‘Dual contracts’ for employees – new measures announced

The government is introducing measures to counter what it perceives as the artificial use of dual contracts of employment by individuals who are resident but not domiciled in the UK.

This measure was announced in the Chancellor’s Autumn Statement on 6 December 2013. Draft legislation has now been published, with a view to its inclusion in the 2014 Finance Bill.

In certain circumstances UK-resident but non-domiciled individuals may claim to be taxed on the ‘remittance basis’, i.e. taxed on overseas income and capital gains only to the extent that they are remitted to the UK.

Overseas income for this purpose includes earnings from an employment with a foreign employer where the duties of the employment are performed wholly outside the UK. It does not include income related to overseas duties if other duties of the same employment are performed in the UK. HMRC considers that individuals working both in the UK and overseas have been entering into artificial arrangements (‘dual contracts’) to split the UK and overseas duties between two related employers (or between different contracts with the same employer), in order to bring about a situation where there is an employment the duties of which are performed wholly abroad.

The new rules
From 6 April 2014 employment income from a foreign employer where the duties are performed wholly outside the UK will not be eligible for the remittance basis (and will therefore be taxed as it arises) if:

• the employee also has a UK employment (i.e. an employment the duties of which are performed wholly or partly in the UK);
• the employer in respect of that employment is the foreign employer, or is associated with the foreign employer. Employers are ‘associated’ for this purpose if, broadly, one has control of the other or both are under common control;
• the two employments are ‘related’ to each other; and
• the foreign tax rate on the overseas income is less than 75% of the UK’s 45% ‘additional rate’ of income tax; i.e. less than 33.75%. If there is more than one overseas employment each is considered independently for this purpose.

The new rules will apply similarly to amounts taxed as income from employee shares or options, and to income that is provided via third parties and is taxable under the ‘disguised remuneration’ rules.

‘Related’ employments
The most contentious issue in the application of the new rules is likely to be whether two employments are ‘related’. The legislation gives six examples of factors that will be treated as giving rise to such a relationship:

• it is reasonable to suppose that, the employee would not hold one of the employments without holding the other; they will both cease at the same time, or one will cease in consequence of the other ceasing;
• the terms of one employment operate to any extent by reference to the other employment;
• the performance of the duties of one employment is wholly or partly dependent on, or otherwise linked directly or indirectly to, the performance of duties of the other;
• the duties of the two employments are wholly or mainly of the same type (ignoring location);
• the duties of the two employments involve, wholly or partly, the provision of goods or services to the same customers or clients;
• the employee is, in relation to either employer or an associated person, a director, a senior employee or among the highest paid employees (broadly, considering associated employers together).

These factors are not exhaustive, however, so HMRC may argue that employments are also related in other circumstances.

For further advice or information please contact your usual adviser at Moore Stephens.


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