Remittance basis to be denied for some non-doms’ dual contracts

Tue 28 Jan 2014

Changes announced in the Autumn Statement aim to prevent  non-doms from using artificially constructed dual contracts to channel remuneration derived from UK employment through overseas employments to avoid UK tax by claiming the remittance basis. The changes included in the draft Finance Bill, which are subject to consultation, will exclude  directors, senior employees and the most highly paid employees (referred to as “relevant employees”) from claiming remittance basis on ‘chargeable overseas earnings’, ‘foreign securities income’ and certain foreign employment income provided through a third party.

Instead they will be taxable on their overseas income as they receive it instead of when they remit it to the UK. The changes are due to apply from 6 April 2014.

Three conditions for excluding income from the remittance basis

The exclusions will apply where the following three conditions all apply:

• the individual has both UK and overseas employment(s) with the same employer or with a UK employer and an “associated” overseas employer(s);
• the UK and overseas employment(s) are “related”; and
• the rate of foreign tax on the overseas employment income eligible for tax credit relief is less than 75 per cent of the UK’s top rate (currently 45%, so the rate of foreign tax needs to be at least 33.75%) – so foreign earnings taxed abroad above this 75% threshold will not be affected.  

Associated employers and related employments

Two employers are associated if one controls the other or they are under common control. Directors, senior employees and the highest paid employees of associated companies are all automatically deemed to be in related employment.

Employments will be “related” if any of the following conditions apply:

• it is reasonable to suppose that the employee would not hold one without the other, both will end at the same time or one must end when the other ends;
• the terms of one employment operate to any extent by reference to the other;
• the duties of the employments are linked or interdependent;
• the duties of the employments are wholly or mainly of the same type (ignoring the fact that they may be performed (wholly or partly) in different locations); or
• they wholly or mainly involve the same customers or clients;

There is currently no ‘get out’ for arrangements which are not tax motivated.  However, income falling within the three year qualifying period for overseas workday relief will not be affected.

There may be scope for assessing whether changes should be made to the terms of contracts before 6 April 2014 especially if income due after 5 April 2014 can be brought forward.

The UK is not the only country to have proposed measures such as this. Therefore the world-wide tax consequences need to be considered before any action is taken.