed on board a vehicle, aircraft or ship while it is traveling, if a substantial number (generally, this means at least 80 percent) of the trips are cross-border trips and at least six trips made during the year involve UK ports.
If you captain a ship that stays within the international waters of one particular country on most of your journeys, then there is a good chance you will not be treated as falling within this category, and non-residency could then be claimed on the basis of full-time work abroad.
If, though, you are caught by this category, you will need to rely on either the other automatic overseas tests (by keeping your days in the UK low), or the sufficient ties test to establish non-residency.
To counter this, you should also note that an individual in these circumstances cannot meet the automatic UK resident test of working full-time in the UK.
There are circumstances under which an individual working on board a vessel might be considered to be resident in no country. If you captain a ship which is moored in a harbour in France for the whole summer, for example, can the French rules deem you to be tax resident in France?
A lot of countries employ a very simple day-counting test in order to establish residency. In some cases this could be as low as 90 consecutive days. In France, the rules tend to be more complicated and there are several criteria which could deem you to be French resident.
Tax authorities in countries where the ship is moored for lengthy periods are likely to become more aggressive if they realize you are not paying UK tax.
It is clear that there are a number of potential pitfalls when it comes to residency when you are moving from one country to another on a regular basis. In all cases, it is best for your position to be analyzed by a professional, as the consequences of being considered resident of a particular country can be severe. In almost all cases you will become subject to tax in that country on your worldwide income.
The UK residence test will require analysis in its own right but it will also be necessary to consider the rules in other countries, particularly if you are likely to be moored up in any one location for a significant period.
The best approach is to leave nothing to chance. Know at the outset which test you are going to satisfy to be regarded as non-resident. Have a contract of employment dated when you start work that clearly states what your obligations are. Be careful you do not become resident if the boat is moored up for a period of time in one location.
Be extra careful in the first year when you tell HMRC you have gone non-resident. Keep all documentation showing where you were on particular days. Be careful about short visits to UK ports. And expect to receive a letter from HMRC when you tell them you are not taxable.
David Anderson is a solicitor with Sykes Anderson Perry Limited in London (www.sykesanderson.com). Comments on this essay are welcome at firstname.lastname@example.org