Press Room

8 Apr 2020

COVID-19 – relief for those stuck in the UK or US due to lockdown


The rapid spread of COVID-19 over the past few weeks has meant that Governments around the world are imposing strict restrictions on the movement of people. The US has now passed China as the country with the most confirmed cases of COVID-19, and we expect to see Donald Trump’s regime put further restrictions in place in order to control the outbreak.

In this bulletin, Luke Jenkinson and Andrew Parkes take a look at the rules in both the US and the UK to see what relief is available for individuals that get stranded inadvertently, due to the lockdown.

Exceptional Circumstances in the UK: Concession or clarification? 

Under the UK’s Statutory Residency Test (SRT), there is a special rule that allows someone seeking to maintain non-resident status to exclude from their UK day-count days spent in the UK due to “exceptional circumstances”. The legislation defines exceptional circumstances as “national or local emergencies such as war, civil unrest or natural disasters”, as well as “a sudden or life-threatening illness or injury”. Under this rule, if someone is only in the UK at the end of a day as a result of exceptional circumstances outside of their control, this is considered an “exceptional day” under the SRT, and is not taken into account when totalling someone’s residency days for the purposes of the SRT.

HMRC have recently published guidance with regards to COVID-19 and what would be considered “exceptional circumstances”. Under the guidance, circumstances will be only considered exceptional if the individual:

  • is quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus; or

  • is advised by official Government advice not to travel from the UK as a result of the virus; or

  • is unable to leave the UK as a result of the closure of international borders; or

  • is asked by their employer to return to the UK temporarily as a result of the virus

Under the SRT, a maximum of 60 days in the UK can be disregarded as exceptional circumstances. It is important to note that this limit has not increased under the new guidance. Exceptional circumstances also do not apply to every part of the SRT. They only apply to those rules that rely upon calculating days spent in the UK and also in concluding whether someone meets the ‘90 day tie’ under the sufficient ties test. Exceptional circumstances are not taken into account when reviewing the ‘work,’ ‘family’ and ‘country’ ties for the sufficient ties tests, which means someone could find themselves UK resident, even though the days they are stranded in the UK are not taken into account towards their total day threshold.

HMRC have used the release of this guidance to clarify their position with regards to COVID-19 and the SRT; however, it is clear that they have not made any concessions to those affected by these limitations.

Establishing US tax residency

Unlike the UK, the US is yet to release any guidance on the impact of COVID-19 for someone determining their residence status under the Substantial Presence Test (SPT).

Under the SPT, someone is a US resident if they were present in the US for at least 30 days in the current year and a minimum of 183 days over the three year period, using the following calculation:

  • all days in the current year

  • ⅓ of all days in the previous year

  • ⅙ of all days in the year before that

The US tax system operates on a calendar year basis and so someone who is stranded in the US and unable to leave, is increasing their 2020 day count under the SPT, (unlike the UK where people can take advantage of “exceptional circumstances”). Depending on how long the lockdown continues, a large portion of the 183 day threshold over the three year period, may be accumulated in 2020 alone.

However, even if there is a protracted stay in the US, all is not lost, as whilst the IRS have not issued COVID-19 specific guidance, there are current sections of the Internal Revenue Code that someone can use to potentially prevent themselves from becoming US tax resident.

Non-US individuals who travel to the US for tourism, medical visits or business and are unable to return home will likely become US resident, should they meet the SPT. However, if someone travels to the US and contracts a medical condition whilst they are there (for example COVID-19) which prevents them from travelling home, then the days of illness are not taken into account when calculating total US days under the SPT. Form 8843 will need to be filed with the IRS by the individual claiming to exclude these days. A word of caution however: if it is not filed by the US individual tax return filing date for the year in question (usually April 15th after the calendar year, unless an extension is filed) then the days are no longer excludable. In addition, once someone is able to leave following their period of illness, but remains in the US, then these days of illness can no longer be excluded.

Being stranded in the US as a result of the lockdown is not sufficient to benefit from the medical exclusion under the SPT. Someone would have to contract COVID-19 whilst in the US so that they are prevented from leaving and returning home.

It is not explicitly clear if someone being unable to leave the US because a person they are with contracted COVID-19, would qualify for the medical exemption. The guidance does state that it is down to facts and circumstances, so if someone is travelling with their child who contracts COVID-19 whilst in the US, this would seem a legitimate medical condition preventing them from returning home, despite not being diagnosed with COVID-19 themselves.

We hesitate to suggest that a mild dose of the virus may, therefore, be beneficial from a tax point of view, in line with the view that death is a known way of avoiding capital gains tax, just not a method anyone would recommend.

There is a second relief that may be of more help if someone becomes a US resident under the SPT as a result of COVID-19. They can still be treated as a non-resident alien in the US if they meet the ‘Closer Connections’ exemption. To meet this, they must:

  • be present in the US for less than 183 days during the tax year

  • maintain a home in a foreign country during the year; and

  • have a closer connection during the year to one foreign country in which you have a tax home, than to the US

Evidence of a closer connection is where their permanent home is, where their family and personal belongings are based, where they vote and where the majority of their social and cultural ties are. Where someone becomes US resident as a result of being stuck in the US, it is likely that they will have a closer connection to another jurisdiction; however, if their US days in the year exceed 183, then this exemption cannot be claimed.

UK temporary non-residence 

Whilst someone is stranded in the UK and not permitted to travel home, there are still a number of UK residents overseas who are unable to come back to the UK, due to the travel restrictions imposed by the Government. It is possible that individuals who historically have been treated as UK resident under the SRT, could become non-UK resident for tax purposes.

If someone leaves the UK and is treated as non-resident for tax purposes, should they then return to the UK within 5 years (from the date they became non-resident, rather than April to April), they may be subject to tax on certain income and gains earned whilst non-resident under the ‘temporary non-residence rules’. In such cases, they are taxed as if the income or gains were realised on the day they return to the UK.

These rules will apply if:

  • the individual returns to the UK within 5 years of moving abroad; and

  • the individual was a UK resident in at least 4 of the 7 tax years before moving abroad

Not all income and gains fall within the scope of the temporary non-residence rules. For example, wages and gains on the disposal of assets that were acquired during the period of non-residence are excluded.

These rules were introduced to stop people moving abroad, disposing of an asset and returning to the UK without having to pay UK capital gains tax. Whilst these are not similar circumstances to someone stuck overseas due to COVID-19, the anti-avoidance rules will still apply.

We may, therefore, see some income and gains drop out of charge and others become taxable in a later year, the year of “return” to the UK. Not expecting these rules to apply, it is possible that people may declare their income or gains in the wrong year (possibly too early) and so under-declare in the correct year.

In normal times, HMRC are known to seek penalties for the under-declaration, even though no tax has been avoided overall, due to the payment in the earlier year. It will be interesting to see what HMRC do here.

If all else fails, treaty claim? 

Someone who is unable to return to their home country and now find they might become a tax resident of another jurisdiction, may be able to use a tax treaty in order to be considered a tax resident of their ‘home’ jurisdiction, rather than where they have been grounded as a result of COVID-19.

As an example, a UK tax resident has been in the US since the start of 2020 for an extended break, intending to return to the UK in April. However, the spread of COVID-19 has meant that they are grounded in the US and unable to fly back to the UK. Depending on how the situation develops over the next few months, if they are in the US until July, then they may have spent enough time in the US to be considered a tax resident for 2020.

If they exceed 183 days in the US in the current year, they are unable to take advantage of the ‘closer connections’ exemption and be considered non-resident in the US for 2020. However, they are UK tax resident for 2019/20, as they spent sufficient time in the UK between April and December 2019. Plus, if they return to the UK in July 2020 and stay here, they will be considered a UK tax resident for 2020/21.They will be UK/US dual resident for parts of two UK tax years.

The UK has double tax agreements in place with many jurisdictions. The vast majority of these agreements contain a residence article that contains a tie-breaker to cover scenarios where someone is resident of both jurisdictions for tax purposes. The UK/US treaty is no exception and under Article 4 (Residence), an individual’s resident status is determined as follows:

  • you are a resident where you have a permanent home. If this doesn’t break the tie;

  • where the centre of your personal and economic life (work, family, investments, social life etc.) is used. Still no answer? You move on to;

  • you are a resident where you are deemed to have your ‘habitual abode’. The courts haven’t decided yet what this means so it can be difficult to claim, which moves us on to the final set of tests;

  • If none of the other tests break the tie, the two revenue authorities would settle the issue, provided you are a national of both countries. If you were only a national of the UK or the US, your residence would default to the respective country

Provided one of the above tests is met, they are able to ‘treaty tie-break’ their residence to one country. In our example, someone who has become a US resident, is most likely able to argue that their permanent home is in the UK and they should, therefore, be considered UK tax resident.

Because the US operates on a calendar year basis rather than the UK tax year, two treaty tie-breaker claims would need to be made, one for each UK tax year. An alternative to this may be to file a split year tax return in the UK; however, this may lead to complications, not least US tax residence. Treaty tie-break claims are far less complex and so, if available, are the simpler course of action to take.

What does this mean for companies? 

Whilst the first thought of the problems arising from COVID-19 is the impact on people, there are knock-on effects for companies due to the changes in individual circumstances.

Under UK domestic rules, a non-UK company (one incorporated outside of the UK) is resident in the UK for tax purposes if its ‘central management and control’ is in the UK. If someone is now stranded in the UK due to COVID-19 and is exercising the central management and control of their company from the UK, then there is a risk that this company could become UK resident for tax purposes and be subject to corporation tax at 19%. However, despite what some doomsayers might have you believe, the risk of this happening is quite remote, because in most cases the company in question will have a board of directors composed of several individuals. In which case, provided the majority of directors are not stranded in the UK, the actions of the one in the UK is unlikely to bring the company into the scope of UK corporation tax, as the vast majority of the decision making body is elsewhere.

Problems can arise though, where you have a non-UK individual trading through a company and they are the sole director. This is because they will be exercising sole management and control over the business and, in the wrong circumstances, the company could become UK resident from the view of HMRC, if the director makes strategic business decisions whilst stranded in the UK.

However, case law states that the business of a company is carried on where central management and control actually abides, which suggests a degree of permanence and this has been confirmed in the guidance that HMRC has published regarding company residence and COVID-19. For example, say someone working for a company that is centrally managed and controlled in the US, has come to the UK and is now stranded here. If they continue to work and exercise a degree of strategic management over the company whilst in the UK, this does not indicate any degree of permanence or regularity to the company operating in the UK. It is a result of the exceptional circumstances they find themselves in. If HMRC were looking to find this company and contact them, they would still look to the US as where the company is centrally controlled and managed, rather than the person who is stuck in the UK through sheer bad luck. Plus, as soon as the airlines start flying again, the director would leave, and so would the company.

If central management and control is a concern for companies that find themselves in situations similar to those described above, they can take steps to mitigate any potential exposure. Directors stranded in the UK can, for example, refrain from making any key decisions or voting on any business resolutions whilst in the UK.

Treaty claims are likely to resolve the issue too. However, as many of the UK’s double taxation agreements now include the “competent authority tie-breaker,” an application must be made to HMRC and for them to reach an agreement with the “home” jurisdiction (which may take several years).

Potentially of greater concern for companies with executives stranded in the UK is that after a period of time they are likely to create a taxable ‘permanent establishment’ (PE) of the company in the UK. Of course, as the UK operates a system of Self Assessment, it is up to the company to decide whether it has a PE and to then allocate the profits to the PE accordingly. However, if they do not register, and should have, HMRC now have 20 years to make assessments and charge penalties.

A place of business is “fixed” if it is established at a distinct place with a degree of permanence. An individual does not need to be exercising a degree of central management and control over the company in order to establish a PE. HMRC have confirmed in their new guidance that they would not normally consider that someone has created a PE by being stranded in the UK, as there is no degree of permanence to the business and there would not be a distinct place from which the business is operating.

However, if someone is in the UK for a period of at least 6 months, then HMRC would likely view this as having established a PE in the UK. Whilst it is unlikely that people will be stranded in the UK for 6 months (although we cannot say for sure!), if they have already been in the UK for a period prior to the lockdown, then they could meet this threshold and bring the company within the scope of UK corporation tax.

An individual in the UK can also create a PE if they are deemed to be an ‘agent acting on behalf of a non-UK company’, meaning they have the authority to conclude contracts in the name of the company, or can bind the company even if the contract is not in their name. Someone does not need to be UK resident to meet this test and so this is a realistic problem when continuing to work whilst stranded in the UK. If a PE is created in the UK, the employee will be subject to PAYE, and unfortunately this is one of the circumstances where a treaty claim will not save you.

As with central management and control, people should limit their work in the UK and not take part in customer facing duties, in order to prevent any UK tax exposure. We would expect a sensible case by case approach to be taken by HMRC in light of the current circumstances, but until any specific guidance is issued, we would advise people to err on the side of caution for now.

A final word of caution for employees that work for a company that is resident in a country that doesn’t have a treaty with the UK (admittedly few and far between). Here, the company would become liable to income tax (rather than corporation tax) if any part of the trade is carried on from inside the UK. This is a much lower bar than for a PE!


Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes