As we continue to move through a prolonged period of uncertainty, the Government is continuing to introduce further measures to assist UK taxpayers. In his speech last Friday (20th March), the Chancellor Rishi Sunak announced a deferral of income tax ‘payments on account’ for self-employed taxpayers; which will be a welcome relief for many individuals. In the same week, HMRC issued an updated guidance note addressing the tax residency of individuals, and more specifically how Covid-19 will interact with the ‘exceptional circumstances’ guidance.
Below we have explored these two key developments and explained how these may affect you and your clients.
1. UK Tax Residence & ‘exceptional circumstances’
How is UK Tax Residence Determined?
Since 2013, an individual’s residence status has been determined by the Statutory Residence Test. This test looks not only at the days spent in the UK, but also the connections (or ties) that an individual has, in any given tax year.
The only definitive day count, by which an individual will be tax resident (regardless of ties), is if they spend over 183 days in the UK during the tax year. An individual may also become tax resident if they satisfy either of two remaining automatic residence tests. These include individuals who have their ‘only home’ in the UK and individuals who come to the UK for full time employment. If an individual does not satisfy any of these tests, then they may still trigger tax residence due to their ties and the interaction with their day counts. The relevant ties are family, work, accommodation, UK presence and country ties. It is likely that a combination of these ties will apply to individuals.
A key aspect of tax residence is therefore the days an individual spends in the UK in the tax year combined with the number of ties that that individual has. Broadly the more ties that an individual has, the fewer days they can spend in the UK before being treated as tax resident. For this purpose, a day is defined as ‘any midnight’ spent in the UK and so days of arrival will count as a day, whereas days of departure will not. There is an exception to this rule which disregards a number of days spent in the UK that relate to ‘Exceptional Circumstances’.
Many individuals will closely monitor their ties and day counts so as to manage when they become tax resident in the UK, or not, as the case may be!
What is an exceptional circumstance?
Within their guidance, HMRC has provided examples of what constitutes an exceptional circumstance. This list is non-exhaustive but includes national or local emergencies and sudden or life-threatening illness or injury. The most recent example of an exceptional circumstance applying to a number of people was in 2010 when the eruption of an Icelandic volcano caused a significant number of flights to be cancelled. Interestingly though, the exception only applied if the Foreign and Commonwealth Office had issued travel restrictions to the countries the individual had left.
HMRC’s updated guidance note during these difficult times follows a similar course of action. What constitutes an exceptional circumstance has been extended to cover a number of certain Covid-19 related circumstances, such as if an 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;
- find themselves advised by official Government advice not to travel from the UK as a result of the virus;
- are unable to leave the UK as a result of the closure of international borders; or
- are asked by their employer to return to the UK temporarily as a result of the virus.
These will only constitute exceptional circumstances if the individual had previously intended to leave the UK at an earlier date, and the individual retains the intention to leave as soon as it is possible to do so.
Given the additional unprecedented restrictions that have been put in place at the start of this week, one (or more) of the above circumstances may apply to individuals. It is useful to note though that if the exceptional circumstances apply, then the maximum number of days that may be excluded is 60 days per tax year.
How may this affect me/my clients?
This could affect an individual’s UK tax residency for either the 2019/20 or 2020/21 tax year (we are hopeful that it will not extend beyond this!)
The most immediate tax consequence of becoming tax resident in the UK is that, as a starting point, individuals are subject to tax on their worldwide income and gains, save for specific rules for non-UK domiciled individuals. Non-UK tax residents are only subject to tax on their UK source income and gains related to UK residential property. This may lead to exposure to a large (and unexpected) UK tax liability, as well as a filing requirement in the UK.
Further to the above, the 2020/21 tax year begins shortly, on 6th April 2020, and individuals may have been dependent on not having become UK tax resident in the 2019/20 tax year in order to benefit from pre-arrival planning prior to ‘arriving’ in the UK in 2020/21. It is imperative for these individuals that residency is not inadvertently triggered in the 2019/20 tax year by virtue of spending additional days in the UK.
As the maximum days for exceptional circumstances is 60 days, if you remain in the UK after June 2020, then any subsequent days will count towards your day count, which again may lead to UK tax residency inadvertently being triggered. It is our understanding, that currently HMRC has no intention of increasing the maximum number of days that may be excluded.
There are a number of complexities when considering your residency position, and we would advise you seek specialist tax advice on this position if you believe the above may affect you or your clients.
2. Income tax payment for the self-employed
Along with a number of measures put in place for employees and businesses, the Chancellor announced a measure to assist self-employed individuals in his speech last Friday 20th March. Further to this, the Chancellor is due to make an announcement today (26th March) with further guidance, especially for self-employed individuals.
Self-employed individuals, who file tax returns in the UK, are able to benefit from a deferral of income tax in respect of their second payment on account for the 2019/20 tax year (due 31st July 2020). This deferral is automatic and will apply to any individual who was self-employed in the 2018/19 tax year. Currently, the guidance from HMRC only applies to self-employed individuals and does not state whether there is a de-minimus level of income from self-employment, in order to qualify. Clarification on this position has been sought by the industry, from HMRC and further guidance is expected here in advance of the 31st July 2020 deadline for payment.
The second payment on account has been deferred until 31st January 2021, which is the deadline for online filing of the 2019/20 tax return and payment of any 2019/20 balancing payment (regarding the total liability to tax in respect of 2019/20).
We would therefore recommend any self-employed individuals who have a filing requirement for the 2019/20 tax year to arrange for their returns to be filed earlier in the year. Dependent on the overall tax position, the second payment on account may not be required.
Our team has a great deal of experience in dealing with both tax advisory and tax compliance matters, and would be delighted to assist with a review of your residence position, preparation and submission of your tax returns or any other matter relating to the above.
Finally, we would like to send our best wishes from all of us here at Edwin Coe, and we hope you are keeping well during these difficult times.
For an update on all the legal implications relating to Coronavirus please see here.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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