taxation 31 Tax residency simplification – or is it ?


The UK Government announced its proposals for the reform of the UK’s residency law in the consultation documents issued on June 17, 2011. The intention is to replace the current regime of limited statutory tests, supplemented by case law, with a comprehensive residence test to apply from April 6, 2012, writes Teressa Compton of PwC’s international mobility team in Southampton


The timeframe for reform is tight and the proposals are complex but will offer a degree of certainty not possible under the current regime. Changes to the regime on ordinary residence and the related overseas workdays relief, as claimed by many expatriates, are also proposed.


The consultation period ended on September 9, 2011, and it is expected that the draft law will be released by the end of the year, ready for April 2012 implementation.


Current position


At present the UK’s residency law derives extensively from case law and many of the related cases date back too far to be able to apply them to the modern world. This has led to much uncertainty for taxpayers and to many disputes over residency in the Courts in recent years. Any test offering certainty and fairness is likely to be welcomed by taxpayers.


Proposed test format


The proposal is that the test itself should break down into three parts, Part A, Part B and Part C. Taxpayers who meet the conditions of Part A will be non-resident and those meeting the conditions of Part B will be UK resident. Anyone who cannot reach a definite conclusion from these two sets of rules, or who potentially falls into both sets of rules, will be subject to further tests in Part C to arrive at a definite conclusion as to their resident status. The proposal suggests that few taxpayers will be subject to the more complex tests set out in Part C of the proposals, although we anticipate they may still affect a significant number for whom their UK tax resident status is material.


Challenge for employers


The challenge for employers, with such a tight timeframe and no transitional rules, will be


as non-UK resident possibly on a No Tax (NT) coding, when in fact under the proposed new rules they are regarded as having remained ’connected’ sufficiently to be regarded as UK Resident and probably liable to UK PAYE taxes? What about business visitors to the UK, are these business visitors regular, could they potentially be considered UK resident if they have not retained a home outside the UK. As an employer these are only some of the questions to be considered in a short space of time. HMRC have always been interested in internationally mobile employees, but the new tests will allow HMRC greater scope for determining who is UK resident and therefore liable to UK taxes.


understanding the proposed changes so that, as an employer, they are able to identify where there may be a risk exposure, or additional costs. For example, do employers understand the movements of their workforce enough to be able to identify whether or not they have any employees currently regarded


Patent Box – what’s the opportunity?


The Government intends to introduce a Patent Box to provide an additional incentive for companies in the UK to retain and commercialise existing patents and develop new patented products, writes Jane Mulholland of PwC. This in turn should encourage companies to locate high-value jobs in the UK


To do this, it is proposing a 10% corporation tax rate on net profits attributed to patents granted by the UK Intellectual Property Office and the European Patent Office from April 1, 2013 onwards. This is estimated to save UK companies around £1 billion a year.


The Patent Box relief should be applicable to any current, as well as new, UK or EU patented products. It is important to apply for patents at the earliest opportunity to maximise the benefit of this tax relief, as a patent will only qualify for the 10% relief from the date of grant. However, a company will be able to claim Patent Box relief


retrospectively for any income which arises between the patent application and the date of grant for up to four years prior to grant.


To qualify a company must be actively involved in the development and exploitation of the patented technology. A company need only have one patented and UK-managed invention underpinning a product or service for the entire turnover to be within the Patent Box scheme. In some cases, the benefit may also apply to income from patent licensing and profits made through the use of a patented process, as well as products. A formulaic


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2011


Overall, a statutory residency test is to be welcomed, but some aspects of the proposals are concerning and the timeframe for the proposed rule change to be effective is extremely tight. Interesting times definitely lie ahead.


Details: Teressa Compton 023-8033-0077 teressa.compton@uk.pwc.com


conflicting patents first. Also, companies should now be looking at whether any existing unpatented technology underpinning a product, can be updated so that any improvements can be patented and the net profits from the product included within the Patent Box scheme.


Companies should consider the impact of the Patent Box when negotiating any new contracts from R&D collaborations with third parties to ensure that they will be able to claim the 10% Patent Box tax rate on future profits.


approach is proposed to calculate the net profit attributable to patents, but an allocation based on transfer pricing principles will also be allowed.


Early application for patents is important, to ensure that others who may be working on similar technology do not file for


www.businessmag.co.uk


Details: Jane Mulholland 023-8083-5072 jane.l.mulholland@uk.pwc.com


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