Middle East conflict: Employees coming to the UK
min readAs the conflict in the Middle East continues, individuals may be considering leaving the region. Whether returning to the UK or coming here for the first time, such individuals should consider the UK tax consequences of doing so.
This article sets out key considerations for employees coming to the UK due to the conflict in assessing the extent of their UK tax exposure.
Unless otherwise set out, this article refers to residence for UK tax purposes only. “Tax year” means a tax year for UK purposes, ie from 6 April one year to 5 April the next. The article focuses on UK Income Tax and UK Capital Gains Tax (CGT) liability. You should also bear in mind other UK taxes, particularly UK Inheritance Tax if you expect to be in the UK for a prolonged period of time.
How do I know if I am UK resident?
UK tax residence is established using the Statutory Residence Test (SRT). The SRT considers, in order of priority, if you are:
- automatically non-UK resident – by virtue of spending minimal time in the UK or working full-time abroad;
- automatically UK resident – by virtue of spending significant time in the UK, having your only or main home in the UK, or working full-time in the UK; or
- UK resident under the sufficient ties test – by virtue of spending a number of days in the UK which exceeds a specified threshold. The specified threshold is worked out based on the number of defined ties you have to the UK.
Generally, if you are UK resident in a part of the tax year, you are UK resident for the whole tax year.
In certain cases, it may be possible to split the tax year into a UK part (being taxed as a UK resident) and overseas part (being taxed as a non-UK resident), including where an individual coming to the UK is starting full-time work in the UK or ceasing full-time work abroad. Conditions for obtaining split year treatment are very specific, however, and beyond the scope of this article.
The SRT is a complex, multi-layered test and should be considered in detail. Accurate record-keeping is also important.
Further details of the SRT and points to consider can be found here:
But what if I am only in the UK due to the conflict in the Middle East?
The SRT provides some relief from becoming UK resident if you are in the UK due to “exceptional circumstances.”
The relief lets you ignore up to 60 days spent in the UK under exceptional circumstances for the purposes of calculating your day count for a given tax year. Any days you spend in the UK beyond the 60-day limit will be counted even if the circumstances continue.
Whilst a helpful relief, it can be difficult to claim “exceptional circumstances.” The rules include “national or local emergencies such as war, civil unrest or natural disasters” as examples of exceptional circumstances. However, they only allow for exceptional circumstances that prevent you from leaving the UK due to such circumstances.
HMRC guidance provides some leniency where an individual returns to and stays in the UK due to exceptional circumstances, eg civil unrest or natural disaster. However, the guidance limits this approach to circumstances in which Foreign, Commonwealth & Development Office (FCDO) advice is to avoid all travel to a particular region.
You should review the FCDO website if you are seeking to rely on exceptional circumstances. For example, the FCDO currently advises against all but essential travel to the United Arab Emirates. As such, you may not be able to discount any days spent in the UK due to exceptional circumstances despite the conflict in the Middle East.
What does it mean if I am UK resident?
Broadly, if you are UK resident, you will be subject to UK tax on income and capital gains regardless of where they are realised.
If you left the UK within the last six tax years and subsequently resume UK residence, you may also be subject to UK tax on certain gains (and in some cases income) realised whilst you were non-UK resident. This is due to the Temporary Non-Residence Rules, which prevent individuals avoiding UK tax by leaving the UK for a short period of time.
In comparison, if you are non-UK resident, your UK tax exposure is generally limited to tax on UK source income (often deducted at source) and gains realised on disposals of UK real estate, non-UK assets deriving their value from UK real estate or UK assets used in a UK trade.
If I am non-UK resident, surely, I don’t have to pay UK tax on my employment income?
Unfortunately, you do. If you are non-UK resident, you are still subject to UK Income Tax on the proportion of your employment income which relates to time spent working in the UK. This is because liability to UK tax on employment income is typically based on where you carry out your employment duties. National Insurance Contributions may also be payable.
You may not have to pay UK Income Tax on employment income relating to duties carried out in the UK if the duties are “merely incidental” (broadly, subordinate or ancillary) to your overseas duties. HMRC interprets “merely incidental” strictly, so it may be difficult to rely on this. HMRC also takes the view that directors’ duties carried out in the UK can never be merely incidental to their overseas duties.
If I become UK resident, is there any way of limiting my UK tax exposure?
You may be able to use a special tax regime, known as the FIG regime, to provide 100% relief from UK tax on certain foreign income and gains, even if the income and/or gains are brought to the UK.
The FIG regime is available to individuals who become UK resident in a tax year following a period of non-UK residence of at least ten consecutive tax years (qualifying new residents). The FIG regime must be claimed but there is no charge for claiming it. It can be claimed in any of the four consecutive tax years beginning with the first tax year of UK residence.
In the same four-year period, a qualifying new resident may also be able to claim full relief from UK Income Tax on employment income earned in respect of duties performed outside the UK. In this case, you would need to make an election as well as a claim to make use of the relief. Broadly, relief here is capped at the lower of £300,000 or 30% of employment income received in respect of duties performed wholly or partly outside the UK for the tax year.
Do I need to think about my residence elsewhere?
Yes, the SRT applies to establish your UK tax position only.
If you are UK resident under the SRT, you may still be resident and, as such, subject to tax elsewhere. There may also be rules around maintaining your residence elsewhere (including for wider purposes, such as immigration), which you should consider if you are spending time out of the jurisdiction – although it is thought that the United Arab Emirates may show leniency in applying its residency test where individuals spend more time than intended outside the UAE due to the Middle East conflict.
If you are resident in the UK and elsewhere, you may be able to claim relief from double taxation on your income and gains under a double tax treaty between the UK and the other jurisdiction, or otherwise if the UK provides unilateral relief.
This article does not constitute advice. Its content was true at the time of writing. If you would like to discuss any of the matters contained in this article, please contact your usual Charles Russell Speechlys contact.
