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Use of Dual Contracts by Foreign Doms

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Use of Dual Contracts by Foreign Doms USE OF DUAL CONTRACTS BY FOREIGN DOMICILIARIES Overview BRIEFING UK resident foreign domiciliaries (“RFD’s”) are entitled, subject to payment of the Remittance Basis charge where applicable, to claim the Remittance Basis, whereby most categories of foreign income and gains are subject to UK tax only to the extent that these are remitted (or deemed remitted) to the UK. The Remittance Basis can apply to foreign employment income, but for this purpose the general definition of what constitutes foreign earnings is tightly drawn making it difficult to qualify. There are special provisions, referred to collectively as “Overseas Workday Relief” (OWR) for short-term UK residents (broadly those newly arrived in the September 2014 UK during their first three tax years of residence), which mitigate the restrictions of the general rule. OWR allows a straightforward apportionment of employment income between UK and non-UK duties with the Remittance Basis being applicable to foreign earnings. When OWR is no longer available, the Remittance Basis can only apply to CONTENTS employment income where: (i) the employment is with an overseas employer; and (ii) the employment duties are wholly performed outside of the UK (with the exception 1. Two sets of provisions relating to the Remittance Basis and only of those duties considered as purely “incidental” – which is a term that is overseas earnings interpreted narrowly). RFDs, claiming the Remittance Basis on foreign employment income outside OWR, 2. The older legislation have come under increasingly sceptical enquiry from HMRC as to the extent to which 3. The legislation enacted by the it is possible to demonstrate that all duties under a foreign contract have been 2014 Finance Act performed wholly outside the UK. It appears that many such enquiries have been successful in HMRC’s eyes: • with many taxpayers having had to concede settlements; and • many multinational groups refraining from offering dual contract arrangements. HMRC’s position was set out as far back as April 2005 (an article in Tax Bulletin 76, April 2005, which is now reproduced at EIM77030 of the HMRC Employment Income Manual). If anything between then and the 2014 Finance Act, it might have been felt that the pendulum had swung too far in HMRC’s direction: rather than taxpayers exploiting dual contract arrangements artificially to attempt a separation of foreign and UK emoluments (where the duties of related employments cannot truly be segregated), our experience has been that HMRC officials take an overly restrictive line, and pursue enquiries with the aim of exhausting the taxpayer. Many officers seem to start from the conviction that UK residents cannot possibly have an employment that is carried out wholly abroad, regardless of the evidence adduced or the specific facts of the case. It is this stance that seems to have informed the 2014 Finance Act changes rather than purely artificial arrangements. 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.
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