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Working from abroad? Don't forget tax

If you work remotely from abroad make sure you fulfill your UK tax obligations
Working from abroad? Don't forget tax
  • You may still be a UK tax resident if you live abroad
  • Where you are resident depends on a number of criteria depending how long you spend in this country each tax year
  • There are different CGT reporting rules for UK and non UK residents

The Covid-19 pandemic resulted in many people working remotely rather than in a work place. Although UK measures to contain the pandemic are no longer in place, some employees continue to do this for some or all of the time, including in other countries. However, if you work from home abroad, as well as local tax and legal considerations, you may still be liable for UK tax.

Even if you spend time abroad you may still be tax resident in the UK, meaning that you have to pay UK income tax. You need to determine where you are tax resident via the UK statutory residence test.

If you are in the UK for 183 or more days in a given tax year you are a UK resident. If this is not the case your tax residency is determined by a number of HM Revenue & Customs (HMRC) ‘tests’.

You are resident in the UK if you do not meet any of HMRC’s three ‘automatic overseas tests,’ or meet one of its ‘automatic UK’ or ‘sufficient ties' tests.’

According to the first automatic overseas test, you are not a UK resident for the tax year if you spent fewer than 16 days of it in the UK but were resident for one or more of the previous three tax years. You are also a non resident in a tax year if you spend fewer than 46 days of it in the UK and were not a resident for the previous three tax years. And if you work full time overseas during a tax year and spend fewer than 91 days of it in the UK, the number of days on which you work for more than three hours in the UK is less than 31 and there is no significant break from your overseas work, you are not a UK resident.

 

UK tests

You are a UK tax resident for the tax year if you have a home in the UK for at least one period of 91 consecutive days if at least 30 of those 91 days are in the tax year when you have a home in the UK and you’ve been present in it for at least 30 days. And at that time you had no overseas home or were present in one for fewer than 30 days in the given tax year.

Under the third automatic UK test you are considered UK resident for tax if you meet criteria including working full time in the UK for any period of 365 days, which falls in the tax year. And more than three quarters of the total number of the days in this period when you work more than three hours are in the UK.

If you do not meet the automatic overseas tests or automatic UK tests, ‘sufficient ties’ could mean you are still a tax resident. If you were not a UK resident in any of the previous three tax years, you could be considered resident in the current tax year for reasons including a family or work tie. If you were resident during one or more of the previous three tax years, you have to check whether you had a country tie. If the UK is the country in which you were present at midnight for the greatest number of days in that tax year you have a tie. The more ‘UK ties’ you have, the fewer days you can spend in this country before you become UK resident.

You can see the full details of what determines whether you are a UK resident or not at https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3. However, because of the complications of working this out it could be worth getting professional advice. This is particularly the case if you were resident in the UK for part of the year but non resident for another part.

Another complication in working out what tax you are liable for where, is that the UK tax year runs from the 6 April to 5 April, whereas in most countries it is for the calendar year.

Even if you are resident in the UK, the country in which you are based may want to tax you for the days you spend working there. The UK has double tax treaties with many European countries and the US to prevent you from being taxed in two jurisdictions on the same income and gains. For example, if you are a UK tax resident the UK will give you a credit for overseas tax paid on income which is sourced overseas. So “planning residence in a specific jurisdiction or joint tax residence in a couple is more likely to provide certainty and a better tax outcome than a constant change of scenery,” explains Kate Aitchison, director, private client tax at RSM.

 

Employer consequences

If you are an employee, before relocating abroad it is important to inform your employer of your plans and get their approval because working in another country could result in tax for your employer. Your employer might have to report and operate payroll taxes in the overseas territory in which you are based, and deduct at source income taxes and social security on your earnings in the overseas territory. This creates an extra administrative burden for your employer.

“Another tax consideration that has to be factored in by the business is whether the presence of the employees overseas will result in some of the UK business’s profits being subject to corporation tax in the overseas territory,” explains Ross Wilkinson, corporate tax partner at RSM UK. “This will hinge on whether the overseas employee's presence in the overseas territory is considered to result in a permanent establishment of the UK company being created in the overseas territory. This can result in a high international effective tax rate overall, given the UK remains a relatively low corporate tax rate jurisdiction.”

 

Reporting CGT

UK residents have to report and pay capital gains tax (CGT) when they dispose a UK residential property which is not their main home. But non-UK residents must submit a CGT report whether or not any tax arises from the disposal within 60 days, and pay any tax due within that period.

But whether you are UK tax resident or not can be less clear if you leave the UK in the same tax year as making a disposal. “For example, an individual may leave the UK during the year, believing their circumstances mean they will not become a non UK resident until the next tax year,” explains Alex Foster, private client tax partner at RSM. “On that basis they won't file the CGT return when they dispose of their main residence. But if their plans change and they don't meet any of the tests in order to be resident for that tax year, meaning that they are non-resident for the whole year [and are] not aware of this until beyond the 60 day deadline for filing [they will] be subject to late filing penalties.”

If you miss the deadline by up to six months, you get a penalty of £100. If you miss it by more than six months there is a further penalty of £300 or 5 per cent of any tax due, whichever is greater. And if you miss the deadline by more than 12 months there is a further penalty of £300 or 5 per cent of any tax due, whichever is greater. 

If the tax year in which you make the disposal is a ‘split year’, whereby you are resident for the first part of the tax year and then non-resident for the remainder of the tax year, you may not know the date on which you cease being a UK resident until after the 60 day reporting deadline. “If it later transpires that you were non-resident at the relevant date, but have not filed as you believed that you were UK resident, file a CGT report as soon as possible,” advises Foster. “You are likely to need to appeal against the resulting penalties.”