Split Year Treatment and Tax Compliance: Best Practices

Navigating tax compliance can be particularly challenging for high net worth individuals (HNWIs) who are often globally mobile, spending considerable time in different countries for work or leisure. If you’re considering a move to or from the UK, it’s important to understand the UK split year treatment, which could significantly impact your tax obligations.

This guide explores the complexities of split year treatment and highlights the importance of precise day counting. Leveraging advanced automated tools can greatly enhance compliance, optimise your tax strategy, and reduce the risk of costly errors.

Understanding UK Split Year Treatment

Split year treatment is a UK tax system determining your tax obligations if you arrive or leave the UK during a tax year. You can only apply split year treatment if you’re considered to be a UK tax resident during the year of relocation.

If split year treatment is available, then you would be:

• Taxed as a UK tax non-resident for the overseas part of the year (generally only subject to tax on UK sources of income) and,
• As a UK tax resident for the UK part of the year (generally subject to tax on your worldwide income, subject to certain reliefs).

This regime is complex but critical for strategic tax planning. It’s essential to note that the date on which you split the year is determined by law and your specific circumstances, not by personal choice.

UK Statutory Residence Test (SRT)

The UK’s Statutory Residence Test (SRT) is fundamental to split year treatment. Established on 6 April 2013, the SRT helps determine your residence status for a given tax year.

The SRT considers the time spent and, in some cases, work conducted in the UK, along with your connections to the UK.

The test is divided into five parts:

• Automatic Overseas Tests
• Automatic UK Tests
• Sufficient Ties Test
• Application of the SRT to Deceased Persons
• Split Years

There are eight ‘Cases’ under which you may qualify for split year treatment, three involving leaving the UK and five involving entering the UK.

If you meet more than one case, a priority system will determine which applies and the effective date of the split year. The split year may not necessarily begin on your actual date of arrival or departure.

Eligibility

You can only use split year treatment if you are a UK resident under the SRT for that year. Non-residents for a specific year cannot use split year treatment and are only subject to UK tax on UK-sourced income.

There is no application process for split year treatment, so consider your circumstances before filing your taxes. Keep in mind that you often need to consider your circumstances for the following tax year.

Example of Split Year Treatment on Arrival

If you arrive in the UK on 1 July 2024 and qualify for split year treatment from that date, you will be taxed as a non-resident from 6 April 2024 to 30 June 2024, and as a UK resident from 1 July 2024 to 5 April 2025. As a non-resident, you’re not liable for tax on foreign income and gains received before 1 July 2024, except as specified by anti-avoidance rules.

If You’re Not Eligible for Split Year Treatment

If you are a tax resident but ineligible for split year treatment on arrival or departure, you may use double taxation agreements to your advantage. The UK has agreements with various countries that typically limit or exclude the UK’s ability to tax pre-arrival or post-departure income.

Split Year Treatment Around the World

Split year treatment is unique to the UK, but other countries have similar frameworks for partial year residency. For example, the US has rules for part-year residence if you move to or from the country, Canada recognises part-year residency, and France applies part-year residency rules.

Double taxation agreements also influence taxation, so always consult with an advisor for compliance and strategic planning.

Common Pitfalls

The complexity of split year treatment requires careful attention to avoid common pitfalls:

• Timing: The date you arrive or leave the UK may not be the split year treatment date. The date is determined by law, sometimes differing from arrival or departure date.
• Residency Rules and Eligibility: The rules involve many layers of conditions for both the year of relocation and following tax years. The SRT includes various tests to determine residency status, and the split year treatment only applies if you’re a resident in the UK for that particular year.
• Record-Keeping and Compliance: Thorough records are crucial for compliance. Understand what constitutes a UK workday and the implications for day counting and tax residency.

The best way to avoid these pitfalls is by planning your residency carefully and seeking professional advice to navigate these complexities.

Laura Sant, Founder of LSR Partners and one of Daysium’s Founding Partners, agrees. As a result of the way that split year treatment works, you need to follow a prescriptive set of rules to obtain this treatment for each Case, and, as with the rest of the SRT, once you have broken the rules – for example, you’ve spent a day too many in the UK pre- or post-split – you cannot undo this,” she told Daysium.

She went on to highlight two examples showing the complexities of split year treatment. In the first example, Laura explains that if you moved into the UK in temporary accommodation and it took too long for you to find a home, you may end up spending too much time in the UK pre-split year treatment, leading to it being unavailable. 

“Alternatively, if you intend to break UK tax residency by means of full time work overseas and your new job doesn’t work out, you might end up needing to pay UK tax on the full amount of your overseas employment income”, Laura explains.

Laura believes that “planning can play an important part in ensuring that you know what is needed to achieve split year treatment and also to have an understanding of your options in case the worst were to happen.”

The Importance of Accurate Day Counting for Split Year Treatment

Accurate day counting is essential for determining eligibility and compliance with split year treatment rules.

Day counting is necessary to:

• Determine eligibility: The SRT relies heavily on day counting.
• Establish the split date: Precise day counts determine the split date.
• Calculate working days: Required for full-time work overseas cases.
• Avoid unexpected residency triggers: The SRT considers day counts over multiple years.

Different cases have varying day count thresholds. Accurate day counts help you and your advisory team understand applicable rules for strategic planning and compliance.

Day Counting Tools: Manual vs. Automated

Optimising day counting and record-keeping is crucial for compliance with split year treatment rules and strategic planning. Choosing the right tools facilitates your compliance journey.

Automated day counting tools offer significant advantages over manual methods. These tools save time, enhance efficiency, and reduce the risk of errors by automatically logging days. They ensure a precise day count, supporting better compliance and strategic planning. Real-time updates allow for timely decision-making and improved planning.

With an automated day counting software, you can streamline the process, ensure minimal friction and maximum security. In contrast, manual day counting tools like spreadsheets are time-consuming and prone to errors, increasing the risk of non-compliance.

Using Daysium for Accurate Day Counting for Split Year Purposes

Daysium simplifies day counting, a crucial element in managing UK split year tax rules. The platform automates the recording of days spent in and out of the UK, integrating tailored tax rulesets directly into its system. This assists you in complying with complex tax requirements.

When you use Daysium, the system automatically logs your location data and updates your day count based on the specific rules that apply to your situation, thus eliminating the need for manual tracking. This automated process ensures that your day counting is precise and aligned with your individual requirements.

For example, if you depart from the UK on 1 July at 11:20, Daysium records your departure time and location, and logs your arrival at your destination. Such detailed and timely records can prove invaluable, especially if your tax situation is reviewed or investigated.

As the scrutiny from HMRC intensifies, particularly for HNWIs, the risk of prolonged investigations grows. Efficient and accurate record-keeping, as facilitated by Daysium, can help mitigate these risks by providing reliable and timely data.

Laura Sant, a specialist in UK tax residency, emphasises the practical benefits of using Daysium for those managing split year treatment scenarios. She notes, “Once you set up your tax residency details in Daysium, the system actively monitors your UK day count, alerting you as you approach the limit.”

She further explains how the companion app aids in effortless evidence gathering: “Daysium automatically records your physical presence, removing the need to manually create travel logs. For example, it allows you to easily record evidence on a real time basis, such as a photo of you at the Eiffel Tower when your phone says you are there.”

Daysium also addresses specific situational needs: “If, for instance, your UK residence must remain unoccupied during the overseas part of your tax year to meet tax residency criteria, Daysium can help document that you haven’t visited your home during that period, using geolocation data.”

How to Strengthen Your Tax Compliance

Three key steps are vital for strengthening your tax compliance when dealing with the UK’s split year treatment:

• Seek professional advice: Tax advisors specialising in UK tax law, such as Daysium Founding Partners, can help you navigate the complex rules.
• Plan proactively: Consider split year treatment in your planning, whether moving to or from the UK.
• Create contemporaneous records: Use technology for accurate day counts and supporting evidence.

By following these strategies, you can maintain compliance and strategically plan your tax affairs.

Conclusion

Ensuring compliance with UK split year treatment rules requires meticulous planning and precise record-keeping. Using automated day counting tools like Daysium can greatly enhance accuracy and efficiency in your tax strategy. By seeking professional advice and planning proactively, you can effectively navigate the complexities of tax residency and protect your financial interests.

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