The coronavirus crisis could have tax implications for individuals as regards their residency, whether caught stuck in the UK or abroad.
Experts from accountants RSM have addressed these two issues: whether covid-19 travel restrictions could affect your tax residency or what happens if you’re a UK resident caught in another tax jurisdiction.
Could covid-19 travel restrictions affect your tax residency?
Alex Foster, partner, private client at RSM says: “The current restrictions on international travel could mean that people inadvertently fall foul of residency rules for tax and find themselves in the UK tax net.
“In the UK, the statutory residence test which determines whether an individual is UK tax resident is largely dependent on days spent in or outside the UK.
“If a person ends up spending either more days or fewer days in the UK than they intended, this could have a major impact on how they are taxed both here and abroad. They could either be treated as resident (if they are required to stay in the UK) or not resident (if they are not able to return).
“For those currently unable to leave the UK and who may then exceed the thresholds for UK tax residence, what should they do? There is the possibility of a claim for ‘exceptional circumstances’ where an individual can disregard certain days spent in the UK (up to 60 days) for most aspects of the statutory residence test.
“Extended stay in the UK for reasons connected with the coronavirus would seem to be exceptional, but the previous guidance is very broad and offered little indication as to whether a claim would be successful.”
Foster welcomes the fact that in the UK HMRC has been quick to react to this uncertainty. On 19 March 2020, it issued guidance on tax residence and covid-19. HMRC has confirmed that circumstances will be considered as ‘exceptional’ if the individual:
- is quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus, or
- finds themselves advised by official government advice not to travel from the UK as a result of the virus, or
- 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.
Foster says that while this guidance is of course welcome and will provide comfort to some, it leaves some questions unanswered. For example:
- what if you cannot (or do not want to) return to the country of your usual residence because of the extent of the virus outbreak there?
- what if you could in theory travel out of the UK to a number of other countries? Does the absence of a reference to all international borders mean that this would still qualify?
- what if the maximum limit of 60 days proves to be too low?
“We would hope that a sensible interpretation of the individual’s circumstances will prevail in these unprecedented times and HMRC has already indicated that it will look sympathetically on relevant claims.
“Trustees should also be particularly vigilant if they have beneficiaries who are usually resident overseas but are now spending time in the UK. If those beneficiaries have become UK tax resident and then receive distributions, they could receive unexpected tax demands.
“We recommend that those affected keep records including travel and hotel tickets, doctor prescriptions/appointment details, a diary of their intentions, actual movements and relevant Government announcements and any other information relevant to their position.”
What if you’re a UK resident caught in another tax jurisdiction?
Gary Heynes, head of private client at RSM says: “The coronavirus pandemic has spurred many worldwide governments into action to ensure help and financial support is available for those hardest-hit by the crisis. However, it will also continue to highlight issues with various aspects of domestic law which lag behind as more important matters are addressed.
“One area is tax residence, which often forms the core basis on which individuals are taxed. For most countries if you are tax resident you are liable for the full range of taxes in that country (there are some exceptions, the USA being the most notable – they tax all their citizens wherever they may be resident!).
“Tax residence in most countries is based on the number of days spent there, together with connecting factors, such as having dependent family in the country or a home there. Elsewhere in this edition of Weekly Tax Brief, we look at those who cannot leave the UK because of coronavirus and how the UK has reacted to the question of tax residence. But what if a UK resident is caught in another jurisdiction?
“Unlike the UK, many countries have not issued any updated guidance so those individuals who cannot return to the UK may find themselves resident in the country they find themselves in and should seek local advice, in due course, as to what that means for their tax status. Most countries have a 31 December tax year, so if trapped in a country this early in the tax year, tax residence is a real possibility. While spending six months in a country is often a key test for residence, spending as little as three months can result in tax residence depending on other connections.
“For example, the US has a cumulative calculation looking at the past three years to consider whether an individual has been substantially present and a three month stay this calendar year could mean an individual becomes US tax resident.
“While Italy considers presence for more than half the tax year, Spain also looks at the presence of dependent family or where an individual has their main centre of life. In the absence of specific local law changes, double tax treaties might be of assistance as they can help determine, where an individual is tax resident in two countries under local laws, which one has taxing rights. However, this can be complicated.
“Only one country gives citizenship to those born there and also taxes their citizens wherever they are in the world; that’s the USA. As if they didn’t have enough to worry about, anyone caught in the US, about to give birth and unable to leave because they are restricted, will find that their child is trapped in the complexity of US taxes from which it will take some effort to extract themselves!
“It’s good to see that HMRC in the UK has given consideration to the issue of residence this early on and, while now might not be the time, other countries will need to give consideration to this issue too, in order to avoid complexities which could never have been foreseen.”
Further reading: Taxable gains on homes and the big payment change ahead