Statutory residence

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This month’s technical corner article comes from Emily Deane TEP, STEP Technical Counsel.

Emily Deane

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STEP alongside the Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants of England and Wales (ICAEW) is urging HMRC to make its policy on tax residence during the COVID-19 pandemic more flexible, following continuing concerns that individuals who normally live abroad will inadvertently become UK-tax-resident because they are stranded in the UK. The professional bodies have been in dialogue with HMRC since August 2020 to try and resolve these issues which are being exasperated by lockdowns.

The statutory residence test already contains an exception that allows days spent in the UK due to exceptional circumstances to be disregarded and HMRC has provided guidance on its interpretation of that exception in the COVID-19 emergency. However, there are still two fundamental issues:

  • The exception is limited to 60 days but the pandemic has prevented foreign travel for many more days than that in the current tax year. Many foreign individuals who have followed government travel advice have been unable to return to their home country before the limit expired.
  • The exceptional circumstances exemption does not apply to all parts of the statutory residence test where day counting is relevant and HMRC invokes a ‘work tie’ criterion instead. Many individuals stranded in the UK are required by their employer to work remotely and will have a work tie if they work in the UK for more than three hours on at least 40 days. This reduces the number of days that they can spend in the UK before becoming UK-resident. Other factors determining tax residence include family ties or homes in the UK.

UK residents that normally work overseas, such as airline staff, are likely to be casualties of the latter problem, especially if they have lost their jobs because of the pandemic and cannot pay unexpected UK tax bills. For company directors, there is an extra danger that an inability to return home might even make the company UK-tax-resident by the ‘central management and control’ test for corporate residence, although this might be eased where the two relevant countries have a double taxation agreement.

STEP is disappointed that the government has not provided any concessions to individuals stranded in the UK as far as tax residence is concerned. Given the continued lockdown and advice against non-essential travel, the existing statutory 60-day disregard for exceptional circumstances is clearly inadequate and, in any event, applies only to certain specified parts of the residence test. The result is that some people will have become tax resident in the UK due to circumstances beyond their control, generating potentially significant additional tax liabilities.

The UK government believes that its existing residence rules strike a reasonable balance, although it has already relaxed the rules in certain cases such as in April 2020 when it relaxed the test for foreign persons moving to the UK to work on coronavirus-related activity so that periods between 1 March and 1 June 2020 spent in the UK would not count towards the residence test.

STEP, CIOT and ICAEW will continue to discuss these outstanding issues with HMRC to try and reach an equitable resolution.

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