War in the Middle East – What Happens to Your UK Tax if You Return Early?

An individual’s tax residency position in the UK is considered by reference to the Statutory Residence Test (SRT). The legislation is actually made up three tests which determine an individual’s UK residency position. The rules can be complex and require careful consideration. Getting things wrong can be costly, particularly where low or no tax jurisdictions form part of the equation.

By Tom Annat – Senior Tax Manager

The disruption in the Middle East could mean that some people may decide to return to the UK early, perhaps at short notice. In this situation, it will be important to consider the tax implications of coming back to the UK.

The third automatic overseas test – working full time overseas

It is often the case that individuals may rely on the third automatic test in the SRT. This requires an individual to leave the UK and work full time overseas. Broadly, they must work an average of 35 hours a week overseas, have fewer than 91 UK days and fewer than 31 UK work days. Day counts are pro-rated depending on the month of departure. A person leaving and returning to the UK in the same tax year, may find they no longer meet this test.

What happens if I am considered UK tax resident?

If you are considered UK tax resident under the SRT, then you will be considered tax resident in the UK for the whole of the tax year, irrespective of when you return (but see split year treatment below). This potentially brings in all overseas earnings into the scope of UK tax, which may not have previously suffered any tax. This could result in a significant UK tax bill.

Split year treatment

In some circumstances, and where strict conditions are met, it is possible to ‘split’ the tax year into an overseas part and a UK part. If someone leaves or returns to the UK part way through a tax year, this concession can exempt overseas income from UK tax.

Returning to the UK early

Individuals can qualify for split year treatment where they leave the UK to work full time overseas. However, one of the qualifying conditions is that they must remain non UK resident for the following tax year. This could present a problem, for example, where a person has claimed split year treatment in the 25/26 tax year but needs to return to the UK in the 26/27 tax year. Split year treatment could be denied and this may result in all income for 25/26 being taxable in the UK.

What are the options?

Move to a third country

One obvious option is don’t come back to the UK. Clearly that won’t be an option for everyone. However, if it is possible to go to a third country, this may avoid becoming UK tax resident and could save a significant amount of tax. Timing could be crucial, particularly as we are getting towards the of the current tax year.

Exceptional circumstances

In certain circumstances which are beyond the control of an individual, a person can be present in the UK for up to a further 60 days. This may allow that person to meet the requirements to remain non UK resident. HMRC guidance indicates that Foreign and Commonwealth Office (FCO) advice to avoid travel to a region because of war or civil unrest can be considered exceptional. This may prove beneficial under the current situation.

Cross border tax issues are very complex and it is important to take professional advice as early as possible. If you are considering coming back or leaving the UK and would like to discuss your tax position, then please get in touch.

Next steps

For any enquiries regarding the above, please contact Tom Annat.