Tax Rules for Foreign Employment in the UK: Part 1
By Terri Schofield, Last updated: 2023-01-18 (originally published on 2019-09-18)
The United Kingdom is an evolving country with business and financial hubs fast becoming a normalised city centre view. It is not a surprise now to walk through a bustling city and see a multi–cultural community travelling between business meetings.
No longer do we think of a ‘business‘ and instantly imagine a ‘business man‘ working laboriously behind a desk. Thanks to societal advancements, both economically and technologically, the world of business has changed. It is now a constantly moving global cycle of blended cultures interchangeably working with one another in new agile and flexible ways.
This has its benefits to global businesses. It means they can source talent from an international pool of candidates and work with them remotely. Not only does this give cross-jurisdictional business insight but it provides opportunities to expand the business and to pluck from a staff pool that is second to none.
Sounds great, doesn’t it? However, international working and employment does come with restrictive and contemporaneous challenges. One of those challenges being (a word that strikes dread in many a heart) taxation. Any resident in the United Kingdom is subject to the taxation of their worldwide income and gains. The rules on taxation for international gains can quickly become intricate and confusing, not an uncommon association with any tax topic.
Foreign income is considered anything that comes from outside England, Scotland, Wales and Northern Ireland.
An employee’s UK income tax liability on employment income depends on the employee’s residence and domicile status in the tax year the income is earned.
Residence and Domicile
A person’s domicile is the individual’s permanent homeland. Employees who are resident and domiciled in the UK, will be liable to UK tax on worldwide general earnings. For those employees who are resident but not domiciled in the UK, where the 3-year non-residence condition is met, will be liable to tax on UK general earnings on an arising basis but on non-UK general earnings (earnings for duties not performed in the UK) on the remittance basis. In other words, “overseas workday relief” is retained for non-UK domiciled employees who meet the 3-year non-residence condition.
Dual employment contracts are beneficial where a UK resident employee works partly in and partly outside of the UK. The arrangement is designed so that the employee has two employment contracts: one with the UK employer for UK duties and one with the overseas employer for non-UK duties. The structure is intended to take advantage of the fact that overseas earnings of a non-domiciled employee may be taxable on the remittance basis.
Her Majesty’s Revenue and Customs (HMRC)have accepted that a dual contract structure might, depending on the circumstances, be a legitimate way to structure an individual’s employment relationships. However, where a single employment has split to take advantage of the remittance basis of taxation or the earnings paid under the two contracts were disproportionate, HMRC would challenge the arrangement.
To prevent dual contract arrangements being used artificially to avoid tax, rules were introduced which restrict the use of the remittance basis. These rules apply to individuals who do not satisfy the 3-year non-residence condition, but meet the following four conditions:
•An individual has a UK employment and one or more foreign employments;
•UK employer and the foreign employer are the same or associated with one another;
•UK employment and the foreign employment are related; or
•The amount of foreign tax credit relief that would be due assuming the total earnings and income from the overseas employment were taxed on the arising basis would be less than 65% of the UK’s additional rate of tax.
Join us next week, where we’ll continue to delve into the tax rules for foreign employment in the UK.
Terri Schofield is a first year LLM with LPC student at BPP, Manchester. Alongside completing her post graduate studies, Terri works full time at DWF Law as an Employment Law Legal Adviser. Terri also sits as the UK Chair of DWF OutFront, their LGBT+ Network, where she is proactive in increasing visibility and sourcing opportunities for DWF’s LGBT+ employees.
This article does not constitute legal advice
The opinions expressed in the column above represent the author’s own.