Covid-19 and the measures which have been introduced globally to delay its transmission have disrupted travel plans and marooned individuals who are unable to move freely between countries, and in many cases unable to return home.
Where an individual or a loved one tests positive with Covid-19, tax will be the last thing on everyone's minds. However, the financial impact of Covid-19 is a sting in the tail of the virus, which is likely to be felt for some time. For individuals temporarily marooned in the UK, who were committed to managing their UK presence to avoid becoming UK tax resident, unexpected days spent in the UK could bring an unexpected tax bill.
Since 2013, the UK's statutory residence test ('SRT') has been used to determine whether an individual is tax resident in the UK. The SRT takes into account various factors but focuses heavily on the number of days an individual can spend in the UK. Broadly, an individual spending fewer than 16 days in the UK in the tax year (6 April to 5 April) or 46 days if not UK resident in one of the preceding three tax years, will be conclusively non-UK tax resident. If the threshold of 183 days in the UK is reached in the tax year, the individual will be conclusively UK resident. Between those ends of the spectrum, an individual's 'UK Ties' will determine how many days he may be present in the UK (being a number less than 183) before he is treated as UK tax resident.
Why does it matter?
Tax residence can be important for a number of reasons:
- UK tax residence brings an individual's worldwide income and gains within the scope of UK tax unless the remittance basis (if available) is successfully claimed.
- In the long term it can also impact on an individual's domicile position which primarily affects his exposure to UK inheritance tax.
It can affect those who are currently non-resident too:
- it may mean they are taxed on income or gains triggered in previous tax years when they were non-resident, under the 'temporary non-resident' rules.
- It can affect the number of days they might be able to spend in the UK during the next tax year.
- It can extend the 'deemed domicile' tail further.
Covid 19 – Exceptional circumstances
As a rule, we recommend that an individual who needs to manage the number of days spent in the UK works out the number of days they can spend in the UK before becoming UK tax resident and then excludes at least 14 days from this total for unexpected visits to the UK for family, business or health reasons. However, the travel restrictions imposed as a result of Covid-19 and the varied approach taken by different jurisdictions, may mean that this safety margin of 14 days is insufficient.
The SRT provides a statutory relief which may be used to exclude from an individual's UK day-count any day as a result of 'exceptional circumstances beyond the control of the individual which prevents him from leaving the UK.' The number of 'exceptional' days is limited to 60 days in the tax year. We have seen many enquiries from clients in recent days, concerned about how HMRC will interpret these exceptional circumstances.
On 19 March 2020, HMRC confirmed that if an individual were to find himself in the following circumstances due to Covid-19, it will be considered 'exceptional' for the purposes of obtaining the relief.
1. quarantine or advice by a health professional or public health guidance to self-isolate in the UK as a result of the virus
2. receipt of official Government advice not to travel from the UK as a result of the virus
3. inability to leave the UK as a result of the closure of international borders, or
4. a request is made by the individual's employer for his temporary return to the UK as a result of the virus.
Unpacking the guidance
HMRC's guidance is clearly welcome, but there are still a number of concerns for individuals in the UK.
- 'Public health guidance' is currently to self-isolate for 14 days if a person with whom you have had contact becomes infected. Would this mean that an individual would obtain the relief for this 14 day period, but otherwise be expected to leave the UK immediately once this period has expired? Even in circumstances where the individual has been recently bereaved or a loved one is unwell?
- What if an individual can freely leave the UK, but may not be admitted by the country to which he is travelling due to that country's Covid-19 response? It is hoped that HMRC would still consider this to be 'exceptional circumstances beyond the individual's control.
- Retired medical professionals called to return to the UK by the NHS will be helped by point 4 of the guidance (assuming that 'employer' is interpreted widely to include new employees or those who have retired).
HMRC will consider cases individually, which ultimately means that the position for taxpayers is uncertain.
Our overriding concern at this stage is what if 60 days is not enough? HMRC should update its guidance if the crisis looks set to continue beyond 60 days into the new tax year and particularly if the UK goes into lock-down.
We can assist you by calculating the number of days spent in the UK making reference to exceptional circumstances. Further, a claim to exclude days for exception circumstances can only succeed if you leave the UK as soon as you are able.
Some problem areas
Working whilst delayed in the UK
Individuals working whilst marooned or quarantined in the UK could face increased risk of inadvertently becoming UK tax resident in a number of different ways – for example, because they are treated as working full time in the UK or because they inadvertently acquire a work tie.
The precise formula in each situation is complex, and advice should be taken to ensure calculations are accurate. If you think you are in danger of breaching a threshold, we can help you to determine your position and provide guidance as you attempt to find ways to "work around" the situation.
Only home is in the UK
There is also a risk that an individual will become automatically UK resident if there is a 90 day period where he only has a UK home and does not spend 30 days in his overseas home in the tax year. We are nearing the end of the 2020-2021 tax year so this is unlikely to apply in relation to 2019-2020 but as we reach 6 April 2020, it will be important to review this rules carefully, as it is an easy trap to fall into. This is a very complex area of the SRT which is often overlooked.
Overseas employer – employee is marooned or quarantined in the UK
Where an employee of an overseas company is working remotely whilst trapped in the UK, a host of unexpected issues can arise:
- Depending on how long it lasts, this can trigger UK income tax for the individual and PAYE obligations for the non-resident employer.
- The non-UK company could be treated as carrying on a trade in the UK which is subject to UK tax.
- If the individual is a director of the overseas company, it can even have the effect of making the non-UK company UK tax resident and subject to UK corporation tax on their worldwide income and gains. Ultimately, the position is decided by HM Revenue & Customs taking into account all the circumstances at the time, which ought to include the exceptional circumstances disrupted travel or being quarantined in the UK but the present situation is, of course, unprecedented.
Remittance basis users
It is likely that remittance basis users who rely on their UK source income to fund their lifestyle in the UK will be hit by the financial issues linked to Covid-19. It is expected that UK rental income and dividends from UK source investments will be lower than anticipated in the short term and remuneration from UK employment may also be affected. Therefore, thought should be given to whether additional funds will be required in the UK, and the most tax efficient manner in which those funds can be made available.
If you need advice on any of the areas covered by this article, please contact us urgently. For taxpayers whose residence position is finely balanced or who have become trapped in the UK, it will be important to react quickly to avoid prejudicing their tax status.
In accordance with our business continuity planning, our fee earners are working flexibly in a number of locations to support our clients at this uncertain time.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.