Although, non-UK domiciliaries are subject to UK tax on their UK employment income, they may not be subject to tax on foreign employment income where it is not remitted to the UK. In the past, taxpayers have argued that a single employment with overseas duties is two separate employments – one in the UK and one overseas. As a result, salary attributable to the ‘overseas employment’ can escape a charge to UK tax.
HMRC have successfully challenged such arrangements with existing legislation where:
- the foreign employment contract is a ‘sham’ and so in reality there is only one contract; or
- substantive duties of the foreign employment are performed in the UK.
In the Autumn Statement 2013, the Government announced that it would be enacting further legislation to counter contrived dual contract arrangements (http://www.gabelletax.com/blog/2013/12/05/autumn-statement-2013-dual-contracts/) and draft legislation was published in January 2014 for consultation.
The original proposal was for new rules to apply where:
- an individual has UK and overseas employments with either the same or associated employers;
- the UK and overseas employments are ‘related’ to each other; and
- the foreign tax suffered overseas is less than 75% of the UK additional rate.
In relation to the first condition, a company is ‘associated’ with another if, broadly, one company controls the other or if both companies are under the control of the same person.
In relation to the second condition, employments would be ‘related’ if, for example, it could be assumed that the second employment would not exist without the first. So if, for example, the overseas employment would cease as a result of ending the UK employment, the two employments would be related.
These rules would not apply to individuals who qualify for overseas workday relief.
Following consultation, the Government has today announced a number of changes to the draft legislation to protect certain ‘innocent’ arrangements.
Firstly, a specific exclusion will be included to “prevent charges arising on nominal directorships if they (or associates) own/control less than 5 per cent of the company’s ordinary share capital.”
A second carve out has been drafted to take into account employments held for legal or regulatory reasons, such as those often seen in the financial services industry.
The legislation will also clarify that income tax charges will not apply retrospectively to employment held before April 2014.
Finally, and perhaps most significantly, the foreign tax suffered must now be less than 65% (previously stated to be 75%) of the UK additional rate of tax i.e. foreign tax suffered overseas must be less than 29.25%. This will restrict the application of the rules because fewer overseas jurisdictions will fall within the lower threshold.
It is still unclear why further legislation is needed given that HMRC have been using existing legislation to successfully counter contrived arrangements. Even with the above amendments, the new rules are still likely to catch many genuine commercial arrangements.
The legislation will have effect from 6 April 2014 and individuals with dual contracts in place will need to have their tax position reviewed carefully. Many individuals will want to rethink their employment arrangements.