01 September 2023
HMRC is focusing many of its enquiries on taxpayers that were non-resident in the years prior to the coronavirus pandemic. During the tax years 2019/20 and 2020/21, individuals may have spent more days than usual in the UK due to travel restrictions imposed by governments. Taxpayers may have claimed exceptional circumstances in respect of these additional days spent in the UK and not counted them as UK days for the purposes of establishing their tax residence.
A taxpayer’s residence status determines their liability to UK taxes. Broadly, UK residents are taxed on their worldwide income and capital gains (although there are special rules for those who are non-domiciled and taxed on the remittance basis). Non-residents are only taxed on their UK source income and certain types of UK capital gains.
Since the 2013/14 tax year, a taxpayer’s UK residence position is determined by applying the statutory residence test (SRT). The SRT provides a clear answer on a taxpayer’s UK tax residence, albeit the rules are complex and many terms are narrowly defined. In many cases, the number of days a taxpayer spends in the UK has to be compared with the number of connections and ties they have to the UK to determine their residence status.
Under the SRT, taxpayers can ignore time spent in the UK due to exceptional circumstances when determining their residence position. The exceptional circumstances need to be beyond their control – for example, natural disasters or sudden life-threatening illness. HMRC issued additional guidance during the pandemic, which explained the coronavirus related circumstances that would be considered exceptional – for example, if a taxpayer is advised by the government not to travel from the UK.
HMRC has established a team to review the UK lockdown rules and travel restrictions in place during the pandemic in connection with claims to non-UK residence. It may look to deny exceptional circumstances claims if it does not consider travel restrictions were in place for the days covered by the claim, although the travel restrictions in the taxpayer’s intended destination country would also have been relevant to a taxpayer’s ability to leave the UK. Furthermore, during the pandemic, several countries imposed tighter restrictions on people travelling from the UK.
HMRC is also requesting a significant amount of information from taxpayers in support of exceptional circumstances claims, such as:
- did they quarantine when they arrived in the UK?
- did they take a coronavirus test on arrival to the UK? and
- did they complete passenger locator forms?
Taxpayers are being asked why they came to the UK, even in circumstances when they arrived prior to lockdown.
Taxpayers are also expected to provide evidence of attempts to leave the UK, including applications for repatriation flights and notifications of any cancelled flights. HMRC has been known to request mobile phone records and taxpayers’ emails as part of its compliance checks to determine whether their activities and arrangements created another connection to the UK under the SRT, for example through the number of UK workdays.
Notwithstanding that many taxpayers will find some of the information requested intrusive, it may be difficult for them to provide all the information being requested by HMRC, as coronavirus tests and passenger locator forms are not records that taxpayers are likely to keep once they had served their specific purpose.
HMRC’s denial of exceptional circumstances claims may not just change the taxpayer’s residence for the years of the pandemic, but could also result in them being resident in years since the pandemic ended because of the complex SRT connections and ties rules. In some cases it may also affect their deemed domicile status.
Taxpayers and their advisers need to be prepared to provide detailed evidence and information to support their exceptional circumstances claims.