In his autumn statement the chancellor, George Osborne, announced plans to curb tax avoidance using ‘dual contracts’. Dual contracts are a common technique whereby an employee working for an international employer has several contracts with different group members with the aim of ring-fencing foreign employment income. This week sees the unveiling of the proposed legislation by HMRC.
HMRC’s objective is to target and prevent contrived arrangements which create artificial divisions between the duties of a UK and an overseas employment in order to obtain a tax advantage. This ought not scare those with legitimate contractual arrangements with several employers and no artificial divisions. However, a look at the proposed new rules reveals that bona fide arrangements will be targeted.
Under the new rules foreign income will be treated as if it were UK income where:
a) the taxpayer has both a UK and a foreign employment, ie there are dual contracts;
b) the UK employer and foreign employer are ‘associated’;
c) the UK employment and foreign employment are ‘related’; and
d) the foreign rate of tax on the foreign income is less than 75 per cent of the UK’s additional rate of tax, currently 45 per cent, so 33.75 per cent.
Whether employers are associated, or whether employments are related is widely defined.
Dual contracts can give tax advantages to non-domiciled employees who have duties abroad and are paid abroad under a foreign contract of employment. For example, a non-domiciled individual might have foreign earnings by serving on the board of a European bank where he is required to attend quarterly board meetings for which he is paid under a non UK employment contract.
Yet he might live in the UK in order to head up the London-based subsidiary of the bank and is remunerated under a UK contract for these services. A non-domiciled individual can elect to pay tax on their foreign earnings either as they arise (the ‘arising basis’) or only to the extent that these foreign earnings are remitted to the UK (the ‘remittance basis’).
They can elect annually which choice results in the lowest tax bill. However, once they have been resident in the UK for seven out of the last nine tax years he is obliged to pay the remittance basis charge of £30,000 per annum in order to claim the remittance basis. This increases to £50,000 for persons who have been resident in the UK for twelve out of the last fifteen tax years.
There are good commercial reasons why an international group might want to segregate their employees’ responsibilities and also their own obligations under the employment law of each jurisdiction. In addition there may be employer’s payroll tax or national insurance savings which make this practice attractive.
In our view, the proposed law does not meet its stated objective. Although it is fair to say that the law as it stood could be exploited and difficult to police as unremitted foreign income is not required to be reported, the proposed rules will catch contractual arrangements that are not artificial and not put in place for the purposes of tax avoidance.
Many taxpayers working in the UK and abroad for different entities of the same international group could be worse off under the new rules as from April they will not be able to shelter their foreign employment earnings by claiming the remittance basis.
However, HMRC think that the changes are directed at ‘a small number of individuals’ – 350 people – and they estimate these provisions will increase the exchequer’s tax receipts by £85 million in 2015/16. This suggests that foreign income of more than £500,000 per person avoids tax each year.
In our view these figures seem incredible and if £85 million is a realistic expectation many more than 350 non-domiciles would have to be caught by these provisions than the original estimate. Therefore anyone using a dual contract should research this change in law and take steps to ensure their income will not be affected by it.
Mark Davies is a director at Mark Davies & Associates and a member of the International Tax Planning Association