Employers reassess tax residence as Middle East staff return to UK

The current instability in the Middle East is prompting some UK-linked employees to return home, in some cases at very short notice. For employers, that creates an immediate question around tax – not just where those employees are working, but whether their return now triggers UK tax residence, and with it PAYE and NIC obligations. These are not always straightforward calls. The rules are highly fact-specific, and in some cases tax residence can be triggered more quickly than employers might expect, particularly where employees still have ties to the UK or return to a UK home. 

For HR teams, the starting point is understanding that this is not simply about where the employee is based on a practical or operational perspective. Tax residence depends on a combination of factors, including days spent in the UK, the employee’s connections here, and how long they have been non-UK resident. In some cases, relatively short periods back in the UK can be enough to trigger residence, and there is also the added complexity that residence may apply across a whole tax year, not just from the point of return. If that happens, the consequences are significant. The employee becomes subject to UK tax on their worldwide income, and employers will need to apply PAYE accordingly, often where previously no UK tax was being operated at all. So the key question for employers is when, exactly, that change in tax residence is triggered. So, if an employee returns to the UK from somewhere like Dubai, what actually determines whether they become UK tax resident again?”

Earlier I caught up with tax lawyer Chris Thomas who joined me by video link and I put that question to him:

Chris Thomas: “So that’s a slightly tricky question to answer because it is rather fact specific and it will turn in large part on the circumstances of the individual but to give you an idea of the sort of considerations that would be relevant. First and foremost, there’s a question as to how long have they actually been non-UK resident for because there’s a difference between someone who’s been out in, say, Dubai for several years and someone who maybe only went out there last year and might have only recently, or relatively recently, become non-UK tax resident. Other factors would include where their home is. So, for example, have they maintained a home in the UK or, when they return, are they going to acquire one, or are they just staying with family? Are they keeping the home they’ve got out in Dubai, perhaps entirely possible they might until they know how the situation is going to pan out, despite being back here so that’s another relevant consideration. Then there are other things, other factors, such as how many days they’re actually spending in the UK during the course of the tax year, what kind of close family they’ve got in the UK. All of these considerations will play into that question as to what their resident status will be. I think as a rough rule of thumb you should always be thinking about the possibility of UK residence being triggered if the employee is spending 90 days plus in the UK during the tax year but, actually, it can be less than that. It could be as little as 46, potentially – if they’ve only relatively recently ceased UK residents in the last two or three years it could be less than that. There are some circumstances where, for example, let’s say they’ve sold up, or got rid of their rental in Dubai and come back here and now they’ve moved back into their old house, that could mean that residence automatically re-triggers, potentially. So it’s very fact specific. The other point to note is that there are some circumstances where even if you only come back partway through the year, you can’t necessarily assume that residence would only resume from the point that you’ve returned. Sometimes it can actually be looked at for the whole year as a whole, which obviously can be a bit unexpected. So yes, not an easy answer, but hopefully that gives you an idea of some of the considerations. It does need looking at on case-by-case basis, really.”

Joe Glavina: “And if UK tax residence is triggered, Chris, what does that mean in practice for employers, particularly in relation to PAYE?”

Chris Thomas: “Yes, so the key principle is that if an employee is a UK resident the default position is that they are liable to income tax but they’ll be liable to income tax on their worldwide employment income, essentially, and the implication of that would be - and we’re talking about UK employers here in this programme primarily - they would need to apply PAYE accordingly in much the same way as they would for any other employee on the basis of that of that resident status. So whereas if you’ve got people who have been working and primarily living in Dubai, they very likely haven’t been applying PAYE, they probably had a non-taxable code applying to that individual.”

So, for HR the key takeaway is that this is not something that can be dealt with after the event. Tax residence can be triggered more quickly than expected, and once it is, PAYE obligations follow. That makes early visibility and assessment critical, particularly where employees are returning at short notice and their plans may still be uncertain. If you would like help reviewing your current arrangements or putting processes in place to manage this risk, please do contact Chris - his details are there on the screen for you.