Establishing non-residence when you live overseas and work in the UK
A number of people have commented that they've got plans to telework from overseas. This will usually involve spending some time in the UK, and some time overseas, but actually living the majority of the time overseas. The UK tax implications of this can be difficult to get to the bottom of, but as always we've had a good go!
UK tax
Firstly, irrespective of your residence position any salary that is attributable to your UK duties will be taxed in the UK. So, even if you're a non UK resident you won't be able to completely avoid UK income tax if you're working in the UK. The exception to this is if you can get relief under a double tax treaty.
The main benefit in establishing non-residence status is that you'll be exempt from UK income tax on any overseas duties.
Fiscal nomad
Some of the people leaving the UK have plans to become a 'fiscal nomad' and avoid being classed as a tax resident of any country. In principle there is nothing wrong with this, however if you're looking to lose UK tax residence by virtue of being a fiscal nomad it is much better to sever ties with the UK completely and not to have significant UK income sources or return visits.
If you are working in the UK, and have UK salary income, but cannot point to an overseas country of residence it is unlikely the Revenue will agree to non UK residence status and they may well seek to class you as a UK resident.
Non UK residence
If you're leaving the UK permanently you can usually establish non UK residence from the date of departure. There are also provisions that apply to individuals going overseas to work under a full time contract of employment. In all cases you would need to ensure that any UK days were less than 183 days per tax year and averaged less than 90 days per tax year.
If you're going to live overseas but retain a UK employment the position is less straightforward. The UK taxman will be looking to see that there is no significant ongoing connection. Therefore there should be no question that any UK property owned should be sold or let.
The existence of a UK employment is something that the Revenue will look at in detail. They require details of UK employment on both the tax return and the form P85 (the form you submit to initially tell them of your non residence status).
If you do want to establish non UK residence status whilst working in the UK you would need to show that your family has moved out of the UK, that you have moved your personal possessions outside the UK, you return to the UK solely for the purpose of employment and that you are establishing new personal and social connections overseas. As always you should also ensure that your UK visits are less than the 183 days in a tax year and average less than 90 days over 4 years.
Unless you're opting to be a fiscal nomad or live in a tax haven the chances are it will be the double tax treaty that will determine the position.
Treaty residence
Firstly you'd look to establish your residence position under the double tax treaty. Usually this would look to the country of your permanent home. So provided you'd sold or long let any UK property you should be able to establish yourself as non UK treaty resident.
How does this impact on the tax position?
Here's a typical double tax provision on employment income (in the UK/US treaty):
(1) ... salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in that other State for a period not exceeding, in the aggregate, 183 days in the tax year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and (c) the remuneration is not borne as such by a permanent establishment or a fixed base, which the employer has in that other State...
How do these impact on telecommuters?
Well, provision (1) is effectively saying that if you were resident in the US and employed in the US, you would be taxed only in the US unless you actually carried out employment in the UK (in which case part of the employment income could be taxable in the UK). In other words, it gives taxing rights to the country of residence, as well as the country where the employment was actually exercised.
Provision (2) is saying that if you were a US resident, but worked in the UK, the salary could only be taxed in the US if : (a) you were not in the UK for more than 183 days in the tax year concerned; and (b) the salary is paid by, or on behalf of, an employer who is not a resident of that the UK; and (c) the salary is not borne by an entity that has a permanent establishment in the UK (e.g. recharging the salary to a UK company). The purpose of this is to provide an exception to the general rule that employment income may be taxed in the country where the employment is exercised.
This will only be relevant where the country of residence and the country of employment/performance of duties are different.
Therefore back to our scenario -- if an individual was treaty resident overseas but worked in the UK they could avoid UK income tax on the UK employment income provided they satisfied the above conditions in respect of the UK employment (eg in the UK for less than 183 days etc). The overseas duties/income would in any case be exempt from UK income tax.
If you were treaty resident in the UK, and not overseas (eg you had your permanent home in the UK) this wouldn't apply and you'd be taxed under (1) above in the UK for the UK salary.
If there is no double tax treaty that applies you'll be back to the standard, default position. Under this you'd be subject to UK tax on the UK salary but could avoid tax on the overseas income only if they were non resident. As we've seen establishing non UK residence is more difficult but not impossible if you're retaining these types of UK ties.