Impact of the Statutory Residence Test as a result of COVID-19

As the vaccination programme continues to roll out in the UK and life begins to return to some sort of normality, thoughts may start to turn for eligible individuals to consider their residence position for the 2020/21 tax year.

Statutory Resident Test (SRT)

In any given tax year, your residence status is determined by the SRT. This consists of a numbers of steps which you follow through to determine whether you are UK resident or non-UK resident in a tax year.

The tax consequences are that if you are deemed UK resident then you will be subject to tax on your worldwide income, whereas if you are deemed non-UK resident then you will be subject to tax on your UK sourced income only.

Some individuals qualify for non-UK residency under the “third automatic overseas test”, whereby they work full time abroad (defined as working on average at least 35 hours per week overseas), and spend no more than 90 days in the UK and 30 work days in the UK (a work day in the UK is defined as spending at least three hours a day on work, regardless of whether it relates to UK or non-UK employment). In addition, there must be no significant breaks i.e. a period of at least 30 days goes by where you do not work overseas.

COVID-19 implications

Due to COVID-19, an individuals abilities to move to and from the UK has been severely impacted. As the pandemic swept through Europe and beyond, issues such as closing international borders and numerous flight cancellations has meant that some individuals were unable to return to their country of employment immediately. They have therefore had to work from the UK for longer than anticipated. As a result, their residence status could be impacted which could lead to financial implications in respect of their tax obligations in the UK.

The legislation has not changed however HMRC have offered updated guidance on how the SRT will apply following the pandemic. In the SRT, up to 60 days spent in the UK can be discounted under “exceptional circumstances” and will therefore not contribute to your overall UK day count in a tax year. HMRC have confirmed that the following circumstances would be regarded as exceptional and can therefore be disregarded as part of the UK day count:

  • If the individual is quarantined or advised by a health professional to self-isolate in the UK as a result of the virus;
  • If the individual finds themselves in a ‘lockdown’ situation as a result of the virus;
  • If the individual is unable to leave the UK due to the closure of international borders;
  • If the individual is asked by their employer to return to the UK temporarily as a result of the virus;
  • Where an individual follows official government advice not to travel from the UK as a result of the virus;
  • Where an individual is self-isolating in line with government advice;
  • Where an individual is required to come to the UK to support a vulnerable family member who has been asked to ‘shield’ or ‘self isolate’, but the individual must be able to demonstrate why it is necessary for him or her to come and remain in the UK to provide support.

In addition, HMRC have confirmed that the UK will not seek to tax the employment income of a non-UK resident that relates to the period between the date the individual originally intended to leave the UK (but for prevention due to COVID-19), and the date the individual actually left, provided the following conditions are met:

  • The UK work-days are taxed in the individual’s home country, and
  • The individual left the UK as soon as they reasonably could have done.

Please note that an individual must be able to demonstrate that they could not leave the UK when intended to due to COVID-19 restrictions and evidence should be kept in case of a HMRC check.

Whilst the allowances were welcomed, unfortunately the relaxations do not extend to underlying criteria for certain tests such as UK workdays or having a significant break from overseas work. For example, if there is a day in the UK where an individual spends more than three hours working, this will still be considered a UK work day for the purpose of meeting the conditions to be non UK resident under the automatic test of working overseas, however it would not count as a day of presence in the UK under the exceptional circumstances provision. Individuals would then need to consider whether they meet any of the other automatic resident or non-resident tests. If none of these tests are met then you will need to consider the sufficient ties test.

How can this affect you?

In some instances an individual arriving into or leaving the UK can claim to have their tax year split in to two parts rather than being UK or non UK resident for the whole tax year. A common example of this is if someone left the UK to work full time overseas.

You may have made a split year treatment claim on your 2019/20 tax return as you were confident you would meet the criteria of working abroad full time in the following tax year. As a result of the pandemic you may no longer meet the criteria to be able to make the split year claim and therefore your tax return is incorrect.

Alternatively, you may have considered yourself to be non UK resident however had to spend more time in the UK in 2020.

If you find yourself in this position, and are unsure of your tax obligations as a result of a potential change in your residence status, professional advice should be sought to determine your residence position for the 2020/21 tax year and your tax consequences, as all circumstances are different. At MHA Tait Walker we have advisers who can navigate you through the SRT and determine your tax position in the 2020/21 tax year as a result of the COVID-19 pandemic and other considerations.

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