x Abu Dhabi, UAEMonday 22 January 2018

Changing tax law might put your income at risk

The tax breaks offered by most countries to their expatriate nationals depend principally on an individual's non-resident status.

A few years living and working in the UAE can do wonders for your bank account - assuming, of course, that you have retained your job during the current world economic crisis and, simultaneously, managed to avoid losing your shirt in the local property market. While you probably spend more on "quasi-taxes" such as speeding fines and car park tickets than you ever thought possible, at least you do not have to pay UAE income tax on your earnings.

And, if you are sensible enough to have arrived here from anywhere except the US, you are probably enjoying generous concessions from your domestic tax-collecting institutions. The tax breaks offered by most countries to their expatriate nationals depend principally on an individual's non-resident status, and though this article focuses on the issue of non-residency as it applies to UK expatriates, I strongly advise you to consult a tax specialist who is familiar with your unique set of circumstances.

If you are UK non-resident, for example, you pay no UK tax on the income that you earn from overseas employment nor from your foreign investments, though you are liable for tax on the income that arises from UK sources, such as rental income. This is a generous tax break and explains why there are so many Brits in this part of the world - amazingly, neither the UK nor the UAE governments seek to tax your local earnings.

But to qualify for this tax break, you must convince Her Majesty's Revenue and Customs (HMRC) that you are, indeed, a UK non-resident. And, sinisterly, there is recent evidence to suggest that this will be more difficult to achieve than it has been in the past. In the UK, there is no formal legal definition of "residence". HMRC's practice, based mainly on court decisions, is to regard you as resident in the UK during a tax year if you spend 183 days or more in the UK during that year or if you have spent more than 90 days per year in the UK averaged over the previous four years.

However, it is important to remember that these rules have no statutory force and are for guidance purposes only. To establish UK non-residence, you need to show that you have left the UK permanently (for at least three years), or for a settled purpose, such as education or employment. Additionally, any UK visits must average less than 90 days per year, as noted above. A recent court case - Grace vs The Commissioners for HMRC - demonstrated how easy it is to fall afoul of these non-residency requirements.

Mr Grace is a long-haul pilot for British Airways who claimed, after a period of living in the UK, that he had relocated to his native South Africa and was now commuting to the UK for his work while resident in South Africa. Although he had bought a house in South Africa, had significant ties there and had satisfied the 90-day rule, he was judged still to be UK resident and therefore liable for income tax on his salary.

The factors that influenced the court's decision were: * he retained a house in the UK; * he was on the electoral roll in the UK as a resident; * mail was sent to him at his UK address; * he kept a car in the UK; * he had a UK bank account into which his salary from British Airways was paid; * he was registered with a dentist in the UK; * his ex-wife and daughters lived in the UK - but he had had no contact with his children for more than 30 years; and

* he was a member of the professional body of the British Airline Pilots Association. This court decision confirms that a UK tax resident is unlikely to be classified as a UK non-resident unless there has been a break in his or her pattern of life. Another case - Robert Gaines-Cooper vs HMRC - looked at the method of calculating the 90-day average. Previously, HMRC accepted that both the days of arrival and departure could be ignored. A common practice, especially among UK eurocrats in Brussels, was to arrive in London on a Friday and depart on a Sunday. This would then be counted as one day spent in the UK.

The commissioners disagreed, arguing that the number of nights spent in the UK was more important. In the above example this would mean two days spent in the UK, not one. Mr Gaines-Cooper had used the arrival/departure rule to claim that he had spent fewer than 90 days in the UK, but he was outmanoeuvred by the commissioners. Interestingly, Mr Gaines-Cooper had been a tax inspector himself, so there was not a lot of sympathy for his cause.

New legislation that went into effect on April 6, 2008 stipulates that any day you are present in the UK at midnight will be treated as a day spent in the UK for the purposes of the 90- and 183-day rules. The key point is that you have to establish residence overseas. Only then does the 90-day rule come into the picture. If, however, you've never really left the UK you will remain UK resident, whether or not you pass the 90-day test.

This article refers to UK non-residency as it applies to UK income tax liability, and does not deal with capital gains tax or inheritance tax, which are governed by an entirely different set of rules. It is also important to realise that I am a financial planner, not a tax expert. If you are concerned about your status, you should seek advice from a tax professional. Finally. as stated above, most countries give similar tax breaks to their citizens when they move overseas to work.

The major exception is the US, which does not accept the notion of non-residency. Its citizens remain liable for income tax no matter where they live, though they do get a tax-free allowance, which currently stands at US$87,600 (about Dh322,000) and rises in line with cost of living increases.

Bill Davey is a financial adviser at Mondial-Financial Partners Dubai. Write to him at bill. davey @mondialdubai.com