It is not an overstatement to say that we currently find ourselves in exceptional times. The measures which have been introduced to attempt to limit the spread of the Coronavirus have wide-ranging impacts for all of us. As we adapt to the new environment, the implications of the restrictions on tax residence are now coming to the fore and HMRC and other tax authorities are beginning to provide updated guidance and adaptations to their practice to reflect the new reality.
Tax residence questions, for both individuals and some businesses, look to the location of where in the world people are located at particular times. Whilst until now there has been freedom to travel internationally in order to preserve tax residence status, COVID-19 precautions and restrictions may severely curtail this flexibility in the short to medium term so the implications on tax residence should be borne in mind.
Both tax authorities and corporate governance rules are needing to adapt rapidly to the changing circumstances. An example of this is that Revenue Jersey recently provided confirmation that where directors are unable to physically attend board meetings in Jersey due to health, self-isolation or travel issues associated with COVID-19 then the Jersey tax authorities would not argue that the relevant company has failed the economic substance test in Jersey.
HMRC currently finds itself at the centre of many of the emergency measures to support business announced by the United Kingdom Government (e.g. administering registration of furloughed workers, postponement of VAT and income tax payments) but we are now beginning to see HMRC guidance for taxpayers emerging in other areas including the implications of COVID-19 on the tax residence of individuals under the statutory residence test which we outline below. We also provide some some observations in connection with corporate tax residence in the current climate.
Statutory Residence Test
For any individual who is attempting to retain tax residence in a particular jurisdiction (whether to remain as or avoid becoming, UK tax resident) under the statutory residence test (“SRT”), the number of days spent in the UK is crucial.
The SRT rules are complex (and a full description is outside the scope of this note), but many of the tests involve counting days present in the UK (or another jurisdiction) to determine tax residence – whether:
- on the basis of automatic residence tests (e.g. being present in the UK for more than 183 days in a tax year) or
- under some of the tests associated with having sufficient ties to the UK (e.g. the 90 day tie test as to whether the individual has spent more than 90 days in the UK in either of the prior two tax years).
In certain circumstances HMRC accept that in applying the SRT day counting rules you may sometimes need to take exceptional circumstances into account when determining the number of days spent in the UK (for example if an event has prevented the taxpayer from leaving the UK). It should be noted that exceptional circumstances can apply to some but not all of the day counting rules within the SRT and details can be found in the HMRC manual on Residence, Domicile and Remittance Basis here .
HMRC typically take a restrictive approach in this area, so that, whether circumstances are exceptional or not depend on the particular fact pattern, the individual’s circumstances and the choices available to them at the relevant time. Where exceptional circumstances apply, then periods spent in the UK as a result of that event can be ignored for the purposes of certain of the day counting tests under the SRT. Essentially, in order for there to be exceptional circumstances HMRC requires that the individual has no real choice concerning the period of time that they spend in the UK and matters are beyond their control (so a serious sudden medical emergency impacting the taxpayer might qualify but scheduled surgery would not).
HMRC have now issued further guidance to make it clear that it is appreciated that COVID-19 may impact on taxpayer’s ability to travel and may require them to remain in the UK unexpectedly. In order for days in the UK to be ignored a result of exceptional circumstances, this will still depend on the facts of each case but HMRC are clear that if an individual:
- is quarantined or advised by a health professional or public health guidance to self-isolate as a result of COVID-19;
- is advised but Government advice not to travel from the UK due to COVID-19;
- is unable to leave the UK as a result of the closure of international borders; or
- is asked by their employer to return to the UK temporarily as a result of the virus
then HMRC will accept that these circumstances will be considered exceptional and days spent in the UK as a result can be disregarded under the day counting rules.
This is welcome guidance. Anyone who is needing to take advantage of this relaxation of the day counting rules would be well advised to keep a contemporaneous note of the details of the reasons that they have needed to remain in the UK, the period to which that applies and the limb of the revised advice which applies to them.
Corporate residence and central management and control
COVID-19 related travel restrictions may also raise some corporate residency issues for companies which are incorporated outside the UK but resident in the UK for tax purposes.
Any company which was incorporated in the UK will be generally be treated as UK tax resident (irrespective of where its board meetings are held). But for companies incorporated elsewhere, they will be treated as resident in the UK for tax purposes if central management and control (“CMC”) is exercised in the UK (subject to the operation of any applicable double tax treaty).
To work out where CMC is exercised, we need to look to a line of case law. This tells us that the location of CMC is a question of fact and requires us to identify where in the world the highest level of control is conducted. For these purposes the physical location of board meeting is important if those meetings are the way in which management and control over the company is actually exerted. If the board is controlling the company then CMC is the place where the board meets. However, if there is a single controlling individual (for example a chairperson who is able to exercise control by reason of a dominant shareholding or casting/weighted voting) then it may be the location of that individual which is important in determining the place of CMC.
The requirements of the CMC test may mean that the impact of COVID-19 and challenges of directors outside the UK physically attend board meetings in the UK need to be considered in order to preserve UK tax residence (and avoid unintended consequences such as exit charges). Practical steps could be to appoint additional UK based directors who could act whilst restrictions apply or alternatively a delegation of powers by board members to representatives in the UK.
Companies which are non-resident in the UK but who have UK employees who normally work abroad but are currently needing to work from homes in the UK could give rise to a concern that this might create a UK permanent establishment. Indeed this could equally apply to a UK tax resident company which has staff working from home in other jurisdictions.
The hope was that HMRC and other tax authorities act with appropriate pragmatism around these issues. HMRC has reacted by providing some further guidance in the International Manual in relation to the impact of COVID-19 on both corporate residence and also the creation of UK permanent establishments. HMRC claim to be “very sympathetic” to the disruption that the virus has caused, and has concluded that existing legislation is sufficiently flexible to deal with the impact of COVID-19 both in terms of corporate residence and existence of a UK permanent establishment. In particular HMRC state that:
- they will take a holistic view and the fact that some board meetings are held or decisions are made in the UK over a short period of time will not necessarily result in a company becoming UK tax resident; also
- that a non-resident company will not automatically create a permanent establishment over a short period of time and that one key test will be whether contracts are habitually concluded in the UK and the degree of permanence which is created.
This approach aligns with the guidance issued by the OECD a few days prior to the HMRC update.
Kate Schmit