Individuals on assignments to the UK can find their tax affairs become quite complicated, and tax returns will be required both in their home country and the UK. Assignment-related expenses, such as education, home leave and the cost of living, will be liable to UK income tax. Consequently tax itself may become the most significant expense and an important factor in determining the length and timing of an assignment.

This edition of Tax Matters aims to help you understand how UK tax law affects overseas individuals working in the UK and their employers.

Who and what is taxed in the UK?

To be liable for UK income taxation, an individual must be either resident in the UK or have a source of income or gains in the UK.

An individual who is resident in the UK will, as a general rule, be liable to tax on the whole of his income and gains, whether they arise in the UK or elsewhere. Temporary visitors to the UK are not treated as resident for the purpose of determining taxable employment earnings or of charging foreign income to tax.

How is “UK residence” defined?

HM Revenue & Customs (HMRC) clearly define when they regard an individual as resident:

• An individual is resident in the UK if he is here for 183 days or more in a tax year or an average of 91 or more days per tax year over a period of up to four years.
• Individuals intending to live in the UK permanently or for at least three years are regarded as resident from arrival.
• Individuals intending to remain indefinitely are regarded as resident from arrival if they have available accommodation here or plan to stay for at least three years.

Domicile in the UK

Domicile is a general legal concept that has been adopted by the UK tax system in relation to individuals. An individual acquires a domicile of origin at birth, normally that of the father. This domicile of origin continues unless and until the individual acquires a domicile of choice. An individual is deemed to acquire a domicile of choice if he fixes his chief residence in a new country, with the intention of living there permanently or indefinitely.

Application of the remittance basis

A non-UK domiciled individual will be taxed on his income as it arises but may claim for the application of the remittance basis. The remittance basis applies to income from a source outside the UK and principally covers foreign rental income, interest and dividends paid by non-resident companies, and capital gains arising from overseas assets.

The remittance basis applies automatically to a non-UK domiciled individual with aggregate unremitted foreign income and gains of less than £2,000 per year.

Where the non-UK domiciled individual has been resident in the UK for at least seven of the preceding nine tax years, he will be liable to an additional remittance basis tax charge of £30,000 per year.

There is a wide definition of remittance which covers non cash remittances and payments made abroad with respect to services and debts linked to the UK. The legislation is complex and outside the scope of this edition of Tax Matters.

Pre-arrival planning

Individuals who will become resident in the UK for tax purposes should aim to ensure that ongoing foreign gains and income are, so far as possible, not subjected to UK taxation. It is important to have evidence of remittances to the UK where a claim is made to be taxed on that basis.

Individuals considering longer-term residence in the UK or UK investments will need to consider inheritance tax (IHT). IHT applies to the value of a deceased person’s estate but, in the case of a non-domiciled individual, applies only to assets located in the UK, subject to any relieving provisions in double tax agreements.

Making UK investments through an overseas company should remove the location of the investments outside the UK. There are, however, many factors and costs involved with such arrangements. In no case is it more important to take advice than when considering the acquisition of a house or flat in which to live in the UK.

Tax equalisation packages

Employers may offer policies known as “tax equalisation packages” to reimburse the employee for any excess tax cost of an overseas assignment. Essentially, the employer bears the tax cost of the taxable assignment benefits such as accommodation and education, plus the higher rates of UK tax on base earnings.

Note though that the reimbursement of excess tax costs to an employee over a period can create a spiralling of the expense of this reimbursement because the reimbursement itself becomes taxable income!

It is important to obtain advice on the UK tax treatment of employee benefits, the expatriate concessions and any favourable double tax treatment, to understand their impact on the cost of tax equalisation packages and how it may be reduced.

Individuals who implement tax planning strategies should always consider the effect on any tax equalisation package.

Split employment contracts

Where a non-domiciled individual performs some duties outside the UK, it is not uncommon for him to have two employments. Earnings from any wholly overseas employment will be taxed only on remittances to the UK.

HMRC will, on enquiry, investigate split employment contracts closely and expert advice is therefore essential.

UK Social Security Contributions

Individuals coming to work in the UK must consider their social security or national insurance contributions (NIC).

An individual who is resident and employed in the UK will be liable for NIC unless EEA regulations or reciprocal arrangements apply.

The UK has arrangements with many countries: some overseas nationals may not have to pay NIC if they are here for a limited period; others may not have to pay NIC for the first year (or more).

Individuals coming to work in the UK need to apply for a national insurance number (NINO). Many employers will have a fast-track application system so that the employee will not personally have to visit application centres.

UK tax compliance matters

The majority of employed earners in the UK pay tax under the PAYE system, where the tax is deducted at source from their earnings and benefits.

Company directors, the self-employed and those with complex affairs or several sources of income are required to “self-assess” their income and capital gains taxes.

Self-assessment involves submitting a tax return on-line by 31 January following the end of a tax year, together with an assessment of any outstanding tax due. HMRC have one year to raise questions and make any amendments to the assessment. Spouses are taxed separately and submit separate tax returns.

The tax return contains claims for non-domicile and non-residence but individuals or their employers should notify HMRC as soon as possible of their arrival so that the correct PAYE procedures can be put in place and excessive tax deductions or underpayment avoided.

Taxation of incentive plans

Many incentive plans receive special tax treatment in the home country, such as in the USA where, in many instances, tax is deferred until the employee receives the benefit.

The UK tax system often does not recognise the tax deferral of benefits and tax is normally charged for the year in which the employer makes the contribution. Relief for contributions to a retirement benefits scheme may however be available.

While it can be possible to make incentive plans conform to the UK tax regime, it may be necessary to discontinue them during the course of the UK assignment or accept that the UK tax treatment will result in excess tax costs.

The UK tax treatment of overseas individuals can be complex and mistakes can be expensive. Friend LLP’s specialist tax team has a wealth of experience in advising overseas employers and employees considering working or investing in the UK.
For help and advice on UK tax matters please contact:

Iain Wright:
+44 121 633 2015 or iain.wright@friendllp.com