changes rather thanpurelyartificialarrangements. facts ofthecase.Itisthis stancethatseemstohaveinformedthe2014Finance Act that iscarriedoutwhollyabroad, regardlessoftheevidenceadducedor specific to startfromtheconviction thatUKresidentscannotpossiblyhaveanemployment line, andpursueenquiries with theaimofexhaustingtaxpayer.Manyofficers seem segregated), ourexperience hasbeenthatHMRCofficialstakeanoverlyrestrictive UK emoluments(wherethedutiesofrelated employments cannottrulybe exploiting dualcontractarrangementsartificiallytoattempt aseparationofforeignand that thependulumhadswungtoofarinHMRC’s direction:ratherthantaxpayers Manual). Ifanythingbetweenthenandthe2014Finance Act,itmighthavebeenfelt April 2005,whichisnowreproducedatEIM77030of theHMRCEmploymentIncome HMRC’s positionwassetoutasfarbackApril2005 (anarticleinTaxBulletin76, manymultinationalgroupsrefrainingfromofferingdualcontractarrangements. • manytaxpayershavinghadtoconcedesettlements;and with • successful inHMRC’seyes: performed whollyoutsidetheUK.Itappearsthat many suchenquirieshavebeen it ispossibletodemonstratethatalldutiesunderaforeigncontracthavebeen have comeunderincreasinglyscepticalenquiryfromHMRCastotheextentwhich RFDs, claimingtheRemittanceBasisonforeignemploymentincomeoutsideOWR, interpreted narrowly). only ofthosedutiesconsideredaspurely“incidental”–whichisatermthat the employmentdutiesarewhollyperformedoutsideofUK(withexception employment incomewhere:(i)theiswithanoverseasemployer;and(ii) When OWRisnolongeravailable,theRemittanceBasiscanonlyapplyto earnings. between UKandnon-UKdutieswiththeRemittanceBasisbeingapplicabletoforeign general rule.OWRallowsastraightforwardapportionmentofemploymentincome UK duringtheirfirstthreetaxyearsofresidence),whichmitigatetherestrictions Workday Relief”(OWR)forshort-termUKresidents(broadlythosenewlyarrivedinthe difficult toqualify.Therearespecialprovisions,referredcollectivelyas“Overseas the generaldefinitionofwhatconstitutesforeignearningsistightlydrawnmakingit The RemittanceBasiscanapplytoforeignemploymentincome,butforthispurpose that theseareremitted(ordeemedremitted)totheUK. most categoriesofforeignincomeandgainsaresubjecttoUKtaxonlytheextent Remittance Basischargewhereapplicable,toclaimtheBasis,whereby UK residentforeigndomiciliaries(“RFD’s”)areentitled,subjecttopaymentofthe Overview FOREIGN DOMICILIARIES USE OFDUALCONTRACTS BY CONTENTS 3. Thelegislationenactedbythe 2. Theolderlegislation 1. Twosetsofprovisionsrelating September 2014 2014 FinanceAct overseas earnings to theRemittanceBasisand BRIEFING The changes have the potential to impact on all Foreign employment income will only be “chargeable grades of employees, but it is clear that they were overseas earnings” where: specifically targeted at senior employees. Broadly, from 2014/15, once the OWR period is over, the • the employment is with an overseas employer; ability to claim the Remittance Basis on foreign and earnings will be denied to senior employees having • the employment duties are wholly performed dual contracts with associated companies, unless outside of the UK (with the exception of purely either the foreign tax on the overseas contract is at incidental duties). least 65% of the additional (or highest) UK income tax rate (so, for 2014/15, the foreign tax will need to be The first condition may be easy to satisfy. It is the at least 29.25%) or regulatory requirements second condition that causes the difficulties. Even necessitate the use of dual contracts. though an individual may have two very different roles, and the duties of the foreign employment may 1. Two sets of provisions relating to the be almost entirely performed abroad, it may be Remittance Basis and overseas earnings difficult to show that no substantive duties are The 2014 Finance Act changes are wholly performed here, particularly where the role is senior disadvantageous to Remittance Basis taxpayers, as and involves day-to-day responsibilities. It will all a new set of provisions that is additional to (rather depend on what is expected of the individual in the than replacing) the older legislation with respect to the specific role. For example, if an individual heads up Remittance Basis and overseas earnings, has been the UK subsidiary of a multinational foreign parent enacted. company, and also has a contract governing his or her position as director on the board of the foreign Strictly, the new legislation applies only in cases parent, it might be possible to meet the condition but where the old legislation would not disallow the only if: Remittance Basis (so only in cases when ALL the duties of the employment - apart from incidental • all the board meetings take place outside of the duties - are performed outside of the UK). Practically, UK; where the new legislation can be applied (so where • all the preparation for the board meetings takes there is sufficient connection with the UK and foreign place outside of the UK; and employment and the foreign tax suffered is insufficient) HMRC are likely to apply it. This is • any follow up work takes place outside of the UK. because doing so is easier since there is no need to If the meetings are held once a quarter and the show that substantive duties are performed in the individual flies out of the UK a few days before to UK. prepare and stays outside of the UK for a few days OWR provides relief from both the old and the new after for follow up work, then the conditions could be legislation but only for a maximum of three years. met. If, however, the individual reads the board papers in the UK beforehand, flies out to the meeting 2. The older legislation and immediately flies back performing any follow up As explained above, the older legislation remains in work in the UK, then it is clear that the conditions place and in many cases (such as where the foreign would not be met, as preparation and follow-up tax credit is sufficiently high that the new dual would each be considered as substantive duties of contract anti-avoidance provisions cannot apply), the role. these provisions will determine whether foreign 2.2 Limit on level of “chargeable overseas earning” employment income is chargeable on the Remittance where duties of an “associated employment” are Basis. performed in the UK 2.1 The strict definition of “chargeable overseas In addition to the strict definition of “chargeable earnings” overseas earnings” there is a specific anti-avoidance Under the general rules (that is before one even starts provision that will imposes a limit on how much of an to consider the anti-avoidance provisions) earnings employee’s earnings can be classified as “chargeable from a foreign employer will not automatically qualify overseas earnings” where: for the Remittance Basis. • in addition to the foreign employment that gives Foreign employment income will only qualify for the rise to the “chargeable overseas earnings” (the Remittance Basis where it comes within the definition “relevant employment”) an employee holds one or of “chargeable overseas earnings”, which is tightly more “associated employments”; and defined.

2 • the duties of the “associated employment(s)” are 3. The legislation enacted by the 2014 not performed wholly outside of the UK. Finance Act In such cases the legislation specifies that the 3.1 Introduction “chargeable overseas earnings” figure cannot be The 2014 legislation applies to earnings from an higher than the proportion of the aggregate earnings employment for 2014/15 or a subsequent tax year. for the tax year from all the employment concerns The provisions deny the Remittance Basis to income (that is the “relevant employment” and all “associated from a “relevant employment” where: employments”), which can be considered reasonable having regard to the nature and time devoted to each • the income would otherwise have qualified as of the following: “chargeable overseas earnings” (defined at 2.1 above); • the duties performed outside the UK; • the income falls within one of the four specified • the duties performed in the UK; and categories, being: (i) general foreign earnings; (ii) • all other relevant circumstances. deemed income from the receipt of foreign “Associated employments” are defined as employment securities; (iii) deemed income from employments with the same employer or with options on foreign employment securities; and (iv) “associated employers”. There are three rules (A, B employment income provided through third and C), which are used to determine whether, for parties; these purposes, employers are associated: • conditions 1 to 4 are met; and • Rule A – an employer (who is an individual) will • condition 5 is NOT met. be associated with other employers (these being Conditions 1 to 4 are discussed in section 3.2 below partnerships or companies) where he or she and condition 5 is discussed in section 3.3. The controls them. This means that an employee of definitions are discussed in section 3.4. Mr X will have an associated employment if he or she also works for a company controlled by Mr Income caught by the legislation will be taxed on the X. Arising Basis in the same way as UK employment income but it is not subject to Pay As You Earn • Rule B – an employer (which is a partnership) will (PAYE) requirements. be associated with other employers (these being other partnerships or companies) if one has The legislation does not cover National Insurance and control of the other or both are under the control there are no plans to introduce corresponding of the same person or persons. For example if National Insurance regulations. UK National Nettles LLP holds subsidiary companies, an Insurance may, however, be due under the terms of employee of Nettles LLP will have associated the coordination of social security agreements across employments if he or she works for the the EU, EEA and Switzerland. These operate partnership and one of the subsidiary companies. regardless of the domicile status of the individual. Generally such agreements provide that where • Rule C – an employer (which is a company) will be someone works (either as an employee, as a self- associated with other employers (these being employed person or in both capacities) in more than other companies) if one has control of the other or one relevant State and/or in a relevant State other both are under the control of the same person or than the one in which he or she is resident, only one persons. For example, an individual working for State will have the right to levy social security two wholly owned subsidiaries of a parent contributions on all the earnings. company would have associated employments. 3.2 The conditions that must be met “Control”, in relation to a body corporate means the power to ensure that the affairs of the company are The four conditions that must be met for the conducted in accordance with one’s wishes either: (i) legislation to apply are as follows: by the holding of shares; (ii) by the possession of • Condition 1 is that in the relevant tax year the voting rights; or (iii) as a result of powers conferred by taxpayer qualifies as a “relevant employee” at a the articles of association or conferred by some other time when he or she also holds a “UK governing document relating to the entity. In relation employment”. Where the “relevant employee” to a partnership, “control” means the right to a share arrives in or leaves the UK in a relevant tax year, of more than half the assets, or more than half the and meets one or more of the statutory conditions income or the partnership. such that split year treatment applies, the

3 condition will be met if at a time in the UK part of 3.4.2 “UK employment” and “UK employer” the relevant tax year the “UK employment” and a “UK employment” is defined as an employment the “relevant employment” are held. duties of, which are not performed wholly outside the • Condition 2 is that the “UK employer” is the same United Kingdom. This is a very broad definition and as or “associated” with the “relevant employer”. means that for the purposes of this legislation: • Condition 3 is that the “UK employment” and the • a “UK employment” can be with a UK based “relevant employment” are “related” to each other. employer or a foreign based employer; and • Condition 4 is that the “65% test” is met. • an employment will come within this definition even if 99% of the substantive duties are 3.3 The condition that must NOT be met performed outside of the UK. For the legislation to apply, the fifth condition must As such, an employment where the earnings NOT be met. It will be met if the two employment previously have qualified for OWR (as it covered UK contracts are required because it would not, by and foreign duties) would be a “UK employment”. virtue of a relevant regulatory requirement, be lawful for: The “UK employer” is the entity that employs the person in connection with his or her “UK • all or substantially all of the duties of the “relevant employment”. employment” to be duties of the “UK employment” and performed in the relevant 3.4.3 “Associated” employments territory (that is the territory where the duties of the The legislation uses the same definition of “relevant employment” are performed); and “associated” employments as is found in the current • all or substantially all of the duties of the “UK anti-avoidance provision (see sub-section 2.2). employment” to be duties of the “relevant Broadly, that means that one has control over the employment” and performed in the part of the UK over or both are under the control of the same person where they are performed. or persons. The relevant regulatory requirements are those 3.4.4 “Related” applying in the jurisdiction where the duties are The term “related” is not specifically defined in the performed. 2014 legislation. However, without prejudice to the The HMRC Guidance provides the following wider scope of the provisions, it is specified that a examples of regulatory requirements: “UK employment” and a “relevant employment” are to be assumed to be related if one or more of the • in order to get a work permit in some countries, following applies: you have to have an employment contract in that country; • It is reasonable to suppose that: • in order to provide certain types of financial — the relevant employee would not hold one services in the UK, you have to be employed by a employment without holding the other person authorised by the Financial Conduct employment; or Authority. — the employments will cease at the same time 3.4 Definitions or one employment will cease in consequence of the other employment ceasing. 3.4.1 “Relevant employment”, “relevant employee” and the “relevant employer” • The terms of one employment operate to any extent by reference to the other employment. To be a “relevant employee” an individual must have HMRC Guidance provides as an example a case a “relevant employment”. where one contract may take into account hours A “relevant employment” is one which gives rise to worked or leave taken under the other contract or the income that may be denied the Remittance Basis may refer directly to duties performed under the as a result of the legislation. It is, therefore, an other contract. employment where all the duties (barring incidental • The performance of duties of one employment is duties) are performed outside of the UK. (wholly or partly) dependent upon, or otherwise The “relevant employer” is the entity that employs the linked (directly or indirectly) to, the performance of individual in connection with the “relevant duties of the other employment. HMRC Guidance employment”. provides the example of a case where an

4 individual carries out research under one of either the “UK employer” or the “relevant employment, and under their other employment employer”; or carries out marketing work made possible by the • be in the highest tiers of seniority or remuneration research. compared to other employees. • The duties of the employments are wholly or The HMRC Guidance states that HMRC will generally mainly of the same type (ignoring the fact that they consider that employees involved in higher-level may be performed (wholly or partly) in different management and decision-making will be senior. locations). The following examples are given of activities that • The duties of the employments involve (wholly or might be carried out by senior employees: partly) the provision of goods or services to the • implementing higher-level or global business same customers or clients. strategies; and • The relevant employee is: • participating in higher-level decision-making — a director (or shadow director) of the UK relating to management issues, finance, corporate employer or the relevant employer and has a restructuring or governance. “material interest" in the “UK employer” or the HMRC Guidance sets down how HMRC will interpret “relevant employer”; “higher or highest levels of remuneration”. Total pay — a senior employee of the “UK employer” or the from the UK and the relevant employment must be “relevant employer”; or taken into account in considering whether the aggregate remuneration is high relative to other — one of the employees of the “UK employer” or employees in the same group of companies. the “relevant employer” who receives the “higher or highest levels of remuneration”. The Guidance states that: “There is no absolute level of pay that is relevant – rather it is a matter of A director (or shadow director) will have a “material comparing your overall remuneration from all your interest” in either the “UK employer” or the “relevant related employments to that of your fellow employer” if either or both of the following conditions employees.” However, rather confusingly after is met: having said that there is no absolute relevant level of • The individual alone or with any associates is: pay the Guidance goes on to say: “HMRC considers — the beneficial owner of; or that if you would be liable to tax at the additional rate on your combined pay (ignoring personal reliefs like — able to control, directly or through the medium donations to charities), it will be a good indication of of other companies or by any other indirect an employee who is higher or highest paid.” This means would suggest that HMRC would see £150,000 as more than 5% of the ordinary share capital of the being indicative of an employee who receives the company. “higher or highest levels of remuneration”. • If either the “UK employer” or the “relevant The explanatory notes provide the following employer” is a close company, the individual alone scenarios, in which HMRC would consider a “UK or with any associates possesses or is entitled to employment” and a “relevant employment” to be acquire, such rights as would: “related”: — in the event of the winding-up of the company; • Where the individual has two employments and or undertakes client meetings, entertainment or marketing under the “relevant employment” and — in any other circumstances manages investments for the same clients under give an entitlement to receive more than 5% of the the “UK employment”. assets that would then be available for distribution •Where: among the participators. — the individual is employed in the UK and the In deciding whether the individual is a senior contract specifies that he or she cannot work employee the explanatory notes state that HMRC will outside the UK; have regard to the level of seniority as compared to other employees in the organisation, and that to hold — the individual is also employed in France, and a senior position the individual must either: the contract specifies that he or she can only work in France; and • be a director who owns or controls more than 5%

5 — the individual does the same type of work under their French contract Rawlinson & Hunter Chartered Accountants as under their UK contract, so although these duties are separated geographically, the work is of the same type. Eighth Floor 6 New Street Square • Where the individual provides financial advice to a client under both a “UK New Fetter Lane employment” and a “relevant employment”. London EC4A 3AQ The Treasury is given powers (subject to the regulations having to be And at approved by the House of Commons) to add to reduce or modify the cases Lower Mill where the “UK employment” and the “relevant employment” are deemed to Kingston Road Ewell be related to each other. Surrey KT17 2AE T +44 (0)20 7842 2000 3.4.5 The “65% test” F +44 (0)20 7842 2080 firstname. [email protected] Broadly, the “65% test” is met where the foreign tax credit that would be www.rawlinson-hunter.com available on the aggregate income from the “relevant employment” if subject to UK tax on the Arising Basis would be less than 65% of the UK additional Income Tax rate for the relevant tax year. Partners The UK additional tax rate for 2014/15 is set at 45%, so this means that for Chris Bliss FCA 2014/15: Simon Jennings FCA Philip Prettejohn FCA • if the foreign tax credit percentage is less than 29.25% the test will be Mark Harris FCA met; and Frances Jennings ACA David Barker CTA • if the foreign tax credit percentage is 29.25% or higher the test will not be Kulwarn Nagra FCA Paul Baker ACA met and the legislation cannot apply. Sally Ousley CTA Andrew Shilling FCA Note that the foreign tax credit takes account only of what could be claimed Craig Davies FCA to set against the UK tax liability in accordance with the relevant double tax Graeme Privett CTA Chris Hawley ACA agreement or (where there is no appropriate double tax treaty) any unilateral Phil Collington CTA relief permitted. This will not necessarily be the same as the total foreign tax Toby Crooks ACA suffered on the income. Directors There are significant practical problems with the “65% test”. It can be Lynnette Bober ACA Mark Bonnett CGMA difficult and time consuming to determine the actual tax liability in some Mike Cunningham ACA foreign jurisdictions and this problem is compounded since the calculation Karen Doe Michael Foster CTA has to be performed on the basis of UK tax years, which is different to that Nigel Medhurst AIIT of most other jurisdictions. An individual may not know when they come to Alex Temlett CA submit their UK tax return whether the 65% test is met and may not even Consultants have the final information in time to made an amendment to their self- Bob Drennan FCA assessment tax return. In the HMRC Guidance this is acknowledged to Ralph Stockwell FCA some degree. The guidance states that the individual may have to file a provisional tax return and submit an amended return within the amendment window (twelve months after 31 January following the end of the relevant tax year). The possibility that the final position may not be known by then is not addressed. 3.5 The commencement provisions and deferred income The information contained in this The 2014 legislation applies to income earned in or after 6 April 2014.The briefing does not constitute advice and HMRC Guidance accepts that the new rules do not apply to foreign is intended solely to provide the reader employment income for tax years prior to 2014/15 that is paid after 5 April with an outline of the provisions. It is 2014. Deferred foreign employment remuneration part of which relates to not a substitute for specialist advice in respect of individual situations. tax year 2014/15 or after and part of which relates to tax years prior to 2014/15 should be apportioned on a just and reasonable basis with the Rawlinson & Hunter is a partnership 2014 legislation only applying to the element apportioned to tax year registered to carry on audit work in the 2014/15 or after. UK and Ireland and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at www.auditregister.org.uk under reference C005362660 for the UK and at www.cro.ie/auditors under reference EWC005362660 for Ireland.