UK: Horizons - International news for employers and international secondees

Last Updated: 1 September 2005
Most Read Contributor in UK, August 2017

Article by Rob Essex, Philip Paur, Andy Hodge and Neil Rogers

UK: Dual contract arrangements In April H.M Revenue and Customs (HMRC) published a Tax Bulletin article on dual contracts in response to what they see as a more widespread use of aggressive arrangements. Dual contracts can be used for UK resident and ordinarily resident employees who:

  • are not domiciled in the UK;
  • have separable duties carried out outside the UK; and
  • have a separate employer for non UK duties, resident in neither the UK nor the Republic of Ireland.

HMRC is concerned that many dual contracts are invalid while acknowledging tacitly that they may be effective in the right circumstances. Consequently, HMRC plans to:

  • make extra resources available for reviews;
  • undertake more detailed enquiries; and
  • focus more on the commercial substance behind the contracts rather than the way they are established and reviewed.

Our view is that dual contracts can still be successfully implemented if:

  • they soundly reflect the commercial reality of the organisation and the employments concerned;
  • employers are willing and able to implement best practice across a wide area;
  • participating employees understand the commercial assumptions implied in their employment arrangements and abide diligently by them;
  • there is a transparent and regular dialogue with HMRC; and
  • there are firm and regular reviews of any dual contract arrangement.


Where implemented correctly, dual contracts have been extremely tax effective. Renewed focus by HMRC will likely lead to an increase in the number of tax return enquiries. Employers operating dual contracts should review their arrangements to ensure they conform with best practice and have real substance.

UK: Deferred corporation tax relief for employee benefit trusts

The House of Lords has delivered judgment in Macdonald v Dextra, which concerns the tax deductibility of contributions made by employers to employee benefit trusts (EBTs). The Lords agreed with HMRC and the Court of Appeal that where an employer pays contributions to an EBT "with a view" to their being paid as emoluments, that means subject to a "realistic possibility" of their being paid as emoluments, even if that does not in fact happen. In such a case the employer’s tax deduction is deferred if the funds contributed are not in fact paid out as emoluments within nine months of the end of the employer’s accounting period. A deduction is permanently disallowed if the funds are not paid out as emoluments at all, but in another form, e.g. as a loan.

The decision affects open tax returns for accounting periods starting before 27 November 2002 where contributions were paid before that date.


Dextra will result in a permanent disallowance of contributions to an EBT which are followed by loans to trust beneficiaries. However, HMRC has said that in other cases a deduction for contributions to an EBT will not be deferred or permanently disallowed simply because they are paid as tax-exempt emoluments. Contributions should not therefore be disallowed where an EBT is used to provide benefits under approved share schemes, or to employees whose earnings are not subject to UK tax.

UK: Impact of pensions simplification on international plans

HMRC have acknowledged that it is unreasonable to deny tax deductions for employer and employee contributions to foreign plans simply because a deduction was not allowed to the member in the country where he was resident immediately before he was assigned to the UK. Under draft regulations published in July, deductions will be allowed if the member was resident in a country which allowed him a personal deduction at any time in the ten years before he became UK resident.

This will, in particular, allow more flexibility to benefit career expatriates not on assignment from their home country, but will still not permit relief for contributions to offshore plans which are not tax recognised anywhere.

Also in July, HMRC published Pensions Update 154 on pre- A Day avoidance. This appears to be targeted mainly at avoidance using approved schemes, but HMRC may also object to pre-A Day (6 April 2006) accrual of benefit in corresponding schemes for tax avoidance purposes if the additional benefit is not funded until after A Day. However, HMRC’s options for withholding or withdrawing corresponding acceptance appear to be limited.


Important aspects of the new tax regime for foreign pensions remain to be clarified, including the treatment of lump sums paid from foreign plans, and the inheritance tax treatment. Deloitte has made representations on both issues. Despite this, enough is now clear for employers to choose among the options for international pension provision after April 2006.

Ireland: Bill to clarify immigration Procedures

The Irish government published the Employment Permits Bill 2005 on 29 June. When enacted it will:

  • set out in legislation the procedures relating to the application, grant, and refusal of work permits;
  • introduce a "green-card" type system for highly skilled migrant workers; and
  • provide new protections for migrant employees.

The bill allows the Minister to grant permission for non-EEA nationals with specified skills to reside and work in Ireland for a defined period of time and to set an annual cap on permits issued. Results of research into the types of skills for which permits should be granted will be published by the Irish government this autumn.


The aim of this bill is to provide a framework within which an active economic immigration policy can be implemented. However, it will also provide welcome clarification of the rules by which temporary assignees can work in Ireland.

China: Social security and work permit changes for workers from Hong Kong, Macau and Taiwan

New rules issued in China in June will amend the operation of social security and the administration of employment permits for workers from Hong Kong, Macau and Taiwan. With effect from 1 October 2005, such workers employed by a Chinese company, or assigned by a non-Chinese company to China for more than 3 months in a calendar year, will be subject to Chinese social security on their employment income. It is expected that such nationals will then be entitled to claim Chinese social security.

The additional social security costs will vary from region to region and according to the way local bureaux interpret the rules. Beijing employer and employee contributions rates for 2005 are 32.7% and 10.5% respectively, payable on the first RMB 7,087 (approx $900) of income.

Changes to work permit procedures for such workers include:

  • tighter rules on the age limit of applicants;
  • clear guidance on required documentation;
  • revised timeframes for the approval process; • tighter deregistration requirements; and
  • revised penalty provisions for non compliance.


The new rules will have significant impact for organisations operating in China that employ or assign workers from Hong Kong, Macau or Taiwan. These changes may be the first steps towards a Chinese social security liability for all foreign assignees.

Australia: NSW payroll tax expanded to include stock option income

The Australian State Revenue Amendment Act received Royal Assent in June 2005, introducing changes to the calculation of taxable wages for payroll tax purposes in the State of New South Wales (NSW). The new amendments extended the rules on including share and stock option grants in payroll taxable income to directors and to certain grants to assignees rendering services in NSW.

Unexpectedly, stock options will have a taxable value at grant for this purpose calculated as a percentage of the exercise price. Previously, stock options granted at fair market value did not have any value at grant for payroll tax purposes in NSW. Companies should consider whether to elect for taxation at vesting to avoid a payroll tax at grant.


Companies should identify all grants since 1 July 2003 and review their exposure under the original and amended provisions. They should also assess whether elections for taxation at vesting should be made for post 1 July 2005 grants. Home country employers with assignees in NSW should make sure the local entity is aware of all grants to assignees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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