The five conditions
The conditions are set out in the illogical way that has become typical of recent tax legislation:
- four conditions are positive; all four must be met for remittance basis to be denied;
- the fifth condition is negative; if it is met remittance basis will still be available.
The four positive conditions are:
- the individual holds a “UK employment”;
- there is an “associated” overseas employer;
- the employments are “related” to each other; and
- any foreign tax on the overseas earnings is less than 65% of the current top rate of UK income tax (ie. 65% of 45% or 29.25% for 2014/15).
The fifth, negative condition is:
- the dual contracts are necessary for regulatory reasons, ie.:
- all or substantially all of the duties of the UK employment could not be carried out lawfully in the country where the related employment is carried out; or
- all or substantially all of the duties of the related employment could not be carried out lawfully in the UK.
This condition provides an override which is only relevant if all the first four conditions are met.
What the guidance says
HMRC stress that their guidance is not exhaustive and only gives examples of how the conditions apply, with some cross-references to relevant parts of their manuals.
Condition 1: UK employment
To meet condition 1 the employee most at the same time hold
- one or more UK employments- some or all of the duties are performed inside the UK; and
- one or more “relevant” employments- overseas employer and duties performed wholly outside the UK apart from duties “merely incidental” (see EIM40203) to the overseas duties.
In a “split year”, Condition 1 applies to the UK part of the tax year (see also RDR1 section 1).
Condition 2: UK and overseas employers are associated
Employers are associated if one has control of the other or both are under the control of the same person or persons. The definition of control is the corporation tax definition (see CTM60210).
Condition 3: UK and overseas employments are related
S 24A (8) sets out Condition 3, that the UK and overseas employments are related.
S 24A (9) sets out specific circumstances in which employments are “assumed” to be related:
- it is reasonable to suppose that one employment would not be held without the other or the employments would cease at the same time or one would cease as a result of the other ceasing;
- the terms of the employments operate, to any extent, by reference to each other;
- the performance of the duties of the employments is linked;
- the duties from the employments are of the same type;
- the employments deal with the same customers or clients; or
- the employee is a director, senior employee or one of the higher or highest paid employees (examples of what these terms mean are provide in the guidance – “higher paid” will catch people who would be taxed at the additional rate ignoring personal reliefs such as charitable donations).
S 24A (9) states that it applies “without prejudice to the generality of subsection (8)”. Therefore HMRC are free to take other circumstances and indicators into account. The guidance gives additional examples but above all it stresses that HMRC will seek to establish the “commercial reality” on the basis of the facts of each case individually. An example given where an employment is of the ‘same type’ is where there are two or more employments with the same duties, but the client base or geographical location differs.
Condition 4: Overseas tax payable equivalent to less than 65% of the UK additional rate
To be outside Condition 4 the overseas tax must have been paid in respect of the income concerned and be allowable by way of foreign tax credit relief against UK income tax on the overseas employment income, if the overseas employment income was taxable in the UK on the arising basis.
The guidance includes a sample calculation of Foreign Tax Credit Relief as a percentage of the UK additional rate (S 24A (13)-(16)).
Condition 5: Regulatory requirement for place of employment
This is a very narrowly defined exception. HMRC say “You will meet Condition 5 if both your UK and your overseas employments oblige you to be employed in each territory in order to legally perform the duties of both employments.” So both of the following must apply:
- the law of the overseas territory prevents work being done there under the UK employment; and because of a regulatory requirement of that territory; and
- UK law prevents the work being done here under the overseas employment.
HMRC refer to the case where a country will only issue a work permit to a person who has a contract there. But if there was no bar to the employee carrying out UK duties under the overseas contract Condition 5 would not be met.
Certain types of financial services can only be provided in the UK by an employee of a person authorised by the Financial Conduct Authority; that means the employer must be UK-resident and the employment contract made in the UK. If that employee also wants to work in the USA and so needs a US employment contract to get a green card, Condition 5 is met.
Unremitted overseas income for tax years before 2014-15
ITEPA 2003 S 24A only applies to income earned after 5 April 2014. Any income received under an existing contract of employment may be affected under these provisions if it is earned for 2014/15 and onwards: there is no grandfathering of existing contracts.
Income of an earlier year remitted after 5 April 2014 is not affected by the new rules
Long-term incentive plans and deferred remuneration
Long-term incentive plan (LTIP) awards and deferred remuneration received after 5 April 2014 requires apportionment on a just and reasonable basis to determine the year it is “for”. The apportionment depends on the facts of the case, including contractual matters. HMRC guidance on apportionment of LTIP awards and deferred remuneration is to be found at EIM40015.
It is not expected that HMRC’s approach to tax return checks in respect of employment arrangements will change substantially as a result of the rules. However, the taxpayer may be required to provide information and documents to demonstrate that these rules do not apply to them.
HMRC’s guidance is specific to remittance basis on dual contracts and not to the treatment of dual contracts. There is no change in HMRC’s approach to dual contracts which is set out at EIM77030.
Do the changes affect overseas workday relief?
Overseas workday relief (OWR) is not affected by the FA 2014 changes which are not mentioned other than to draw attention to guidance note (RDR4).