Ian McMonagle: UK citizens living in Europe must act now to regularise their tax affairs
Ian McMonagle, tax specialist at Russell & Russell Business Advisers based in Glasgow, discusses why UK citizens living in Europe must act now to sort their tax affairs following changes in EU residency regulations.
In an interconnected age, with ease and convenience of travel, many UK citizens lead complex lives, with their residence in one country, their main business dealings in another country and perhaps even their family in another.
Another layer is about to be added to this complexity as the negotiations to extract Britain from the European Union drag on. At the time of writing, there was still no indication of whether a mutually acceptable Brexit deal was achievable.
The latest problem arises because, after the end of the transition period on December 31 this year, UK citizens will be subject to the Schengen 90/180 day rule when visiting those EU member states that form part of the Schengen Zone.
As a result, they will be limited to a cumulative total of 90 days in any 180-day rolling period. This rule could have a negative impact on a wide range of citizens including tourists, business people, students and second home owners.
The fact is that, while Britain was an active member of the EU, and before anyone envisaged its proposed departure, significant numbers of people bought a property in popular countries such as France, Spain or Italy, but also retained a residence in the UK to give them freedom of choice about where they wanted to stay.
From January 1, however, British visitors will be treated as Third Country – i.e., non-EU, EEA or Swiss – citizens and their passports will be stamped with entry and exit dates so that border officials can check that they do not overstay the new limits.
Under the Withdrawal Agreement of February 2020, British citizens who are lawfully resident in EU member states before January 1, 2021 will be able to continue to live, work and travel (although these rights would cease after a leave of absence of more than five years).
British citizens will have until June 30, 2021 to apply for residence status, although some member states have said that they will extend the deadline.
The upshot is that many people are going to have to make difficult decisions in the very near future about where they are going to live for tax purposes and where their primary centre of economic interest lies.
The waters are further muddied by the fact that many European fiscal jurisdictions have a wide variety of local and regional taxes. Spain, for instance, has some 17 autonomous tax-raising regions.
As an example, Italian income tax is substantially greater than in the UK, as it pays for an expensive social security system. A British person living in Italy might have a UK company, or UK employer and benefit from lower UK rates.
What that person is effectively saying to the Italian authorities is that he is not resident in their country and, as of January 1, the authorities will be entitled to respond to that situation with a request, or order, for the non-taxpayer to leave.
To add even more complication, the rules in both Europe and the UK are based on 183 days within the tax year and if you spend that time in one jurisdiction you are assessable in that country for your worldwide income.
But the tax year in the UK is April to April, while in Europe it runs from January to December. So, it would be perfectly possible to spend 183 days in both tax years and, as a consequence, become assessable in both. This is a situation which it would be wise to avoid.
How can people decide where their centre of economic interest lies? They have to ask themselves: should they be paying their tax in, for instance, Spain, or in the UK? How can they set one off against the other? Should they be completing returns in both countries?
It will all become clearer over time, as our new relationship with Europe resolves itself, but at the moment it remains extremely complicated and any advice offered has to be bespoke.
Professional tax advisers will be able to analyse the detail of personal circumstances, but for people who might be affected by these changes, the time to act is now.