The founder who travels is the hardest residence case in British practice, and not because the law is unclear. It is unclear only to the person applying it from memory. The statutory residence test in Schedule 45 to the Finance Act 2013 is a mechanical test with defined inputs, and it produces a determinate answer for a given set of facts. The difficulty is that the founder’s facts are unusually rich, and the test is unusually sensitive to facts that have nothing to do with days.
The habit that causes the damage is the belief that residence is a day count with a single threshold. There is such a threshold, and almost nobody who takes advice is near it. Everything of consequence happens below it, in a part of the test where the number of days that will make a person resident depends on how many connections that person has to the United Kingdom, and where those connections are defined by statute rather than by impression.
The order in which the test is applied
Schedule 45 has a fixed sequence and it cannot be entered in the middle. The automatic overseas tests are considered first. If one is met, the individual is not UK resident for that year and nothing further is considered. Only if none is met are the automatic UK tests considered, and only if none of those is met does the sufficient ties test apply.
That ordering matters commercially because the automatic overseas tests are the only ones that produce certainty in advance. There are five of them, and the last two apply only where the individual dies in the year. The first is that the individual spends fewer than 16 days in the UK in the year, where they were UK resident in one or more of the three preceding years and do not die in it. The second is that they spend fewer than 46 days, where they were not resident in any of those three years. Both are mechanical and neither depends on the individual’s work, home or connections.
The third is the full-time work abroad test in paragraph 14, and it is the one that a founder can realistically use. It requires the individual to work sufficient hours overseas across the year, to have no significant break from overseas work, to have fewer than 31 days in the year on which more than three hours’ work is done in the UK, and fewer than 91 days spent in the UK, counting for that last limit only days that are not treated as spent here by the deeming rule.
What sufficient hours overseas actually means
Paragraph 14 does not say thirty-five hours a week, although that is how it is universally described. It sets out a five-step calculation which disregards days on which more than three hours’ work is done in the UK, computes net overseas hours, establishes a reference period, and divides. The test is met where the answer is 35 or more.
The consequences of the mechanism are not intuitive. Days worked in the UK are stripped out of the numerator before the average is taken, so UK working days hurt twice: once against the fewer than 31 day limit and once by reducing the overseas hours available to reach the average. A founder who spends three heavy weeks in London on a fundraising round has not merely used up a quarter of the UK working day allowance; the hours worked in those weeks are excluded from the overseas total altogether.
The significant break rule compounds it. Paragraph 29 provides that there is a significant break from overseas work if at least 31 days go by and not one of them is a day on which more than three hours’ work is done overseas, or on which the individual would have done so but for annual leave, sick leave or parenting leave. A founder between raises, on sabbatical, or recovering from illness outside the categories protected by the paragraph, can break the test without going near the United Kingdom.
The automatic UK tests, and the one people forget
If no overseas test is met, four automatic UK tests are considered, the fourth of which applies only where the individual dies in the year. The first is spending at least 183 days in the UK in the year, and it is the number everybody knows and almost nobody reaches.
The second is the home test, and it is the one that catches founders. It applies where the individual has a UK home in which they are present on at least 30 days in the year, and there is at least one period of 91 consecutive days which occurs while they have that home, at least 30 days of which fall in that year, throughout which they either have no overseas home or have overseas homes in each of which they are present on fewer than 30 days in the year, or a combination of those two conditions. A founder with a London flat used intermittently and no fixed base abroad, or a base abroad which is a hotel rather than a home, can meet this test on far fewer than 183 days in the country. The Schedule excludes from the meaning of home somewhere used periodically as nothing more than a holiday home or temporary retreat.
The third is the full-time work in the UK test, which looks at a 365 day period with sufficient UK hours worked, no significant break, more than 75 per cent of the days on which more than three hours’ work is done being days worked in the UK, and at least one day falling in both that period and the tax year on which more than three hours’ work is done in the UK. Note that the period is 365 days rather than the tax year, so it can straddle two years and be established by a run of work either side of 5 April.
The ties, and how few days they buy
Where nothing is automatic, the sufficient ties test decides. The ties are defined by statute and each is a factual condition rather than a matter of degree.
The family tie exists where there is a relevant relationship with a UK resident, being a spouse or civil partner not separated, a person the individual lives with as if they were a married couple or civil partners, or a child under 18 seen in the UK on 61 or more days. The accommodation tie exists where a place to live in the UK is available for a continuous period of at least 91 days and at least one night is spent there, and that becomes at least 16 nights where the accommodation is the home of a close relative. The work tie exists where the individual works in the UK for at least 40 days on which more than three hours’ work is done. The 90 day tie exists where more than 90 days were spent in the UK in either of the two preceding tax years. The country tie, which counts only for those resident in one or more of the three preceding years, exists where the UK is the country in which the individual meets the midnight test for the greatest number of days.
The tables then convert ties into days. For someone resident in one or more of the three previous tax years, at least four ties make them resident at more than 15 but not more than 45 days, at least three at more than 45 but not more than 90, at least two at more than 90 but not more than 120, and at least one at more than 120. For someone not previously resident, all four ties are needed at more than 45 but not more than 90 days, at least three at more than 90 but not more than 120, and at least two at more than 120.
Two rules that break the arithmetic
Days spent in the UK are counted on the midnight test: the individual has spent a day in the UK if present here at the end of the day. That is the rule founders plan around, by flying out in the evening. It has a narrow exception for transit, where the individual only arrives as a passenger, leaves the next day, and does nothing between arrival and departure that is to a substantial extent unrelated to their passage. HMRC’s guidance on transit days sets the limit of it: only the day of arrival is removed, and the departure day can still count under the deeming rule.
The deeming rule exists to stop exactly that. Paragraph 23 provides that it applies where the individual was UK resident in one or more of the three previous tax years, has at least three UK ties for the year, and is present in the UK on more than 30 days without being here at midnight. Once it applies, qualifying days beyond that threshold count even though no midnight was spent in the country. It carries an exception in paragraph 23(5), repeated in HMRC’s guidance on the deeming rule: deemed days are ignored in deciding whether the three tie condition that triggers the rule is met, the 90 day tie being the case the Schedule spells out, so it cannot bootstrap itself. A founder commuting into London for the day, repeatedly, on a three-tie profile, is accumulating days on a basis that does not appear in any flight record.
The second is exceptional circumstances. Days spent in the UK because of circumstances beyond the individual’s control which prevent them leaving may be disregarded, and the Schedule itself gives national or local emergencies such as war, civil unrest or natural disasters, and sudden or life-threatening illness or injury, as examples of what may be exceptional. The relief is capped at 60 days in each tax year, the individual must intend to leave as soon as circumstances permit, and it does not apply to every day counting test in the Schedule. HMRC lists the tests where exceptional circumstances cannot be taken into account, among them the home test, the family, accommodation, work and country ties, and the deeming rule, and separately the rules where they can be taken into account, which include the sufficient ties tables and the 90 day tie. It is a narrow safety valve and not a plan.
Building the record while the year is running
Everything above is evidenced or it is not established. What the file needs is a day by day record of location at midnight, a record of hours worked and where, and a record of the availability of any UK accommodation with the dates it was available rather than the dates it was used.
In one mandate we reviewed a founder who had been advised to keep below a day threshold and had done so precisely. The exposure came from two places nobody had recorded. A property held through a company had been available throughout the year and gave an accommodation tie, availability under the Schedule not requiring any estate, interest or legal right to occupy. And the founder had been present in the UK on more than 30 days without staying overnight, which on a three-tie profile brought the deeming rule into play. The day count in the diary was correct and the conclusion drawn from it was wrong.
The lesson is that the inputs to this test are not the ones a travelling founder naturally tracks. Flights and hotel bookings answer the midnight question. They say nothing about hours worked, about what accommodation was available, or about where a child under 18 was seen and on how many days.
What this means for a European relocation
A founder moving operations to the Netherlands, Ireland or anywhere else in Europe is usually solving for the destination first, and the destination test is generally simpler. The British side is what determines whether the move produced anything, and it is decided by the sequence in Schedule 45 rather than by where the founder feels resident.
The practical conclusion is that the objective should be an automatic overseas test rather than a favourable position under the ties. An automatic test is binary, is provable from records the founder can control, and does not move when a spouse’s plans change or a flat is retained. A position that depends on holding a tie count steady is a position that has to be monitored every year and that can be lost by a decision nobody thought was a tax decision. Split year treatment, where it is available, affects how the year of departure is divided, not whether the test is met.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.