When British pilots at Emirates, the Gulf airline, returned to the UK from the Middle East last year after losing their jobs because of the pandemic, they had little hope of finding more work in aviation amid a global travel shutdown.
To compound their difficulties, many now also face big and unexpected tax bills, having moved from a low-tax location back to the Britain. Those who earned £80,000 in a year, now face a bill of around £20,000, according to Max Porter, a tax consultant specialising in expat finances.
“They thought they were overseas earning tax-free cash . . . but they’re actually UK resident,” says Porter of the former Emirates pilots he has advised. Those with several years in the Gulf under their belt may have savings, but some worked for Emirates for as little as 12 months.
Porter says: “The added kicker is that given the industry they work in, there are no jobs. They can’t even start working. They’ve got this tax bill to pay, but no way to pay it.”
The pandemic has disrupted every area of life, and expatriate workers are no exception. As well as those made redundant, people have been displaced because of sickness, quarantine, cancelled flights or closed borders.
Some have ended up in places where they have family and friends. Others, often on business trips, have found themselves isolated from home for months. Many people who lost their jobs, like the Emirates pilots, have had to return to their home countries.
On top of all their other personal and financial difficulties, many of these displaced people have seen their tax affairs thrown into turmoil.
Porter, private client director at ATC Tax, a consultancy based in Devon, has spoken to hundreds of people in sectors including finance, tech and travel, who are locked out of their home countries or stuck longer than planned in a foreign tax jurisdiction, and are frantically trying to understand the financial implications.
“So many people have had to put their plans on hold,” he says. “Often this is someone who’s had their life turned upside down. But they can’t forget about tax for a minute.”
Other advisers echo the stories of clients tripped up by the rules that define where they are tax resident. From a tax point of view, the worst hit are those who normally live in low-tax economies, such as the Gulf states, but find themselves obliged to stay in high-tax locations, such as western Europe, including the UK.
Many countries took emergency measures to soften the rules and prevent people from becoming unintentionally tax resident due to Covid-19 restrictions. But experts warn the devil is in the detail, especially when it comes to how the concessions are applied.
Professional bodies in the UK are worried the measures introduced by HM Revenue & Customs will not be supportive enough and are urging greater flexibility. The Chartered Institute of Taxation (CIOT), the Institute of Chartered Accountants of England and Wales and the Society of Trust and Estate Practitioners (Step) have been discussing the issue with HMRC for several months.
But so far, the government is “not persuaded there needs to be any more flexibility in the system”, says John Cullinane, CIOT director of public policy.
The UK government says: “We believe our rules strike a reasonable balance, and that an individual who has ties and connections to the UK and spends a substantial proportion of the year here should be treated as tax resident.
“But we are aware of the significant effects the pandemic is having on the ability of individuals to move between countries, which is why we’ve made changes and clarified our residence rules to enable people to manage the disruption.”
FT Money has investigated how the tax residence rules work, the problems the displaced can expect to face and how best to handle potential pitfalls.
Broadly speaking, whether you are defined by a tax authority as resident and liable for taxes is closely linked to how long you spend in a country. In some countries other factors also count, such as a dependent family or a home.
Spending six months or more during a year in a location is often a key residence test, notably in Europe. But it varies by country. You could be UK tax resident after spending just over two weeks in the country, depending on your other connections, says Gary Heynes, head of private client at RSM, an accountancy firm. Other factors include a family home or close relatives in Britain, or working in the UK for part of the year.
The US takes a different approach, looking at the preceding three years to decide whether an individual has been substantially present in America. A three-month stay in a calendar year could mean an individual becomes US tax resident, Heynes says. US rules are in any case highly unusual because the authorities can tax American citizens wherever their live, even non-residents.
Tax year dates also vary. Most run on the calendar year, unlike the UK’s April 6 to April 5 tax year. Advisers say this could lead foreigners stranded in the UK and British people stuck in other countries to be judged as resident in two places simultaneously.
Such people could technically face “double taxation” — liable for tax on the same income in both places — but most countries have treaties with other nations to resolve this. As bilateral accords, these are not affected by the UK’s withdrawal from the EU.
One tax adviser found himself in a corner after the imposition of Covid-19 restrictions. Speaking to FT Money on condition of anonymity, he says he and his wife moved from the UK several years ago and now live in Cyprus. They return a few times a year to visit family and friends and retain a UK home.
In early March last year, they arrived for what was supposed to be a two-week holiday. However, the start of the first lockdown and the implosion of international travel meant the couple stayed for five months.
“I was mindful of the fact that I needed to spend a limited number of days so as not to become tax resident,” he says. But cancelled flights and getting a Covid-19 test in time to fly, as required, was hard.
Fortunately, he was able to make use of HMRC’s emergency tax residence extension. In certain circumstances, this allows individuals to spend an extra 60 days in the UK without becoming tax resident.
However, others have not been able to make it back to their home countries in time. Jay Sanghrajka, tax partner at Price Bailey, an accountancy firm, says one of his clients, a senior executive at an Indian company, has been unable to return from a trip to the UK.
He has been in the UK for three months (accumulated over a number of business trips) so will be classed as tax resident for at least the 2020-21 tax year. Meanwhile, because he is the sole director of a company, the work he was doing in the UK risks making the Indian company liable for UK tax.
Companies are considered UK tax resident if they are incorporated or “centrally managed and controlled” in the UK — in other words, key decision-making takes place in the country. This makes them subject to UK corporation tax, currently 19 per cent, on all worldwide income and gains. The UK-India double tax treaty may provide relief but this will depend on the taxing authorities in each country reaching agreement.
Tax advisers say measures can be taken to limit these risks, such as temporarily changing the board of directors; ensuring the stranded director takes no part in board meetings; or if the company defers big strategic decisions. However, this “never manages the risk completely”, says Sanghrajka.
A company is more likely to become tax resident in another country when the director is an owner-manager or sole shareholder of the business — because they are typically the chief decision maker.
Sanghrajka says HMRC’s Covid-19 support measures should not be limited for 60 days. “Covid is not limited to 60 days. You can be stuck in the country for a much lengthier period.”
What is more, some who arrived in the UK just before the first lockdown and have yet to return home could find three tax years affected: 2019-20, 2020-21 and potentially 2021-22.
The implications of being accidentally UK tax resident in 2020-21 are “far-reaching” for people who took HMRC’s opportunity to use a common technique and “split” the tax year, having previously left the UK, says Tim Stovold, head of tax at Moore Kingston Smith. People who used to live in the UK, went to work overseas, and came back to the UK for a short period only to get stuck could be caught out by this.
“An individual may have made a claim to split the 2019-20 tax year so that they were treated as UK tax resident up to the date of leaving the UK to commence work overseas,” explains Stovold. “However, one of the conditions for splitting the 2019-20 tax year into a period of UK residency and a period of non-UK residency is that the individual is non-resident in 2020-21, so failing this condition would have implications for 2019-20.”
Like Porter, Gary Heynes, head of private client at RSM, an accountancy firm, has British clients normally based in the UAE. In many cases, they came to the UK in July and August to escape the hot Middle Eastern summer, only to be stranded. “They’ve gone from an almost no-tax jurisdiction, to finding themselves . . . potentially caught in the UK tax net,” he says.
Conversely, many thousands of Britons have been stuck in other countries, including the US. This can create tax liabilities in both places. Dawn Register, head of tax dispute resolution at BDO, an accountancy firm, says her firm has British clients stuck in Brazil, Hong Kong and Spain.
Some were abroad for business trips when local lockdowns hit. Others had chosen to go abroad to be nearer to family — but were unaware of the tax consequences.
“A lot of the uber-wealthy have fled London and the UK and are living elsewhere, but that could affect their tax residency,” she warns. One is a business owner who “rather than living in a London apartment, decided to work from the beach in the Costa del Sol”. By so doing, he has potentially made himself and his company tax resident in Spain and the UK.
“Health and wellbeing was the driver of his decision,” she says. “But it could have a major financial impact on the tax he pays.”
Meanwhile, a number of countries have introduced Covid-19 tax residence emergency measures. These vary by country. So people will need to check whether local rules will help their circumstances.
When HMRC said in March it would permit non-resident people to stay an additional 60 days in the UK, it set specific “exceptional circumstances” associated with the pandemic.
These are limited to when someone is quarantined in the UK or asked by a health professional or public health guidance to self-isolate in the UK; is acting on government advice not to leave the UK; is unable to depart because of border closures; or asked by an employer to return temporarily to the UK because of the virus.
HMRC said the change was “not a blanket ruling and should be read in conjunction with existing guidance, and does not represent a change in the rules or requirements for determining tax residency”.
But tax experts warn the guidance leaves unanswered questions, such as whether staying in the UK because a travelling companion is forced to isolate or quarantine would count.
Andrew Fahy, head of tax and financial planning at wealth manager Brewin Dolphin Ireland, adds the concessions will be “tricky” for many to claim because the pandemic has gone on so long. “More concessions may be required,” he says.
Dhana Sabanathan, partner at law firm Winckworth Sherwood, says her firm has been contacted by individuals stuck in the UK, who have continued to work remotely.
“Unfortunately, working on those days they have been forced to remain in the UK, due to exceptional circumstances, are still counted for the purposes of the statutory residence test, and can still result in UK tax residence,” she warns. So those who keep working may not benefit from the 60-day concession.
Advisers recommend keeping a record of your movements, border closures, flight cancellations, doctors’ prescriptions and appointments, and any other information that could affect a future claim.
“Tax is generally the last thing that people think about,” says Heynes. But this is a problem that’s going to go on and on into the future.”