Many individuals now find themselves trapped in the UK by the coronavirus and government responses to it. The big question for them is whether this will force them into UK tax residence for 2019/20 or 2020/21. Alex Ruffel and Chloe Harbutt explore the options
We simply do not know how many people face this risk but it is enough of a concern for HMRC to have recently issued clarification of their approach.
Since 2013, the UK has used a Statutory Residence Test (SRT) to determine whether an individual is UK tax resident. The SRT sets out various ways in which an individual may meet the residence threshold, including working full-time in the UK and having specific UK ties. A key feature is day-counting. Those who wish to be non-UK resident are limited to between 16 and 182 days in the UK per tax year.
It is rare for HMRC to publicly react to world events (normally the onus on individuals to work it out for themselves) and their guidance is welcome but it is not quite as generous as it initially looks."
The SRT does contain a concession: when day-counting, individuals may ignore days (up to a limit of 60 per tax year) that are spent in the UK due to "exceptional circumstances beyond their control that prevent them from leaving."
On 23 March, HMRC issued guidance that they will accept a person's claim to discount days on the basis of exceptional circumstances if he or she:
• was quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus
• finds themselves advised by official Government advice not to travel from the UK as a result of the virus
• is unable to leave the UK as a result of the closure of international borders, or
• is asked by their employer to return to the UK temporarily as a result of the virus.
It is rare for HMRC to publicly react to world events (normally the onus on individuals to work it out for themselves) and their guidance is welcome but it is not quite as generous as it initially looks.
First, the discount is limited to 60 days per tax year and we do not know how long lockdowns will last.
Second, HMRC have made it clear that whether a person can discount days will "always depend on the facts and circumstances of each individual case". What happens if a person wants to return to their home in the Bahamas but cannot because all international flights there are suspended? Are they obliged to find another country outside the UK that will take them temporarily? There is no certain answer to this question.
In our opinion, they should be able to rely upon UK government advice against any non-essential travel. However, it is clear that anybody in this position, and anyone relying upon the other circumstances listed by HMRC, must keep reviewing whether they can feasibly leave the UK and retain as much evidence as possible (for example, invoices for cancelled flights) that they were planning to leave and how they were prevented from doing so.
Third, the exceptional circumstances rule does not apply for all SRT purposes: if a person has to work remotely while they are trapped in the UK, those days will still count when looking at whether they can claim non-UK residence because they are ‘working full-time overseas'.
Finally, an involuntary stay in the UK will present other tax issues that HMRC has not directly addressed. The most obvious is residence of companies: a foreign company that is managed and controlled from the UK is UK resident and so liable to UK corporation tax. Where a key director has remained in the UK and must make major decisions while here, there is a tax risk for that company. Where possible, decisions should be left to board members who are safely outside the UK.
There are some glimmers of light. The virus has conveniently managed to spread as one tax year turns into another, which means that individuals will have a fresh set of 60 days available from 6 April 2020. The SRT looks at whole tax years and, even if lockdowns continue until August, many people will be able to adjust their travel plans for the rest of the year to ensure that they maintain non-UK residence. Some may also qualify to split their year into resident and non-resident parts.
There will also be a disparity between those who have reportable UK income, such as income from UK property and those who do not. The first category will need to tell HMRC in their tax return that they are discounting exceptional days. However, the second will not.
The attitude of HMRC will be tested with the filing of 2019/20 returns, when claims for exceptional circumstances begin to be made. We hope that they will apply common sense and compassion.
Alex Ruffel is a partner at Irwin Mitchell and Chloe Harbutt is a trainee solicitor at Irwin Mitchell