A Contractor’s Guide to UK’s Tax Residency Rules Amid Covid-19

International contractors should always be aware of a country’s tax residency rules, which could affect both tax rates and which types of income are taxable.  Most countries will have criteria to qualify as a tax resident or non-resident, usually based on the number of days spent in the country in a single year.

This has become even more complicated with the pandemic, where due to travel restrictions contractors may become stranded, and could unintentionally exceed the allowed number of days to avoid tax residency.  In response to this, tax authorities in the UK have modified their residency rules, recognizing that some foreign workers may not have been able to leave.

If you are working in the UK and were unable to return home, you will want to review the residency tests and some new exceptions for those affected by the pandemic.

What were UK’s tax residency rules prior to Covid-19?

The Standard Residency Test (SRT) in the UK states that tax residency results with stays of more than 90-120 days in-country (depending on number of ties to the UK) per tax year (April 6 to April 5).  This is different from many countries that use the calendar year, or a rolling year from arrival date, to calculate residency.

If that number is exceeded, the worker will be deemed a resident for the entire tax year.  Up to 60 days can be deducted from the total for ‘exceptional circumstances’, so the possible maximum is 180 days before residency is applied.

What has changed about UK’s tax residency laws?

UK lawmakers have modified the SRT somewhat in response to the pandemic for individuals who may be stranded, delayed a planned move or are being asked to work remotely from the UK.  Essentially, they have expanded the ‘exceptional circumstances’ definition to include certain Covid-related circumstances.

What is considered an exceptional circumstance?

Under the new rules, an exceptional circumstance will now include:

  • Public health quarantines
  • Self-isolation
  • Closure of international borders
  • Asked by their employer to return to the UK temporarily

Even if these conditions apply to you, 60 days is still the maximum number of days that can be credited, and there are no other means to avoid residency except leaving the UK until the next tax year begins.

How do these changes impact contractors in the UK?

Experienced contractors may intentionally plan their time around avoiding tax residency, for example limiting any stay to 3-4 months, and then returning home.  Many may have been caught inside the UK when borders closed and quarantines were imposed in the spring, whether they were still working or not.

In that case, they would likely be entitled to another 60 days but might have to show proof of their intention to leave sooner, such as flight reservations.  Regardless, the latest possible date of departure to avoid residency in 2020 was October 5th if you have been in the UK since April 6th.  Because that is the start date for calculation, any days prior to that would be applied to the previous tax year.

Are there changes to double taxation treaties?

In general, a tax resident pays taxes on worldwide income, not just income earned in the country, and has to look to a tax treaty to avoid double taxation.  All double taxation treaties the UK has with other countries are unaffected by this temporary change in SRT criteria.

Conclusion

The impact of tax residency in the UK can be a real issue for contractors, who may not have planned on that outcome.  Contractor Taxation has access to a fully vetted network of resources in the UK who can help with determining residency, use of tax treaties and how to fulfill any tax filing and payment requirements.  We can help you if you have become stranded in the UK due to COVID and want to know your options and how to avoid any penalties.