Draft legislation has been published in order to counteract the perceived abuse of dual employment contracts used by non-domiciled individuals in order to shelter earnings from UK tax in relation to overseas work. HMRC have often contended that there is in fact only a single employment contract.
Current position
A UK resident, non-domiciled individual may claim the remittance basis of taxation in respect of earnings that relate to employment held entirely outside of the UK.
Many non-domiciled individuals use 'split contract' arrangements; one contract relating to employment wholly within the UK and another for employment wholly outside of the UK. The earnings from the non-UK employment are only subject to UK tax to the extent that they are remitted into the UK.
Draft legislation
The draft legislation seeks to dis-apply the remittance basis where employment is artificially split into a UK employment and one or more foreign employments. These rules will apply for employment income and general earnings arising on or after 6 April 2014 where all of the following conditions are met:
- An individual has both a UK employment and one or more 'relevant' (i.e. foreign) employments.
- The UK employer and the relevant employer are 'associated' with each other.
- The UK employment and the relevant employment are 'related'.
- The foreign tax rate that applies to income in respect of a relevant employment, calculated in accordance with the amount of foreign tax credit relief, which would be allowed against income tax if the income were not taxed on the remittance basis, is less than 75% of the UK's additional rate of tax (currently 45%).
A typical scenario is where a UK resident, non-domiciled employee has employment contracts with both a UK company and a foreign employer within the same group and the two employments are 'related' (for example, they are mutually inclusive or involve working for the same clients or if the employee has a senior position within the organisation).
Action points
Where split contracts genuinely represent different roles being performed and are not split purely on a geographical basis, the remittance basis should still be available for non-domiciled employees. The draft legislation should not prevent newly resident employees from temporarily claiming the remittance basis on overseas workdays (typically for their first three years in the UK).
Employers should consider reviewing split contract arrangements in order to ensure that they genuinely relate to distinct roles and consider restructuring contracts where appropriate.
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