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Current travel disruption – Tax issues facing Swiss trustees

13 May 2020

From our conversations with Swiss intermediaries, it is clear that a number of tax issues have arisen from the restrictions on travel that are currently being imposed due to COVID-19.  In this update, we consider how individuals and companies are being affected and how HMRC are responding to these challenges.

UK residence for individuals

Many individuals will be prevented from travelling to, or from the UK, at this time.  As we begin a new tax year, a number of clients are concerned about how these travel restrictions will impact their residency position for 2019/20 and 2020/21.

The Statutory Residence Test (SRT), which sets out the method for determining residence in the UK, has an existing provision which enables individuals to ignore days spent in the UK due to “exceptional circumstances”.  However, there is a limit of 60 days that can be claimed under this provision every tax year.  In addition, this provision does not apply to every aspect of the SRT.

Following recent events HMRC has updated their guidance on the meaning of exceptional circumstances and offers some examples of what would likely be covered – such as an inability to leave the UK as a result of the closure of international borders or being advised by a health professional (or by public health guidance) to self-isolate in the UK as a result of the virus.  However, it is stressed that each case should be considered on its own merits and contemporaneous records should be kept to support such claims. 

HMRC are showing a tendency to focus on clients who are non-UK resident due to working full time abroad and these claims may need reviewing in the current climate.

The Organisation for Economic Co-operation and Development (OECD) has, though, issued guidance to national tax authorities that employment income should be treated as received in the usual country of employment, even if workers are temporarily required to work elsewhere during this time.  They also state that individuals relying on treaty residence should be unaffected and encourage tax authorities to be lenient in applying their local tax residence rules.

Finally, the Chancellor has announced that a targeted exemption will apply to highly skilled individuals who have come to the UK to help with the pandemic between 1 March 2020 and 1 June 2020.  Days spent by such individuals in the UK in that time will not count towards their UK residency position.

Example: A previously UK resident individual plans on becoming non-UK resident in 2019/20.  He has spent 80 days in the UK during the tax year and makes a visit to the UK in early March 2020 to see friends.  He plans on staying for 5 days.  He has two ties to the UK (by having available accommodation and by spending at least 90 days in the UK in the previous tax year) and cannot exceed 90 days in the UK in 2019/20 without being UK resident for the tax year. 

Whilst in the UK he develops symptoms of COVID-19 and is advised to self-isolate.  After the period of self-isolation he is then unable to return to his home in Switzerland due to travel restrictions.  It is likely that this individual will be able to claim exceptional circumstances, at least for the period where he is self-isolating.   

The individual would not be making the claim to be non-UK resident until submitting their 2019/20 tax return (possibly as late as 31 January 2021).  HMRC would then have a year to enquire into the return (i.e. by 31 January 2022).  So it could be nearly two years before the exceptional circumstances need to be proven to HMRC.  This shows how important it is to keep good records of what has taken place, for example doctor’s notes and printing out Government advice (a real-time version may be needed as the advice gets updated).


Company residence

A foreign incorporated company may still be treated as being UK tax resident if the central management and control of the company takes place in the UK.  The concept of central management and control is based on where the key strategic decisions regarding the company are made.  There is a body of case law on this matter, and a number of factors may be considered.

There is a concern that some directors and employees are having to meet (likely electronically) and make key strategic decisions in the UK because they are unable to leave the country.   HMRC has expressed sympathy with people affected by current travel restrictions and will continue to take a holistic view of where the key decisions are being made – i.e. a short term requirement to hold board meetings in the UK will not necessarily jeopardise the company’s residence position. Again, each case should be considered on its own merits.

It may be that a company which is considered to have become tax resident in the UK will be covered by a double tax treaty anyway and the OECD’s guidance suggests that companies’ tax residence status under international tax treaties should not be affected by the temporary location of the key decision makers.  For the UK-Switzerland Treaty this would mean that a company’s place of effective management should not be altered by one or more directors temporarily making decisions in the UK due to travel restrictions.

Permanent establishments

A permanent establishment of a company is a trade that is carried out in the UK through a fixed place of business or a dependent agent.  HMRC consider that the existing laws provide sufficient flexibility to deal with the present circumstances because a degree of permanence is required in the UK in order for there to be a permanent establishment.  The current travel restrictions are intended to be short term and should not of their own create a permanent establishment in the UK.

Listen to our latest webinar from our Global Employer Services team where we touch on issues around permanent establishment in the current climate.

Resolving tax residency issues for individuals and companies can be complex, and the significance of UK residence for all legal entities (including Trusts and Foundations) should not be underestimated. As HMRC continue to highlight the importance of considering the facts of each case it is important to review clients’ positions in light of recent events. This also highlights the need to keep accurate records such as calendars and travel receipts.  If you have any questions or are concerned about how these rules will apply to you, please get in touch.