Trapped in the UK by the pandemic, overseas workers are finding themselves in breach of UK tax residency codes. It is a problem that affects the workers, obviously, but, as we will see, it is also a problem for the companies that employ them.
It was the FT that highlighted this in its article ‘Expats stranded by pandemic face heavy tax toll’ which they flagged on their Twitter feed. They give the example of the British pilots who worked for Gulf airline, Emirates, who returned to the UK from the Middle East last year after losing their jobs because of the pandemic, and who now face big, and unexpected, tax bills, having moved from a low-tax location back to the UK. Those who were earning £80,000 in a year now face a bill of around £20,000. They thought they were overseas earning tax-free cash but now find themselves to be UK residents for tax purposes, and it’s a problem in many other sectors where many expats are stranded in the UK.
This was predictable, and many countries did take emergency measures to soften the rules and prevent people from becoming unintentionally tax resident due to Covid-19 restrictions but, as the FT reports, the devil is in the detail. That detail is in the form of the concessions and how they are applied and, in the case of the UK, HMRC is showing very little flexibility. So, when the Revenue said back in March it would allow non-residents to stay an additional 60 days in the UK, it was conditional on a set of specific ‘exceptional circumstances’ to do with the pandemic and they are not budging from that.
So, let’s look at why this has become such a problem and what, if anything, can be done about it. To that end I phoned tax specialist Chris Thomas. I started by asking who exactly is affected by this:
Chris Thomas: “Yes, so this is concerning a couple of scenarios, really. One of them is the question of when somebody is treated as a UK resident or not for tax purposes and is, obviously, pretty fundamental to determining how their employment income needs to be taxed. It’s also people who are maybe only making relatively short visits to the UK, so they're primarily based abroad but they're making visits here and would be non-resident ordinarily, but there are questions as to how you count the number of days that they're treated as being here, and how you apportion how much of their remuneration is subject to UK tax. So essentially, that's what these couple of rules are concerned with. HMRC had issued some clarifications on these points last year, and then there has been various backwards and forwards with a couple of the professional bodies, and they’ve issued some revised guidance and produced some questions and answers on what the position is and how it applies in practice.”
Joe Glavina: “So how do the rules apply? What are the categories of workers are affected?”
Chris Thomas: “So first of all, we're looking at non-UK residents, so this would be your typical short term business visitors. So, the question was to what extent will HMRC be willing to relax the rules for these people who maybe have ended up being in the UK for somewhat longer than they otherwise would because of the Covid-19 pandemic? I think a lot of businesses got examples of that, where people ended up being here for longer than planned and so there’s a question of what that means in terms of (a) might they end up being treated as UK resident for tax purposes when they ordinarily wouldn't have been; and (b) how do you calculate the amount of their income that is subject to UK tax? That is significant because if you've got somebody who is working in the UK then the general rule would be, even though they are a non-UK resident, the general rule would be that they are subject to UK tax on the proportion of their remuneration as relates to the work they've done here. Now, previously, HMRC had had sort of clarified that if you were stranded in the UK, you could exclude any employment income that was earned during that period so long as it was being taxed in your home country, which it generally would be, but you needed evidence that, effectively, you were prevented from leaving the UK. So it wasn't just a case of, you know, arrangements have changed and it was more convenient to be here, or you were concerned about travel and you weren't sure it was safe, or whatever, it really was a case that you actually can't physically leave. Similarly, with the question of whether you're a resident, there's a statutory residence test that determines when you are and when you aren't, and part of that is quite critical in that you have to count days spent in the UK and, effectively, HMRC have confirmed what they previously said, although elaborated a bit, that essentially the question is whether days spent in the UK can be disregarded and, essentially, what they have said is well, yes, but only if that's due to ‘exceptional circumstances’ beyond your control and, effectively, you were prevented from leaving the UK. So, in terms of when that might be it could be because you are self-isolating, it could be if international borders were closed, it could be if the UK Government had issued advice against all but essential travel. So any of those situations would potentially count as an exceptional circumstance, but it is quite limited, so once you're in a situation where actually you could have left, but you didn't, the easement stops at that point and, critically, there is a 60 day limit – they will only disregard up to 60 days in the UK. Now, obviously, a lot of people have a lot more than that and hence there's a limit to how helpful this is actually is going to be. So, as I say, there has been various correspondence with the ICAEW, the accountancy professional body, on whether HMRC might be willing to further relax some of these provisions and be a bit more generous in terms of sort of flexing the rules, and essentially HMRC has come back to say, well, no, essentially, it is as we previously said, we have gone about as far as we're going to go. So that exceptional circumstances rule that I mentioned a minute ago, that will apply for the purposes of counting days in the in the UK, but you are still capped at the 60, there are still various sort of sub-tests, if you like, within the statutory residence rules where those days will still count for certain purposes, the test for the number of work you are deemed to have spent here, and for the purposes of certain rules that can exempt you when you go to work full time overseas, are you still covered? So it's very complicated, but I think the overarching message is that you really do need to be very careful when you've got people who perhaps have been here for perhaps longer than they were originally intended to be as to whether they are they within scope of this easement, noting that it is quite tightly defined. We have seen a lot of clients who have had people who are caught as a resident and paying more tax on their remuneration than would ordinarily been the case.”
Joe Glavina: “This seems to be targeted at individual. Why is it a company problem?”
Chris Thomas: “It will depend on the particular circumstances, but the main reason it’s a company problem is because we're talking about remuneration from their employment, the point being that it's the employer that's got the responsibility for applying PAYE to the extent that UK income tax and social security does apply. So it is it is a problem for employers, because they obviously need to be able to work out how they should be applying PAYE for these populations of people and if they do that wrong, then prima facie, they're the ones that are on the hook, vis-à-vis HMRC, for not having done it correctly. So yes, it is it is an employer issue. It’s challenging enough at the best of times, keeping track of your expatriate population, as to who's doing what, and where, and planning around that, but when it's all been disrupted, obviously it becomes rather harder.”
Joe Glavina: “But there is there actually anything that employers can do about it?”
Chris Thomas: “The short answer is probably not really. The main question is going to be making sure you get your compliance right on identifying when you have got people who are in that situation, because, yes, if someone has spent too many days here and that has changed their classification for tax purposes then obviously that is what it is to a large extent and HMRC has not shown itself to be particularly willing to flex the rules. So it is going to be a question of the employer making sure that it is keeping track of what people are doing, and how many days people have spent here, and getting some advice to work out exactly what the implications of that are for what it needs to be doing in terms of PAYE compliance.”
Chris and his colleagues in the tax team have covered off a number of important tax issues for HR’s benefit during the course of this pandemic – there’s a lot on IR35 for example. All of those programmes are available now for viewing on the Outlaw website.