Jonathan Schwarz, Barrister, Temple Tax Chambers. Visiting Professor King’s College London.
The slender majority referendum vote in favour of the UK leaving the EU has raised questions of tax residence and domicile in a dramatic way.
If the UK proceeds to give notice under TFEU Article 50, British citizens resident in other EU Member States and other EU nationals resident in the UK, shorn of their EU rights, may well find themselves compelled to move. Some politicians have indicated a willingness to use these people as a bargaining chip in negotiations, but, even if that does not materialise, the impact of the loss of the rights that European citizenship offers British subjects, and the loss of EU rights in the UK for other EU nationals, may give rise to population shift. This may increase if the predicted economic slowdown means that UK residents move abroad in search of employment and business opportunities.
The Statutory Residence Test (SRT) can produce a straightforward outcome for individuals who are able to organise their lives around the test’s mechanical rules. Individuals who don’t have control over their arrival and departure times or who need to work in two States during the transition, or who have difficulty selling their homes, or have children who need to finish a school year, will find the rules more challenging to navigate. More cases of dual residence are likely, with an increased need to look to Article 4 of the UK’s tax treaties with other Member States to resolve the problem.
These individuals will also find a customs border when moving household effects and personal property if they relocate to or from the UK with customs procedures with duties and VAT potentially payable in a way that only applies to movements out of, or into, third countries. Special rules apply to individuals who relocate their ‘normal place of residence’. Will the UK now want to have its own independent residence test for such movements?
Domicile of individuals will be influenced by Brexit. For example, it may be difficult to maintain an intention remain in a State that is sufficient for a domicile of choice. Returning British citizens may well reacquire UK domicile as a result of the loss of EU citizenship rights. Questions of domicile where only limited immigration rights are available are likely to become more common.
EU law on social security distinguishes between ‘residence’ (the place where a person habitually resides) and ‘stay’ (temporary residence) both for purposes of contributions and benefits. Cross-border workers post-Brexit will not benefit from the EU Social Security directive to prevent double contributions and will need to look to the old concepts of residence and ordinary residence to determine their UK National Insurance contributions liability. Ordinary residence has been abolished for tax purposes but will apply to NICs and the SRT does not apply to NICs either.
Corporate migration is likely to become more challenging where UK companies no longer benefit from the EU fundamental freedoms. BEPS Action 2 proposals on addressing dual residence of companies and other legal persons will give greater discretion to HMRC to decide whether companies have successfully changed residence to or from the UK, unfettered by the constraints of EU free movement and establishment rights.
Jonathan Schwarz FTII is the author of Booth and Schwarz: Residence, Domicile and UK Taxation (19th Edition) which publishes in October in print and e-pub versions: http://www.bloomsburyprofessional.com/uk/booth-and-schwarz-residence-domicile-and-uk- taxation-9781784513825/