The impact of the COVID-19 pandemic on travel to and from the UK has resulted in individuals having to remain in the UK for longer than intended, and in many cases for significantly longer than anticipated at the outset of the pandemic.
This can have unintended consequences in terms of UK residence and may create a UK tax liability as a result. Even where no ultimate UK tax liability arises due to the additional presence in the UK, a filing requirement or need for a formal claim may arise in order to take advantage of the reliefs available and to secure the optimal position.
As the UK removed domestic restrictions on 19 July and international travel options have started to open up, we take a look at the key issues that are facing our clients.
Potential consequences of inadvertent UK tax residence
The Statutory Residence Test (SRT) sets out how a person’s UK tax residence is determined. For individuals who do not satisfy one of the automatic overseas tests or automatic resident tests, residence is determined based on the number of ties that person has and the number of days they spend in the UK in the tax year.
In counting days present in the UK those resulting from exceptional circumstances can be ignored subject to a maximum of 60 days for some (but not all) parts of the SRT. Exceptional circumstances normally apply when the individual has no choice concerning the time they spend in the UK, or in returning to the UK, and where the situation is not under their control. HMRC guidance for many years has provided examples of a sudden life-threatening illness or injury to the individual or a spouse, partner or dependent child, or local or national emergencies such as civil unrest, natural disaster or the outbreak of war.
Further HMRC COVID-19 specific guidance confirms that the following reasons will be considered as exceptional circumstances for individuals spending time in the UK as a result of the pandemic:
A specific and limited exception has also been introduced for medical or healthcare professionals and scientists who have been present in the UK for purposes connected to the detection, treatment or prevention of COVID-19.
Such individuals can ignore any days in the UK between 1 March 2020 and 1 June 2020 inclusive provided they are resident in another country in that tax year. These days do not count towards the 60-day exceptional circumstances limit.
Despite representations from various professional bodies that – as the impact of the pandemic has now been felt here in the UK for well over a year – the 60-day limit is inadequate. The government has made clear that the limit is set in law and it has no intention to amend the law.
Given the duration of the pandemic and various lockdowns, large numbers of people will have been stuck in the UK for all or most of the year ended 5 April 2021 through no fault of their own. This includes many of our clients who, in normal circumstances, will have been carefully managing their days in the UK to avoid becoming UK resident under the SRT. While each individual’s circumstances will be different, even after disregarding up to 60 days of presence in the UK due to exceptional circumstances, many people are likely to have exceeded one of the day limits in the SRT and will be treated as UK resident for that year.
With some international borders now reopening, those individuals wishing to leave the UK for their home country may possibly be able to do so relatively soon, being quite early in the new tax year. A claim for relief for exceptional circumstances of up to 60 days may therefore be appropriate. This will reduce the remaining days of presence in the UK in the current year below the SRT limits in order to avoid UK residence for the current year. Claimants should bear in mind that the 60 days is the permitted maximum. A claim for exceptional circumstances for someone unable to leave the UK on 6 April 2021 would cover the period from that date only until circumstances change and they were able to leave the UK, even if they did not do so immediately. It is therefore important to monitor the guidance from the government and relevant authorities and not to delay leaving the UK once travel to your chosen destination is permitted.
Where an individual is unexpectedly UK tax resident, this does not necessarily expose their worldwide income and capital gains to UK tax. They may also remain tax resident in their home country by reference to that country’s domestic law. Where this is the case and there is a double tax treaty between the two countries, it is necessary to refer to the tie-breaker rules in the treaty to determine where the individual is treated as resident for the purposes of that treaty.
While individual circumstances will differ, often it will be the case that the treaty tie breaker awards treaty residence to the home country rather than the UK, particularly where the individual’s personal and economic ties are closer with the home country, and they were intending to be visiting the UK only temporarily before being prevented from leaving the UK.
It is therefore important for the tax advisers in both jurisdictions to work together to ensure that parallel filings are made in each country and that agreement is reached as to which country has primary taxing rights.
While exceptional circumstances relief will not apply to days worked in the UK for the UK workdays tests in the SRT, HMRC has confirmed that it will not seek to tax employment income relating to days worked in the UK by a non-resident employee due to COVID-19 imposed restrictions.
However, this is a narrow relief as it will only apply to earnings for the period from the day the non-resident intended to leave the UK to the date they eventually left, if the income is taxable in the individual’s home country, and they left the UK as soon as they possibly could.
HMRC will require evidence in support of a claim to exclude days of presence in the UK due to exceptional circumstances or earnings of a non-UK resident relating to UK workdays. We would therefore recommend obtaining and retaining all relevant documentation in support of a claim, including (where appropriate):
We will be able to review your individual circumstances and advise you on: