The Statutory Residence Test was introduced by the HMRC to determine tax residency status for persons associated with the UK.
The Statutory Residence Test, while challenging, is vital when it comes to understanding your UK tax status and can mean that your worldwide income is taxed in the UK. Failure to comply with the rules for declaring and paying income tax can lead to fines and penalties.
If you qualify for a UK tax resident, you will be taxed on your worldwide income, unless your permanent residence is overseas. It includes:
- Wages, if you're employed abroad;
- Foreign investments and savings interest;
- Income from a foreign property;
- Income from pensions held overseas.
But what if I have already paid my overseas income tax?
You can claim a foreign tax credit deduction when you declare your foreign income on your self-assessment tax return.
The tax credit you receive depends on the double taxation treaty between the UK and the country of origin of your income. You can usually get relief even if there isn’t an agreement. This is called a Unilateral relief; Foreign Tax Credit relief is usually granted on the basis of the lower of the actual tax suffered and the equivalent UK tax on the same income.
To determine your UK tax status when taking the Statutory Residence Test, you must consider the following factors:
- Part A – factors which will conclusively determine when someone isn't resident for UK tax purposes.
- Part B – factors which will conclusively determine when someone is resident for UK tax purposes.
- Part C – will apply only to those with more complex affairs who cannot conclusively determine their status under Part A and Part B, using various connections with the United Kingdom to live the position.
These connections, known as “UK ties”, are then compared with the amount of time spent in the UK to determine if the UK tax residence exists.