Displacement of employees from the Middle East

Low or no tax rates have made parts of the Middle East a favourable location for high-earning employees.

However, the region’s ongoing conflict has seen increasing numbers of employees returning to the UK. The UK Foreign, Commonwealth and Development Office (FCDO) has issued advice to either avoid all travel (to Israel, for example), or to avoid all but essential travel (to the UAE or Qatar, for example) to the area.

Relocating to the UK, for even a temporary period, could see them facing unexpected tax bills. Likewise, employers of returning individuals will also need to consider the ramifications.

UK tax implications for individuals

Many employees returning to the UK may have been treated as non-UK tax resident and are therefore only taxable on their UK source income (eg UK investments and UK workdays). Becoming UK tax resident again could bring their whole income and capital gains back into the scope of UK taxation.

Employees who left the UK after 5 April 2024 who permanently return to the UK before 6 April 2026 may find that they are still UK tax resident and are taxable on their global earnings for the entire period.

In addition, those individuals who ceased to be UK tax resident in the last five years may find that any capital gains made since their departure will now become taxable in the UK.

The statutory residence test and exceptional circumstances

Fundamentally, an individual who is present in the UK for 183 or more days during the UK tax year will be classed as UK tax resident. Individuals spending fewer than 183 days in the UK may still be tax resident under the Statutory Residence Test (SRT).

Under the SRT, an individual will automatically be non-UK tax resident if:

• They spend fewer than 16 days in the UK and they have been UK tax resident in any of the previous three years.
• They spend fewer than 46 days in the UK and they have been non-UK tax resident for the previous three years.
• They are working full time overseas without any significant breaks and spend fewer than 91 days in the UK in the tax year, of which no more than 30 are workdays.

If none of these tests are satisfied, the individual would need to consider the automatic residence tests and then the sufficient ties test.

When counting the time present in the UK in the tax year, up to 60 days spent here because of exceptional circumstances can be ignored. HMRC’s guidance states that:

“Exceptional circumstances will generally not apply in respect of events that bring an individual back to the UK. However, there may be circumstances such as civil unrest or natural disaster where associated FCDO advice is to avoid all travel to the region.

Individuals who return to and stay in the UK while FCDO advice remains at this warning level would normally have days spent in the UK ignored under the SRT, subject to the 60 day limit.”

This guidance only applies where the FCDO advice is to avoid ‘all travel’ to a location. Most of the current advice is to avoid ‘all but essential travel’ to a location, making it uncertain if HMRC would accept the days as exceptional circumstances – especially as the individual could potentially work elsewhere in the world (subject to local immigration rules).

Days spent in the UK in excess of 60 days for exceptional circumstances are not ignored. Qualifying days can be excluded in determining the number of days spent in the UK but not in determining the number of UK workdays.

What do employers need to consider?

Employers should discuss the situation with their employees. There will be individuals who will not want to return to the Middle East, while others will have an uncertain wait for FCDO advice stating that it is safe to return.

Employees on the UK payroll

Employers will need to start deducting tax and National Insurance (NI) for individuals returning permanently to the UK. For individuals who plan to return to the Middle East and remain non-UK tax resident, UK tax will still be payable on UK workdays and will need to be collected through the UK payroll.

For individuals who have ceased to pay UK NI under the 52 weeks rule, they will become liable to UK NI again after six continuous weeks spent in the UK. Individuals who are still within the initial 52 weeks of working abroad may see a new 52-week period start when they return to the Middle East. In both cases, this will mean higher NI liabilities for employers.

Overseas branches of UK employers

Where the returning employee works for a branch of the UK employer, they will need to pay UK tax and NI through the UK payroll (even if still paid by the branch payroll).

Overseas employers

Where an employer currently has no presence in the UK, employees relocating to the UK could create permanent establishments for their employer in the UK leading to corporation tax and payroll obligations.

Employers of Record

Care should be taken in respect of individuals who are employed by Employers of Record in the overseas location. If they return to the UK, the UK entity may be considered to be a host employer liable to deduct tax and social security. There is also a risk that the new umbrella company legislation would mean that any UK payroll failures of the Employer of Record would be payable by the UK entity.

Temporary workplace

Employees whose permanent workplace is overseas may benefit from the temporary workplace rules and can claim a deduction for travel, accommodation and subsistence costs. However, it must be clearly documented that the individual will return to their permanent workplace within 24 months.

Next steps for employers

Employers need to discuss the situation with their employees and find out what they want to do in the long term. In times of uncertainty, employers need to consider the tax and social security implications to avoid any future consequences.

For more information on the tax considerations for employees returning to the UK, please get in touch with Jo Webber or your usual RSM contact.

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