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UK: New HMRC Guidance on Dual Contracts Labour and Employment Client Service Group Tax Advice and Controversy Client Service Group From Bryan Cave London 30 March 2012 UK: new HMRC guidance on dual contracts Last week HM Revenue and Customs (HMRC), the UK’s tax authority, issued revised record-keeping requirements affecting dual contract arrangements. The guidance can be found here: see http://www.hmrc.gov.uk/menus/dual-contracts.pdf. This guidance will affect any employee who is employed under a “dual contract” arrangement who spends at least some of their time working in the UK. HR practitioners who manage this type of work scenario should undertake an audit of their record- keeping arrangements, and the work practices of affected employees, to ensure that they will meet HMRC’s requirements going forward. What are “dual” contracts? Dual contracts are used to obtain a tax advantage where an employee who is not UK-domiciled for UK tax purposes works both in and outside the UK. Employees who are not UK-domiciled do not need to pay tax on earnings from overseas employment, provided those earnings are not remitted to the UK (i.e. provided the earnings are kept offshore). Executive employees who work for a group of companies sometimes have both an onshore UK role and one or more “offshore” roles. By taking advantage of the rules applying to non-UK-domiciled earnings, income derived from a separate employment relationship offshore can be paid without attracting a UK tax liability (even if the individual also has another UK-based role), provided the earnings are not remitted to the UK. Typically, an employee in this situation will have two or more employment contracts, one with a UK employer (for the UK role) and the other(s) with a foreign employer (for the non-UK role). 1 Bryan Cave LLP Europe | America | Asia www.bryancave.com When do dual contracts work? In order for dual contract arrangements to be tax-advantageous: 1. the employee must be non-UK-domiciled for UK tax purposes; 2. there must be two separate, and distinct roles (one onshore UK role, and one offshore role), rather than the employee actually having one role that is artificially “split” into two on paper; 3. the employee must not undertake “offshore” duties whilst “onshore” in the UK (other than attending to something “merely incidental” to the offshore role), otherwise the offshore earnings will become taxable in the UK; and 4. the “offshore” earnings must not be remitted to the UK (i.e. they must be kept offshore). HMRC’s latest guidance relates to what records must be kept to prove both (2) and (3) above. Record retention If HMRC audits a “dual contract” employee, it will ordinarily ask to see the following in respect of any relevant tax year: • work diaries • work e-mails (which should be kept separate, for the two separate roles) • expenses claims/records • telephone records • client files HMRC will expect employers to retain such documentation for at least two years following the end of the relevant tax year, or longer if the return is filed late or subject to enquiry. When reviewing this documentation, HMRC will look for any evidence that demonstrates that someone was performing “offshore” work duties whilst “onshore” in the UK, or that one role had been artificially split into two (for example, if the email and other contact details for the individual are the same for both roles). “Merely incidental” activity Under the UK’s tax laws, attending to a “merely incidental” work activity whilst in the UK will not upset the tax treatment of an “offshore” employment arrangement. In the past, however, HMRC has not always been consistent in its approach as to what activities are properly said to be “merely incidental” to an offshore role. The latest guidance also addresses this and provides more clarity regarding the issue, although HMRC takes a tough line on this point. HMRC gives the following as examples of “merely incidental” duties: 2 Bryan Cave LLP Europe | America | Asia www.bryancave.com • arranging meetings and business travel; • feedback on employee performance and/or business results (provided this does not involve the employee concerned in preparation or analysis whilst in the UK and as long as responsibility for these matters is not part of the employee’s core duties of employment); • input into team restructuring and staff matters (provided that the employee does not have a management role); and • reading generic business e-mails that do not relate directly to the employee’s role/responsibilities. In contrast, HMRC considers the following to be more than “merely incidental” and at risk of bringing the entire offshore earnings within the UK’s tax regime: • instructions and/or guidance to colleagues and/or team members; • work carried out on issues or projects that do not come to fruition; • reporting on performance/business results where these matters are part of the employee’s core duties; • analysis of reports/information with the intention to produce results/recommendations that can be reported upwards in the organisation; • preparation work carried out prior to discussions, meetings or presentations with customers/clients, colleagues, board members or shareholders and follow-up work after such discussions, meetings or presentations; • discussions and meetings (including by telephone, teleconference or video conference) with customers/clients, colleagues, board members or shareholders; • applying generally expertise in any role or function which the employee is contracted to perform in his or her duties for the employer; and • (for company directors) attending any meeting of directors within the UK. The latest guidance from HMRC shows that it can be expected to take a tough stance on what is a legitimate dual contract arrangement, and when “offshore” work duties performed in the UK will render the employee liable to pay UK taxes on his or her “offshore” earnings. To discuss this briefing further, please speak to your Bryan Cave contact, or to: Darren Isaacs Sarah Buxton Labour and Employment Group Tax Advice and Controversy Group Direct Dial: +44 (0)20 3207 1171 Direct Dial: +44 (0)20 3207 1282 Email: [email protected] Email: [email protected] Bryan Cave's Briefings are available online at www.bryancave.com/bulletins. This bulletin is published for the clients and friends of Bryan Cave LLP. To stop this bulletin or all future commercial e- mail from Bryan Cave LLP, please reply to: [email protected] and either specify which bulletin you would like to stop receiving or leave the message blank to stop all future commercial e-mail from Bryan Cave LLP. Information contained herein is not to be considered as legal advice. Under the ethics rules of certain bar associations, this bulletin may be construed as an advertisement or solicitation. 3 Bryan Cave LLP Europe | America | Asia www.bryancave.com .
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