98: Stuck in the UK due to COVID-19? Effect on UK residence of individuals, their companies and trusts
The question of whether an individual is UK resident or not is determined by a piece of legislation called the ‘Statutory Residence Test’ (or SRT for short). As most people are aware, an important factor in this is the number of days an individual stays in the UK. However, this is not the only factor. In practice, some individuals can spend as long as 182 days in a tax year without becoming UK tax resident, while others can spend no more than 15. If an individual becomes UK tax resident this can in turn affect the residence status of any company of which they are a director or have control, and any trust (including will trusts) for which they are a trustee.
In practice, individuals often need to stay in the UK longer than they planned to, so we usually advise them to plan to stay for 10 days or so less than the maximum permitted time. This would usually provide a sufficient margin of error, but this year it may not be enough. Many clients have found they are unable or unwilling to return to their place of residence as a result of COVID-19 for many weeks or even months, and they are concerned that they might become UK resident without having planned for this.
HMRC gave some guidance early on as to whether such individuals would become UK tax resident, and more recently has commented on the position for companies. The OECD has also provided guidance in relation to companies, though we are not aware of any official guidance for trustees. In this post we look first at the guidance for individuals, then on the impact for their companies and trusts, and what might be done to mitigate complications that may arise.
The residence status of individuals
Under the SRT up to 60 days’ presence of an individual in the UK in a tax year can be disregarded if this is due to ‘exceptional circumstances’ beyond the individual’s control, such as national or local emergencies or life-threatening illness or injury. This is helpful, though it is important to be aware that the maximum permitted in any circumstances is 60 days. Presence in the UK after this for any reason, however exceptional, still counts as presence for the purposes of the SRT.
Individuals remaining in the UK for reasons connected to COVID-19 will of course wish to know whether these reasons will be regarded as ‘exceptional circumstances’. HMRC’s guidance is that the following should qualify:
- being quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus;
- official Government advice being not to travel from the UK as a result of the virus;
- being unable to leave the UK as a result of the closure of international borders; or
- being asked by your employer to return to the UK temporarily as a result of the virus.
It is clear, therefore, that the ‘exceptional circumstances’ are quite limited. Many individuals who are staying in the UK longer than they would have done as a result of COVID-19, will in fact not be entitled to any extra days. Individuals who feel safer in the UK than their usual place of residence (because they feel they will have access to better medical treatment, for example) would not usually be entitled to extra days. It is also important to be aware that the circumstances must be beyond the individual’s control – so if an individual chooses to come to the UK for medical treatment this will not count as exceptional circumstances.
For some individuals, inadvertently becoming UK tax resident will not matter that much. Many non-UK domiciled individuals, for example, will still be taxed only on their UK source income and not their foreign income. For others, though, both UK and non-UK domiciled, the consequences could be severe. UK residence would cause a UK domiciliary’s worldwide income and gains to be subject to UK tax, and a non-domiciliary might become deemed UK domiciled, bringing their worldwide income, gains and estate into the scope of UK taxes. There will often be ways the problems can be managed and the tax mitigated, but this usually requires prior planning. Ultimately, where UK tax does arise the individual will need to know in advance so they can consider how this will be paid and interest and penalties avoided.
Other individuals for whom the unplanned UK residence could have major consequences are where the individuals are directors or controllers of companies, or trustees.
Directors / controllers of companies
What if the individual is a director of a company incorporated outside the UK, or effectively manages such a company? The residence of an offshore company is determined by where it is managed and controlled. If the director / controller of such a company becomes UK resident this does not automatically cause the company to become UK tax resident. However, if extended time in the UK means that the individual director / controller starts effectively running and controlling the company from the UK then the company will become UK tax resident. This could cause issues not only in the tax year of residence, but when the company ceases to be UK resident, as this can give rise to an export charge.
The situation could be particularly complicated if the company is also tax resident in the jurisdiction where the individual usually lives for some or all of the tax year. Due to differences in the dates of tax years the analysis of this, and of any relevant treaties, could be complicated.
The OECD guidance is that if the director / controller ends up becoming UK resident as a result of COVID-19 this should not affect its status under the international tax treaties. HMRC states that, while they are sympathetic to the difficulties individuals may have, they consider that the existing legislation and guidance already provide enough flexibility to address the current circumstances.
Another issue is whether the company will continue to satisfy the economic substance rules in the place it is managed and controlled. Many jurisdictions have introduced some flexibility in this. To address all these matters, though, cross-border professional advice may be required.
To avoid such problems arising, individuals might consider appointing alternative directors on a temporary basis. Such directors will need to genuinely make the decisions and ensure this is evidenced by the necessary paperwork. If they do not wish to do this, they could postpone decisions until they return to their usual place of residence, again ensuring that they keep proper records of this.
If the individual is trustee of a trust – which in some cases could arise simply by being executor of a will – their change of tax residence might cause the trust to become UK tax resident. As with companies, this could give rise to tax issues both in the tax year in which the individual is UK resident and also when they cease to be UK resident, as then an export charge may arise.
As with companies, the trust may end up being resident in more than one jurisdiction for all or part of a tax year. The tax that arises might or might not be mitigated by tax treaties, but the professional advice required is likely to be costly. Where possible it may be better to avoid this happening by appointing a new trustee in the place where the trust is usually resident.
As is generally the case where tax is in question, it is much better to seek advice as soon as possible. This will help to enable action to be taken to prevent or manage problems that could otherwise arise from remaining in the UK longer than planned, as a result of COVID-19.