How Covid-19 has affected the UK Tax residence for internationally mobile individuals.
Government responses to the pandemic have varied dramatically across the world, with many countries encouraging working from home where possible and enforcing strict controls on their borders, and entrants having to comply with compulsory quarantine periods. These measures have of course impacted the lives of millions of people, including the way we work. Internationally mobile individuals may be hit with a number of potential tax issues due to the change in circumstances caused by covid-19.
Individual’s tax residence
Guidance was quickly published by HMRC regarding the days of presence within the UK, and outlined the circumstances considered ‘exceptional’ that related to the Covid outbreak and are therefore exempt from certain day-counting tests present within the UK Statutory Residence Test (SRT) rules.
The continuation of the usual 60 day limit on the amount of relief days qualifying as exceptional has been confirmed in the HMRC’s guidance. It was also confirmed that ‘exceptional circumstances’ will apply when an individual is present on a given day for any of the following reasons:
- The individual is quarantined or self-isolating as advised by a healthcare professional or public health guidance on COVID-19
- The individual is following advice from the UK government not to travel from the UK as a result of COVID-19
- The individual is unable to leave the UK as a result of the closure of international boarders
- The individual was asked to return to the UK temporarily by their employer, as a result of COVID-19
Without doubt, HMRC will receive a larger amount of exceptional circumstances claims than normal this year, given the minimal days presence many individuals are authorised to be in the UK.
Individuals affected should be extra vigilant and must document not only their exit and entry dates to the UK but the reasoning for remaining in the UK, being sure to record any border closures and received healthcare advice as ‘exceptional circumstances’ claims are more liable to become subject to an enquiry by HMRC.
The SRT rules have already seen additional changes, this is to preserve non-resident tax status to those whose presence in the UK was due to professional demands and connected with COVID-19. The rules are very specific, however, certain individuals who fall into the qualifying bracket may be able to disregard the affected days of UK presence for the purposes of applying the SRT.
Tax residence for corporations
The majority of corporate directors and employees have amended their working locations due to COVID-19. Increased acceptance and wider adoption of home working has encouraged employers to widen their talent search, with some even recruiting a new starter from a different country. Similarly, the number of professionals requesting to emigrate or return to their home country, with their argument being that their jobs can be performed from overseas just as well as it can it the UK.
These circumstances may result in corporations inadvertently changing their tax residence in one or more countries, with some corporations potentially being considered to have a permanent establishment in a country, therefore giving a taxable presence in that destination.
If a company is a tax resident in the UK, it must either have been incorporated in the UK or centrally controlled or managed from the UK.
There is a risk that businesses with activity carried out in the UK due to COVID-19 that would normally be carried out abroad could result in the company becoming a UK tax resident.
Guidance from HMRC does state that a few meetings within a short space of time doesn’t technically make a company a UK tax resident, but companies are still encouraged to consider this factor and seek advice.
Corporate tax definitions vary from country to country, therefore businesses must consider the implications of any activities that may be carried out in a non-UK jurisdiction, under the relevant laws and tax treaties.
It’s worth noting that tax treaties between countries will of course vary, however under the OECD model, any entity that creates a “fixed rate of business” in a tax jurisdiction is able to create a ‘permanent establishment’ in that jurisdiction, with the activities of which becoming subject to tax in that jurisdiction.
Any employer who agrees for a staff member(s) to work from home or remotely from overseas must consider the possibility that the arrangements could create a permanent establishment.
The OECD clarify the model treaty by explaining that workplaces require a ‘degree of permanence’ for it to be considered ‘fixed’, and therefore a business must be undertaken wholly or partly from that fixed location. As there is a likelihood of the temporary working environment becoming a permanent establishment increases depending on how ‘normal’ the working arrangement becomes. Arrangements made due to the COVID-19 pandemic are more than likely to be considered temporary, yet one which is considered indefinite may be more likely to be viewed as a fixed environment.
Any employers who are concerned about potential implications regarding remote working should seek advice as well as ensuring they retain clear records of both formal and informal agreements relating specific remote working locations, durations and any other agreed arrangements.