Covid-19 and the UK statutory residence test

Additional guidance and limited changes to the UK statutory residence test have been announced to assist those affected by the pandemic. 

Exceptional circumstances

The UK statutory residence test has a special rule for days spent in the UK as a result of exceptional circumstances. The term “exceptional circumstances” is defined in paragraph 22 of Schedule 45 of the Finance Act 2013 as including “national or local emergencies such as war, civil unrest or natural disasters” and “a sudden or life-threatening illness or injury”.

The rule applies where the individual would not be present in the UK at the end of the relevant day but for exceptional circumstances beyond the taxpayer’s control that prevent the taxpayer from leaving the UK. The taxpayer must leave the UK as soon as the circumstances permit. We refer to days spent in the UK due to exceptional circumstances as “exceptional days”.

The question is whether an individual who is unable to leave the UK as a result of Covid-19 would be able to claim exceptional circumstances.

It seems clear that if the individual was hospitalised from Covid-19 this would be exceptional circumstances. However, as restrictions started to be brought in in mid-March, HMRC were asked to clarify the treatment of the significant number of individuals who remain well but cannot leave the UK as planned due to travel restrictions.

HMRC has responded very quickly to this situation, publishing the following helpful guidance late on 19 March:

The UK is currently experiencing the effects of the coronavirus (Covid-19) pandemic. Events resulting from the impact of the virus are changing rapidly and this guidance may change at short notice as situations change.

The coronavirus (Covid-19) pandemic may impact your ability to move freely to and from the UK or, require you to remain unexpectedly in the UK.

Whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case. However, the circumstances are considered as exceptional if you:

• are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus;

• find yourself 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 your employer to return to the UK temporarily as a result of the virus.

In issuing the guidance, HMRC have indicated that they will look sympathetically at any individual cases where the virus has caused specific issues or difficulties.

This new guidance needs to be read in conjunction with HMRC’s current published guidance which sets out some simple scenarios relating to what are considered exceptional circumstances and exceptional circumstances where Foreign and Commonwealth Office advice applies. HMRC has also set out examples of circumstances that are not considered to be exceptional. 

The new guidance therefore broadens the scope of exceptional circumstances but with the caveat that each circumstance is individual. The Foreign and Commonwealth Office advised against non-essential travel on 17 March and the starting point should be that anyone in the UK on that date who intended to leave but was unable to do so should be able to count days from the date they intended to leave as qualifying; an individual coming to the country shortly after 17 March with the same intention should also qualify.

HMRC confirmed on 19 March that they do not plan to issue any further guidance on this issue at present and clients should also note that the wider rules such as the 60 day annual limit for exceptional days in any tax year are still in place and relevant.

We anticipate that those arriving now are likely be in a different position as they should only be coming to the UK for an essential purpose. If an individual travels to the UK for a non-essential purpose and is unable to leave the UK that individual may well struggle to persuade HMRC that they benefit from the exceptional circumstances exception.

If an individual travels for an essential purpose and can presumably still leave the UK then this similarly would not be within the exceptional circumstances exemption. However, if an individual arrives in the UK for an essential purpose but is unable to leave (for example, because of a full travel ban) then the exceptional circumstances exemption should apply to days from the point they would have left the UK onwards.

It is important to note that the relief in exceptional circumstances does not apply to all elements of the UK statutory residence test. It applies only when counting days spent in the UK and in determining whether an individual has a 90 day tie. However, this relief does not apply to the work tie or the family tie. So even an individual in the UK as a result of exceptional circumstances could still be UK resident if, for example, the individual works on those exceptional days. This seems illogical, but the rules are clear.

By contrast, HMRC accept that if an individual spends 87 days in the UK and 15 exceptional days in the UK, the 15 exceptional days will be discounted for the purposes of not only the sufficient ties test in the current year, but also the 90 day tie test for the subsequent two UK tax years.

Cross border workers

The Covid-19 pandemic has also caused more general concerns for individuals with cross-border tax affairs, particularly those working remotely outside their usual country of employment or who find themselves stranded outside their main country of residence.

On 3 April 2020, the Organisation for Economic Co-operation and Development (OECD) responded to this challenge by issuing guidance on the interpretation of international tax treaties in context of Covid-19.

The guidance is brief, and is framed only as a recommendation to national tax authorities such as HMRC, but the OECD’s long-standing role in developing cross-border tax policy and furthering the development of the global network of tax treaties means it is likely to be persuasive.  

Many individuals who normally work in a different country to their country of residence will now be working from home due to the restrictions imposed by the Covid-19 situation. For such cross-border workers, the guidance provides that employment income received during this period should be treated as though received in their usual country of employment. 

Furloughed workers are given similar treatment, with the OECD’s view being that employment income paid by their employers (as part of a government stimulus package) should treated as income from the country where they used to exercise their employment. 

Individuals normally tax resident in more than one country (and whose overall tax status is determined by rules in international tax treaties) can also take comfort from the guidance. Being stranded away from home or returning to a “previous home country” on a temporary basis should not affect an individual’s treaty residence status. Encouragingly, OECD commentary accompanying the guidance encourages national tax authorities to exercise similar leniency in applying their domestic rules for tax residence (such as the UK’s statutory residence test). 

For company directors and those who own or run cross-border businesses, the guidance also covers a number of important points. 

If a company’s employees are working from home during the pandemic and they live in a different country from where the company is based, this should not, according to the guidance, create a “permanent establishment” of the company in that country for tax treaty purposes. If a permanent establishment were created, this could trigger new tax obligations for the company.  

Similarly, the guidance provides that a company’s tax residence status under international tax treaties should not be affected by its senior executives exercising their roles outside the company’s country of residence. This is the on the basis that the Covid-19 situation is temporary and exceptional, and there-fore unlikely to change a company’s “place of effective management”. However, the position under domestic tax rules may be different. 

HMRC has also published guidance on the possible consequences of Covid-19 in determining the tax residence position of companies. More information on this guidance can be found in our recent note.

The OECD has announced that it is considering further concerns raised by taxpayers and national tax authorities about the impact of the Covid-19 situation on cross-border workers and those whose tax residence status may be affected by travel and health restrictions. Additional guidance could follow. 

Reassuringly, the guidance concludes that the tax position of cross-border workers and displaced individuals should remain largely unchanged by the Covid-19 situation. 

Highly skilled people coming to the UK for Covid-19 related reasons 

On 9 April, the Chancellor of the Exchequer, Rishi Sunak, announced a limited exception to the operation of the statutory residence test.  

The intention of the Government is to facilitate “highly-skilled” people from across the globe coming to the UK to help on the Covid-19 pandemic. This sensible change removes an unnecessary complication for individuals whose skills may be in short supply coming to the UK. 

The exemption will discount time in the UK which would otherwise be counted towards the various day count tests under the statutory residence test in this critical period. 

The exemption is expressly intended to be time-limited and will only apply to time in the UK between 1 March 2020 and 1 June 2020. This period may of course end up being extended depending on how the situation develops. 

The Chancellor emphasised that although this is a necessary relaxation of the rules it will be carefully targeted in order to minimise the risk of abuse. The criteria for qualification (which have not yet been published) will therefore be tightly defined. The Chancellor highlighted anaesthetists and engineers working on ventilator design and production as the kind of individuals who could benefit from this exemption but this is not assumed to be an exhaustive list. 

More information on the UK statutory residence test can be found in our introductory note and our more detailed note.

Keep track of all the latest legal updates across a wide range of topics by visiting our Covid-19 hub.