Now that the UK has left the EU, UK residents living and working temporarily in Spain need to ensure they avoid double taxation and complete their self-assessment returns correctly. Barrister Leon Fernando Del Canto explains.

Spain continues to flourish as a hugely popular destination, with many UK residents accustomed to flitting back and forth to their work, business or second home with ease.  Spanish tax authorities have long been viewed as undemanding and laissez-faire, encouraging expats and foreigners to feel at home and unconcerned about taxes. UK tax advisers are unaccustomed to having any involvement with the Spanish tax authorities, but the post-Brexit world means that all this is subject to change.

The tax year ending 2021 has witnessed transformations in how we travel and work, and where we reside. Schengen rules mean it’s time for UK tax residents with interests in Spain to get savvy about their tax position. Anyone working remotely in Spain must avoid being classed as a Spanish tax resident by considering their centre of vital interests together with counting the dates when they were resident in either the UK or Spain.

Visiting or working in Spain

New rules limit stays in Spain to 90 days within any 180-day period. For more than a million UK residents with interests in Spain, 90 days is not long enough. They have rushed to obtain   Spanish visas so that they may retain rights to work, retire or invest in the country. Yet the granting of most Spanish visas requires a residency period of 180 days, making applicants Spanish tax residents by default.

If someone restricted their visits to fewer than 180 days within the Spanish year ending 31 December, and their centre of vital interests and residency are clearly UK based, then they are unlikely to be deemed Spanish tax residents. But things are not always so clear cut.

Let’s take the example of a UK company director who travels back and forth to Spain. Like most small company directors, he works long hours and does so remotely when he travels. He may mention having a property in Spain which he has visited over the years but be hazy about precisely how often and when.

Tax returns for this year must account for clients spending more time in Spain than they have recounted. They may have been affected by lockdown rules, new post-Brexit immigration rules or simply too much vino, who knows? Regardless, it is important to know how many days clients have spent in Spain.

Counting tax days

The five ‘W’ questions can be helpful: what, when, how, where and why they may have been working in Spain and whether they use their Spanish home address for business or tax notifications.

The risk is falling foul of dual residency tax disputes, as happened to my client recently. Loopholes in the UK self-assessment tax return allowed the Spanish tax office to claim taxation rights. The inspector argued that my client’s consumption of electricity and water, the Spanish electoral role data and the fact that the UK tax return included his Spanish address, made him a Spanish tax resident.

The HMRC certificate of tax residence was rejected and a final tax determination was delivered to the client’s Spanish address. Being in the UK at the time, he failed to receive it and the statutory time for an appeal was missed.

Even though legally, and from the point of view of a double tax treaty, the case clearly favours the UK tax resident, nonetheless we are still trying to exhaust the tax and administrative legal actions to reverse the inspector’s decision. This is but one of many examples of an innocent tax mistake yielding expensive legal consequences.

When assessing if a client is a UK resident, we tend to rely on the statutory residency test (SRT). The SRT spells out the rules that will be followed by HMRC when counting days for residency purposes, with the ‘UK day’ defined as presence in the UK at midnight.

We are familiar with section 5 which probes entitlement to any foreign income including income that has or could have been received (directly or indirectly), any capital payment or benefit from a person abroad as the result of any transfer of assets, or the desire to claim relief for foreign tax paid.

However, those working remotely in Spain should consider the specifics of their work abroad, its frequency and how the work is done in order to comply with Spanish tax residence rules. Checkbox 7: ‘residence, remittance, etc’ takes us to form SA109, for those cases where they were, for all or part of the year to 5 April 2021, one or more of the following:

● not resident;
● not domiciled in the UK and claiming the remittance basis; or
● dual resident in the UK and another country.

Many advisers, and even tax inspectors, consider UK SRT rules to be adequate in determining the tax residence of a UK national. However, they must not delude themselves that the double tax treaty rules lack the capacity to be vigorously challenged by the Spanish tax authorities.