Residence status – tax implications

When completing tax returns, company or individual, you must take into consideration the tax residence rules, to determine which jurisdictions you will be taxed in. Below is a discussion of the rules according to the UK and IOM tax authorities.

When are you considered to be a resident for tax purposes?

Individuals

Residence rules for individuals are based generally on physical presence of the individual in a country for a stipulated period time. In general, both the UK and IOM tax authorities consider a person to be tax resident if they reside in that country for 6 months or more in a tax year (which runs from the 6th April to 5th April). There is an additional criterion; you are considered a tax resident if your main home is in the UK/IOM and you spent at least 3 months there in the tax year. Therefore, tax residence is not based on citizenship. If you were born in the UK but moved to the IOM, then you are considered to be an IOM tax resident if your meet the criteria above.

It is however possible to be tax resident in more than 1 country, for example if you meet tax residence rules in both countries. If this is the case, then you may be considered by each of those countries under a “double taxation agreement” which basically avoids you being charged tax twice. The double taxation agreement is between tax authorities in 2 different countries which states which country should charge you tax.

Companies

For companies, the place of incorporation is usually the basis for tax residency. If a company is incorporated in the IOM, then it is an IOM tax resident. However, it is possible that a company can be incorporated in the IOM but be considered e.g. a UK tax resident. This is the case if the company’s business and operations are mainly done from the UK taking into account where most of its employees, directors, customers and suppliers are based, and where the main office are located. This is considered a major topic especially in the UK, as the tax authorities enforce rules to limit tax avoidance for companies who intend to take advantage of the IOM’s tax haven status by incorporating in the IOM but doing business in the UK. In such a case, because the IOM and the UK have a double taxation agreement, the company would not need to declare any income the IOM tax authorities as it will be taxed in the UK.

The above example shows that a company can be tax resident in 2 countries, however due to the existence of double taxation agreements between these 2 countries, it will only be taxed in 1 of the countries.

What are the tax implications of tax residency status?

UK and IOM authorities tax both individuals and companies on a world-wide income basis, which means that if e.g. you are tax resident in the IOM, you will be taxed in the IOM on all the income you earn world-wide. So, if you also earn some income in the UK, you will be taxed by IOM tax office and you will not be charged tax by HMRC as you are not tax resident in the UK.

There is however an exception to the world-wide income rule, and this relates mainly to property income. If you are an IOM tax resident but you own property in the UK which you rent out and receive rental income from, then this income is taxed based on where the property is situated i.e. in the UK and therefore ignores the tax residency rules of the individual or company.

For dual tax residence, double taxation agreement are used to determine where the resident should be taxed. The IOM and UK have double taxation agreement with each other and with many countries. However, if this agreement does not exist, then the resident is usually allowed to offset the tax liabilities or to claim tax back by correspondence with the tax authorities. So, the onus lies on the taxpayer reaching out to make some sort of any agreement so as to avoid paying twice.

What can Invicta do for you?

As registered tax agents for both HMRC and the IOM tax office, we provide tax services which allow us to perform tax computations for you to calculate the correct tax amount due or receivable. We are a team of experienced accountants with detailed knowledge of tax rules for both the UK and IOM, and we are in a position to interpret the rules in order to compute the right tax amounts for you. We will act on your behalf removing the possibility of incorrect interpretation of the rules.

Call Invicta Accounting on 01624 672358 or emails us at info@invicta-accounting.com for assistance.