Britons returning from Gulf countries: the tax risk behind the headlines

There has been significant media coverage regarding Britons being required to leave the Gulf countries following recent developments and, justifiably, concerns surrounding the unexpected UK tax implications.

An unplanned return to the UK now can undo a non-residence position entirely, particularly where someone was relying on specifics in the statutory residence test.

If UK work resumes, UK accommodation or family presence reappears, or the overseas work pattern is broken, HMRC can dispute that the conditions were never met and the non-residence position can be reversed.

This can have real time UK tax implications for those having to return to the UK, particularly where an individual relied on split year treatment and full-time work overseas.

Client example of split year treatment under full-time work abroad

Recently one of our clients, a UK resident at the start of the tax year, left the UK part-way through the year to take up full-time employment overseas, intending to be non-UK resident going forward.

On departure from the UK, they expected to qualify for split year treatment under Case 1 (starting full-time work overseas).

When they left the UK, the position was straightforward:

• overseas employment was expected to meet the sufficient hours overseas condition,
• UK duties were expected to remain within permitted limits,
• UK presence was planned to be restricted, and
• the individual expected to be non-UK resident in the following tax year, as required for split year treatment to apply at all.

Due to the current situation in the Gulf, the individual has now returned to the UK unexpectedly, which put the entire analysis at risk.

For Case 1 split year treatment to apply, the following conditions must be met throughout the remainder of the tax year and into the subsequent year, otherwise HMRC may dispute that the conditions were never satisfied, if following the return:

• UK work duties resume (even on a temporary or remote basis),
• the overseas work pattern no longer meets the “full-time” threshold,
• UK accommodation becomes available and is used, or
• UK family ties are re-established in a way that strengthens the sufficient ties position

If this is the case, the individual is treated as a UK resident for the full tax year, not merely from the point of return.

While some assume that the exceptional circumstances provision will preserve the position, unfortunately, this is not the case, as that rule may allow a limited number of UK days to be disregarded for day-count purposes. It does not override failures in the split year conditions or repair a broken full-time work abroad pattern.

The result is that a return driven by safety or necessity, can retrospectively unravel the original residence planning and exposed international income and gains for the entire tax year.

To further complicate matters, the individual had disposed of UK shares and taken large dividends from a UK company, which were brought within the scope of UK tax upon the individual’s return, at current tax rates.

How we can help

Our role in these situations is to stress-test the residence position in real time and help clients make informed decisions that limit unintended UK tax exposure while events are still unfolding. Where events are moving quickly, timely advice can make a material difference to the outcome.

We regularly advise individuals returning to the UK, whether planned or unplanned, on the UK tax consequences of residence, split year treatment and temporary non-residence. Please contact one of our International Tax experts here, so that we can help maximise your potential.