Following the fundamental changes to the UK residence, domicile, and remittance basis rules that took effect on 6 April 2008, there have been a number of consequential changes to the way in which HM Revenue & Customs (HMRC) treats taxpayers who are resident but not ordinarily resident (RNOR) or not domiciled in the UK and claim the remittance basis. This client alert provides an update on the procedural changes for those who claim overseas workday relief in the UK. This relief is potentially available to taxpayers who are not ordinarily resident in the UK (broadly meaning that they intend to remain in the UK for less than three years).
In the past, HMRC operated by a Statement of Practice, SP 5/84, which allowed overseas workdays to be calculated on an annual basis and matched with remittances made during the tax year as a whole. SP 5/84 has been replaced by SP 1/09, effective as of 6 April 2009. Perhaps unsurprisingly, SP 1/09 is more restrictive than its predecessor and the conditions less flexible.
Those who intend to claim overseas workday relief from tax year 2009/10 onwards should ensure that they fall within the remit of the new SP 1/09. If the conditions of SP 1/09 are not satisfied, any remittances made will need to be reviewed by reference to each individual transfer. This could be time consuming, complex, and potentially result in a higher tax charge.
Statements of Practice can be viewed on HMRC’s website.
Overview of SP 1/09
The provisions of SP 1/09 are intended to provide a more practical method for calculating relief by relaxing the application of the strict wording of the “mixed fund” rules in the Income Tax Act 2007 (ITA). The mixed fund rules are designed to determine the kinds and amounts of income or chargeable gains remitted to the United Kingdom from an account containing more than one kind of income and capital, or income and capital of more than one tax year. The earnings of RNOR employees who work outside the UK fall into two separate categories: UK taxable earnings relating to UK workdays and overseas earnings which could potentially qualify for overseas workday relief. This means that their overseas paid earnings will be a mixed fund for the purpose of these rules.
SP 1/09 provides guidance on the apportionment of employee salaries and transfers from offshore accounts related to employment.
Apportionment of Employee Salaries
SP 1/09 details the rules regarding the apportionment of the employee’s salary where the employee carries out duties in the course of his employment abroad and in the UK.
1. Where salary is paid partly in the UK and partly overseas
RNOR employees in the UK, who travel overseas for their employment, may receive part of their earnings in the UK, and the rest overseas. In this situation, the effect of SP 1/09 is that the amounts paid in the UK can be matched with UK workdays first. No tax liability will then arise on the earnings paid overseas, provided that the aggregate amounts paid in the UK and remitted to the UK do not exceed the proportion of earnings which relates to UK duties. The attribution between UK and overseas duties is usually arrived at on a time apportionment basis, comparing the number of workdays spent in the UK and overseas.
For example, if an RNOR employee has 250 workdays in total and spent 100 of those days working outside the UK, the UK proportion would be 60%, and the overseas proportion 40%. In this example, provided that not more than 60% of the total general earnings are received or remitted to the UK, the 40% paid and remaining overseas will not be taxable. However, in reality it is not always easy to identify where earnings are paid or enjoyed, and detailed advice should be taken to ensure that the claim is appropriate.
2. Where salary is paid entirely overseas
RNOR employees who have both UK and overseas workdays, but are paid entirely overseas, will usually make remittances from the overseas account in order to pay for UK living expenses. Under SP 1/09, HMRC is still prepared to accept that an amount equivalent to the UK proportion of the earnings can be remitted to the UK, with a normal UK tax charge, and the overseas proportion of earnings will only be treated as remitted if the total remittances and UK payments exceed the UK proportion of the total general earnings.
Transfers from Offshore Accounts
In order for SP 1/09 to apply, the employee’s offshore account must hold only the income and gains from a single employment. The concession in SP 1/09 will also only be available to RNOR individuals who claim the remittance basis and work both overseas and in the UK during the normal course of a single employment. The rules are restrictive on this, and if an individual is not resident, or not claiming the remittance basis, SP 1/09 will not apply, and the rules in ITA will.
Additional Requirements under SP 1/09
In order for SP 1/09 to apply, certain other conditions must also be met:
- The “mixed fund” must be held solely in the employee’s name and NOT as a joint account; and
- The account must contain only income from that single employment and NOT from any other employment.
If the appropriate accounts are not already in place, affected taxpayers should now review this as a matter of urgency.
The account may include:
- Interest that may arise on that account;
- Gains arising from foreign exchange transactions (but only to the extent that they relate to funds in that account);
- Gains arising on employee share related transactions (so these will be directly related to the employment); and
- Proceeds from an employee share scheme related transaction (this is to include amounts paid by the employee in acquiring the shares).
The employment income may include:
- The actual employment income;
- Relevant foreign earnings;
- Foreign specific employment income (including termination payments and the proceeds from employee share schemes); and
- Employment income subject to foreign tax.
Guidance from HMRC
HMRC has also made various other changes to its procedures in dealing with matters connected with residence, domicile, and the remittance basis. Booklet IR20 has been withdrawn, and replaced with new guidance in booklet HMRC6. It is important to note, however, that to some extent the new guidance is still a work in progress, and it is unclear if some of the differences between the old guidance in IR20 and the new HMRC6 were intended.
McGuireWoods LLP and Grundberg Mocatta Rakison LLP are pleased to announce the merging of their operations effective May 1, 2009. Our London office draws on the combined firms’ common traditions of excellence and client service. We look forward to better serving our clients with wealth management matters through an enhanced Private Client Services team.