Grounded? ‘Exceptional circumstances’ and the UK tax residence test

HMRC have just updated their guidance on the UK’s Statutory Residence Test (SRT) in light of the temporary grounding of individuals as a result of the Covid-19 pandemic.

An individual’s residence status under the SRT is often determined by the number of days spent in the UK during the relevant UK tax year (6 April – 5 April). For these purposes, an individual will spend a ‘day’ in the UK if he or she is present in the UK at midnight at the end of that day. Typically, an individual will have a maximum number of days that he or she can spend in the UK during a tax year without becoming UK resident for that year.  These maximum day-counts range from 15 to 182, depending on how many connections or ‘ties’ the individual has to the UK. 

Whether or not an individual is UK resident for a tax year determines his or her exposure to UK income tax and capital gains tax. There is very limited exposure to these taxes for individuals who are non-UK resident. For foreign domiciled individuals, the issue of residence has a further implication, in that individuals in this category have a finite number of tax years in which they can be UK resident, before they become deemed domiciled and are subject to a different tax regime.  For this and other reasons, foreign domiciled individuals will often wish to manage the timing of their acquisition of UK resident status with particular care.

Many internationally mobile individuals therefore integrate strict day-counting into their global tax planning, keeping a close eye on the number of midnights they spend in the UK each tax year, to ensure that they remain non-UK resident.  As the 2019/20 tax year now draws to a close, concerns have been growing that the recent restrictions on freedom of movement and public health guidance are likely to have left people grounded in (or in other cases, stranded outside) the UK for longer than intended.

In ‘normal’ circumstances, the day-counting thresholds are strict.  However, where an individual spends a day in the UK only as a result of 'exceptional circumstances', that day may be disregarded in calculating the individual's total days for the tax year. In some cases, such discounting will prevent the individual’s maximum day count from being exceeded, resulting in the individual remaining non-UK resident for the relevant tax year.

The legislation provides that ‘exceptional circumstances’ for these purposes include 'national or local emergencies'. It seems fairly clear that the current pandemic should be considered a national emergency and HMRC evidently agree. According to their new guidance (RDRM11005), the following Covid-19 related circumstances will be considered ‘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;
• if you find yourself advised by official Government advice not to travel from the UK as a result of the virus;
• if you are unable to leave the UK as a result of the closure of international borders; and
• if you are asked by your employer to return to the UK temporarily as a result of the virus.

It is worth noting that HMRC interpret the exceptional circumstances provisions as being potentially applicable not only where an individual is prevented from leaving the UK, but also if he or she is compelled to travel to the UK. This is clear from the fourth bullet point above, but may also be relevant in other situations. For example, if an individual needs to return to the UK to care for a family member who is suffering from effects of the virus, HMRC may well be prepared to accept that days spent in the UK doing so may be discounted on the basis of ‘exceptional circumstances’. Certainly, HMRC consider elsewhere in their guidance that an individual returning to the UK to look after an ill child may have his or her days spent in the UK disregarded on that basis (RDRM13240).

Many will breathe a sigh of relief at this new guidance, as individuals are likely to have other pressing matters to be concerned about without having the extra worry of an additional tax burden on their shoulders.  Nonetheless, caution still needs to be exercised, for a number of reasons.

A key point is that these rules only assist where an individual is seeking to avoid UK residence, by disregarding days spent unexpectedly in the UK. They do not provide any leeway where an individual is trying to become UK resident. If an individual intends to spend certain days in the UK, but is prevented from doing so as a result of exceptional circumstances, those days cannot be taken into account under these rules. For some internationally mobile individuals it can be surprisingly difficult to become UK resident under the SRT – if an individual is unable to move to the UK when planned as a result of the pandemic, this may result in failure to become UK resident when expected. This could affect an individual’s status (and tax exposure) in his or her country of origin, or another country in which he or she has been spending a significant amount of time.

Another crucial point to note is that only the SRT tests which depend on the number of days spent in the UK will allow for the deduction of days due to exceptional circumstances. For example, the first ‘automatic UK test’ (spending 183 or more days in the UK) allows days to be disregarded in this manner – if an individual spends more than 183 days in the UK but can disregard enough days to bring them under the 183 day threshold due to exceptional circumstances, he or she will not satisfy the automatic test. Exceptional circumstances, however, will not affect other provisions of the SRT which may be influenced by the amount of time the individual spends in the UK. For example, exceptional circumstances will not prevent the second and third ‘automatic UK tests’ (the ‘only home’ test and the ‘full-time work in the UK’ test) from being satisfied.  Similarly, exceptional circumstances will not prevent an individual from acquiring the ‘work tie’, if there are 40 or more days in the tax year on which he or she works for more than three hours.  The fact that the individual may have been required to work in the UK on some or all of those days due to being ‘grounded’ in the UK is neither here nor there.

It is also worth bearing in mind that a day can only be discounted under the SRT if the individual ‘intends to leave the UK as soon as the circumstances permit’. So, if an individual is quarantined in the UK for a period and wishes to disregard those days on the basis of exceptional circumstances, it is essential that he or she leaves the UK as soon as possible after the end of that period. A practical difficulty here is that it may not be possible for the individual to return to his ‘home’ country, even if he is able to leave the UK, for example if the borders to his home country are closed.  Strictly, the test is whether the individual leaves the UK, not whether he returns home, so HMRC would be entitled to take the position that if the individual could leave the UK and go to a third country, he would need to do so in order for the ‘exceptional circumstances’ provisions to apply. HMRC’s stance on this is not clear from the current guidance. HMRC note that their guidance is subject to further change, so perhaps later versions will include a clear statement of their position in relation to this point.

A final important caveat is that there is a limit on the number of days that can be disregarded on the basis of exceptional circumstances – if the number of days spent in the UK due to such circumstances exceeds 60, the excess days over 60 are not disregarded (ie they are taken into account, despite the exceptional circumstances). This is unlikely to be an issue for 2019/20. But the point may become more relevant in the coming tax year, as the pandemic continues. The limit is statutory and so, strictly, would require new legislation to be passed for it to be increased. However, it is possible that HMRC may be prepared to increase the limit on a concessionary basis, and so we will need to wait and see for further developments on this.

So, although HMRC’s guidance makes it clear that a Covid-19 related grounding will be deemed ‘exceptional’, specialist advice should still be sought to ensure that you or your clients are not caught out. And experience shows that careful record-keeping will be key, as reconstructing what happened, when and why, once normality has returned, will otherwise be hard.

This article was written by Sophie Hart and Catrin Harrison. For more information please contact Sophie at sophie.hart@crsblaw.com or on +41 (0)22 591 18 54 or contact Catrin at catrin.harrison@crsblaw.com or on +44 (0)20 7427 6514.