EIM77045 - Appendix 5: COVID-19 considerations for non-residents and non-domiciled employees for 2020 to 2022

Impact of COVID-19 travel restrictions on UK non-resident employees and UK resident employees eligible for Overseas Workday Relief (OWR)

This guidance applies to tax years ending 5 April 2021 and 5 April 2022, it was withdrawn on 6 April 2022.

There are a number of different groups of employees whose taxable earnings will potentially have been affected by the COVID-19 travel restrictions. This appendix sets out HMRC’s rationale for its treatment of 2 of these groups: non-UK residents and UK residents eligible for Overseas Workday Relief. The associated GOV.UK guidance can be found here:

For both these groups, Income Tax (Earnings and Pensions) Act 2003 (ITEPA) section 41ZA determines how much of the general earnings are in respect of UK duties performed in the UK. For non-UK residents s41ZA determines the earnings that are taxable in the UK. For OWR employees, s41ZA determines the amount of earnings that is taxable on the arising basis and the amount that is taxable on the remittance basis.

S41ZA states that the extent to which earnings are in respect of duties performed in the UK is to be determined on a just and reasonable basis. Apportionment of general earnings is essentially a question of fact, but for many years HMRC has accepted time apportionment, based on the number of days worked abroad and in the UK, except where this would clearly be inappropriate.

The guidance ‘Tax on your UK income if you live abroad’ clarifies the meaning of ‘just and reasonable’ in the context of COVID-19 travel restrictions and time apportionment: that if a non-resident is stranded in the UK due to COVID-19, any employment income earned here while unexpectedly stuck in the UK can be justly and reasonably excluded if taxed in their home state.

Non-UK residents with employment income from a period when they were stranded in the UK are therefore able to submit a claim through Self Assessment that this income is not liable to UK Income Tax. They will have to provide evidence that they were prevented from leaving the UK during this period, as well as proof that they were taxed on this income in their home state.

For UK residents eligible for Overseas Workday Relief (that is UK resident employees with a period of non-residence within the 3 previous tax years) a day spent working in the UK will continue to be treated as a UK workday, even if they have been prevented from leaving the UK as a result of COVID-19 travel restrictions.

The rationale for this is as follows:

The UK has a claim to tax the worldwide income of UK resident employees, but has chosen to restrict that right for those who meet the conditions of section 26 ITEPA, allowing them to receive Overseas Workday Relief. OWR allows for employment income which relates to duties performed overseas to be taxable only to the extent that it is remitted to the UK, provided certain relevant conditions are met. It is a condition of s26(1)(a) that the income eligible for OWR cannot be ‘general earnings in respect of duties performed in the United Kingdom’. Therefore, if a UK resident performs duties related to their employment in the UK, even if they are stranded in the UK as a result of COVID-19 travel restrictions, the requirements of s26 will not be met and they will be ineligible for OWR on income earned during those days.

Only the UK can establish any rights to tax the income for the period or periods the UK resident taxpayer spends in the UK, it is therefore reasonable for the UK to charge tax on its residents for work performed in the UK as no other state will have a claim to tax any earnings for such work.

With regards to taxpayers chargeable under section 22 with a dual contract, the duties of the overseas employment cannot be performed in the UK without removing the earnings from treatment as overseas chargeable earnings (subject to sections 38 and 39). As this is effectively an all or nothing charge, section 41ZA is not relevant.