Section 15 and Schedule 3: Restrictions on Remittance Basis
Summary
1.This section and Schedule tax certain overseas earnings and employment income of non-domiciled individuals on the ‘arising’ basis. In most cases this will apply where separate employment contracts have been artificially arranged to obtain a tax advantage (commonly known as “dual contracts”). This will have effect for income earned in tax year 2014-15 and thereafter. It will not apply to overseas income that falls within the 3-year period for Overseas Workday Relief set out at section 26 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
2.Schedule 3 contains provision for taking certain overseas earnings, income relating to employment-related securities and securities options and employment income provided through third parties out of the scope of the remittance basis for UK resident non-domiciles. This will apply to income in respect of employment where:
An individual has both a UK employment and one or more “relevant” (i.e. foreign) employments.
The UK employer and the relevant employer are “associated” with each other.
The UK employment and the relevant employment are “related”, and
the foreign tax rate that applies to income in respect of a relevant employment, calculated in accordance with the amount of foreign tax credit relief which would be allowed against income tax if the income were not taxed on the remittance basis, is less than 65% of the UK’s additional rate of tax (currently 45%).
Details of the Schedule
3.Paragraph 2 inserts new subsection (1A) into section 23. The effect of the new subsection is that a UK resident non-domiciled individual’s (P) overseas employment income will be taxed on the “arising” basis and not on the “remittance” basis if the new section 24A of ITEPA (inserted by paragraph 3) applies.
4.Paragraph 3 inserts new sections 24A and 24B into ITEPA.
5.New section 24A(1) and (2) set out when new section 24A will apply and provide a signpost to the provisions which set out the consequences. New section 24A(1) also defines the terms “relevant employment” and “relevant tax year”.
6.New section 24A(3) provides that PAYE will not apply to income taxed on the “arising” basis under new sections 23(1A), 41C(4A), 41H(5) and 554Z9(1A). Section 41H is inserted by section 52 of, and Schedule 9 to Finance Act 2014.
7.New section 24A(4) defines other terms used in this section.
8.New section 24A(5) sets out different types of employment income (certain overseas earnings, income relating to employment-related securities and securities options and employment income provided through third parties), in respect of a relevant employment. One or more of these paragraphs must apply, and conditions 1 to 4 must be met, (and condition 5 must not be met), for new section 24A to be engaged (see new section 24A(1)(a) to (c)).
Condition 1: The UK employments test
9.New section 24A(6) sets out condition 1, which is that P has a “UK employment” at the same time as they hold the “relevant employment” at some point in the “relevant tax year” or in the UK part of the year if the year is a split year.
Condition 2: The associated employer test
10.New section 24A(7) sets out condition 2, which is that P’s UK and relevant (i.e. overseas) employer are either the same, or are associated with one another.
Condition 3: The related employments test
11.New section 24A(8) sets out condition 3, which is that the UK employment and the relevant (i.e. overseas) employment are related to one another and new section 24A(9) contains provisions to assist in interpreting when a UK employment and a relevant employment will be “related”.
12.Some examples of scenarios in which HMRC would consider a UK employment and a relevant employment to be related to one another are:
Where it is reasonable to suppose that P’s UK employment would cease if their relevant employment ended.
Where P has two employments and undertakes client meetings, entertainment or marketing under the relevant employment and manages investments for the same clients under the UK employment.
Where P is employed in the UK and P’s contract specifies that P cannot work outside the UK. P is also employed in France, and P’s contract specifies that they can only work in France. P does the same type of work under their French contract as under their UK contract, so although these duties are separated geographically, the work is of the same type.
Where P provides financial advice to an individual under both a UK and relevant employment.
13.New section 24A(9)(f) and (10) provides that employments will be “related” where P has a senior position in at least one of their UK or overseas employments or with an associated employer. In deciding whether or not P meets this condition, regard must be had to their level of seniority compared with other employees in their organisation: to hold a senior position, P must either be a director who owns or controls more than 5% of their UK or relevant employer’s ordinary share capital, or be in the highest tiers of seniority or remuneration compared to other employees.
14.New section 24A(11) and (12) provide that the Treasury may amend new section 24A in respect of the “related employments” test by regulations. Any such regulations will be subject to the positive affirmation procedure by the House of Commons.
Condition 4: The 65% test
15.New section 24A(13) sets out condition 4. New section 24A(14) and (15) and new section 24B define terms used in relation to condition 4. Condition 4 will be engaged if the rate of foreign tax relief that would apply to the relevant employment income defined in accordance with new section 24A(5), if that income were taxed on the arising basis, would be less than 65% of the UK’s additional rate of tax. For example, if the UK’s additional rate of tax is 45% in 2014-15, then condition 4 will apply if the rate of foreign tax credit relief that would be given in relation to the relevant employment income in tax year 2014-15 would be less than 29.25% (65% of 45%).
16.New section 24A(16) provides that the percentage set out at new section 24A(15) may be amended by Treasury Regulations. Any such regulations will be subject to the negative affirmation procedure.
Condition 5: The regulatory requirement test
17.New section 24A(17) sets out condition 5. Section 24A will only apply if condition 5 is not met. Condition 5 applies if (a) the duties of the relevant employment could not be lawfully performed in the relevant territory by virtue of any regulatory requirement imposed by or under the law of that territory if the duties were duties of the UK employment instead and (b) the UK duties of the UK employment could not be lawfully performed in the UK by virtue of any regulatory requirement imposed by or under the law of any part of the UK if the duties were duties of the relevant employment instead.
18.New section 24A(18) provides the definition of “the relevant territory” and “UK duties” for the purposes of new section 24A(17).
19.Paragraph 4 amends section 41C of ITEPA and sets out the circumstances in which overseas income from employment-related securities is taken out of the scope of the remittance basis. It has effect for cases where the tax year in question is the tax year 2014-15 or any subsequent tax year.
20.Paragraph 4(3) introduces new section 41C(9), which sets out that if the remittance basis does not apply to employment-related securities income by virtue of new section 24A, then section 41E (just and reasonable apportionment) is to be treated as providing that it is just and reasonable that none of the securities income accruing in the tax year is “foreign”. This means that section 41E will not override the amount of shares income which is determined under this measure to be taxed on the arising basis.
21.Paragraph 5 sets out the circumstances in which overseas employment income provided through a third party is taken out of the scope of the remittance basis. Section 554Z9 of ITEPA makes the link between the rules on employment income provided through third parties and the remittance basis in cases in which the employee (‘A’) is non-UK domiciled but does not meet the requirement of section 26A of ITEPA (remittance basis: 3-year period of non-residence). This paragraph amends section 554Z9 to remove this link, so the provisions will apply if new section 24A applies to the relevant employment.
22.Paragraph 6 makes a minor consequential amendment to section 717 of ITEPA.
23.Paragraph 7 contains the commencement provisions for the legislative change. It applies new sections 24A and 24B to income earned on or after 6 April 2014 or, in the case of securities income, to income accrued in 2014-15 or subsequent tax years.
Background Note
24.This measure supports the Government’s objective of making the tax system fairer by targeting and preventing contrived avoidance by a small number of high-earning UK resident non-domiciled individuals who are creating an artificial division between the duties of UK and overseas employments in order to obtain a tax advantage.
25.This measure will tax UK resident non-domiciles on income that arises in respect of overseas employments according to the ‘arising’ basis if that income passes a series of tests to establish whether or not there has been an artificial separation of UK and overseas employments. The effect of this measure is to prevent the income it identifies from being eligible for remittance basis tax treatment.
