UK: Internationally Mobile Employees: UK Tax

Last Updated: 1 May 2018
Article by Clyde & Co LLP

Most Read Contributor in UK, November 2018

Does UK tax apply?

For an internationally mobile employee, establishing whether income from employment is subject to UK income tax is by no means straightforward. It requires an understanding of the rules under UK law and how these rules may then be overridden in any given case by a double tax treaty.

Even UK law has one set of rules for "general" earnings and another set of rules for "specific employment income" such as income relating to shares and share options acquired by employees.

General Earnings

Under UK law, three central concepts govern liability to UK tax on general earnings from an employment: residence, domicile and source.

UK resident and domiciled persons are liable to UK tax on their earnings for any given year regardless of where they are employed. It makes no difference if the employee only receives the earnings in a subsequent year in which they are no longer resident in the UK. The meaning of receiving payment includes entitlement to payment and is extended still further for company directors.

However, if a UK resident is not domiciled in the UK, they may be able to access a preferential tax regime (remittance basis taxation) for foreign employment income. Under this regime, the income from the foreign employment is not taxed if the income is left overseas and not "remitted" or brought back to the UK. This regime may be available to a non-domiciled employee in two cases:

  • the first case is that the employee has a period of 3 years of non-residence in the last 5 years; and
  • the second case is that the employment is with a foreign employer and the duties are all performed abroad. The second case gives rise to dual contract arrangements for non-domiciled individuals: one contract for foreign work and one for UK work. Anti-avoidance rules now prevent too much of the salary being attributed to the contract for foreign work.

In general, non-UK residents are only liable to UK taxes in respect of UK-source income – in the case of employment income that means that the income is derived from work physically done in the UK. For non-residents, there is no UK tax liability on income from their work done abroad even if they receive the earnings in a subsequent year when they have become UK resident. However, military personnel, civil servants and diplomats continue to be liable to UK tax. For both this rule and the rule for non-domiciled individuals working abroad, incidental work in the UK is disregarded.

An individual may be resident in one part of a tax year and not in another part of the tax year; in that case the rules above need to be applied separately to each part of the tax year.

Employee shares and share options

Employees may receive shares or share options because of their employment. Some or all of the return on the shares or share options may be deemed to be employment income under provisions in the tax code. These provisions are mainly directed at counteracting tax avoidance.

Special rules then apply to this deemed income if the employee has not been domiciled or resident in the UK in either one of two periods depending on the provision under which the income is deemed to arise. The first period is the period during which the shares or share options are held. The second period is the tax year in which the income is deemed to arise. The rules refer to this as the relevant period.

As with general earnings, the effect of these rules is that a proportion of the income may not be liable to UK tax or may only be taxed if the income is brought into the UK.

The calculation of this proportion involves treating the income as accruing on a daily basis over the relevant period. For each day, you need to see if the employee is resident in the UK or not resident in the UK.

  • If the employee is resident in the UK but has a period of 3 years of non-residence in the last 5 tax years, the deemed income has to be apportioned between UK and non-UK work and the amount apportioned to non-UK duties is not taxable in the UK if left overseas.
  • If the employee is resident in the UK but the employment is with a foreign employer and the duties are all performed outside the UK, the deemed income is also not taxable in the UK if left overseas.
  • If the employee is not resident in the UK and the duties are all performed outside the UK, the deemed income is not taxable in the UK regardless of whether it is left overseas or brought into the UK.
  • If the employee is not resident in the UK and the duties are performed partly in the UK and partly outside the UK, the deemed income has to be apportioned between UK and non-UK work. The amount apportioned to the non-UK work is also not taxable in the UK regardless of whether it is left overseas or brought into the UK.
  • If the employee is resident in one part of a tax year and not in another part of the tax year, then the rules above need to be applied separately to each part of the year.

The rules incorporate similar anti-avoidance rules to deal with dual contract arrangements and also treat military personnel, civil servants and diplomats as continuing to be liable to UK tax.

Double Tax Treaties

The UK has double tax treaties with more than 130 other countries and most of those are based on the OECD Model agreements. Most of these treaties provide that an employee who comes to work in the UK on a short-term basis is taxed only in their home country. This generally means less than 183 days in the tax year or any period of 12 months.

Two further conditions typically need to be satisfied. The first condition is that the employee's remuneration is paid on behalf of an employer who is not resident in the UK. The second condition is that the remuneration is not borne by a UK permanent establishment of the overseas employer.

The special rules for deemed employment income arising on shares or share options are intended to limit the proportion of income which is taxable in the UK. However, there could still be mismatches between the UK tax system and a foreign tax system in relation to the timing or amount of a tax liability

There are some specific provisions in double tax treaties which help protect an internationally mobile employee against this potential double taxation and there are others which aim to prevent the employee from avoiding taxation by exploiting differences between the tax systems.

The UK special rules are intended to tax only an amount which equates to the amount earned in the UK. However, there may still be circumstances in which the taxpayer may need to claim relief under a double tax agreement. For example, the exchange of notes to the UK/USA double taxation convention provides for the taxable gain on a share option to be apportioned between the two countries based on residence in the period between grant and exercise. This may be different from the UK rules because the UK rules look at the period from to the earlier of exercise or vesting. The taxpayer may be in a better position by claiming relief under the double tax treaty.

Employees sometimes consider that they are entitled to double tax relief against income tax and therefore ask the employer to anticipate the relief by applying payroll taxes only to the amount actually taxable in the UK. If the employee is resident in the UK for the purposes of the double tax agreement, the UK will give relief for foreign tax by way of a credit. In these circumstances, it is not possible for the employer to anticipate the double tax relief except by making a special agreement with HMRC. If the double tax relief is given by way of exemption, payroll taxes do not need to be applied to the exempt amount. However, it would still be sensible for the employer to agree such an approach with HMRC because the employer will be at risk if the exemption was not available.

National Insurance contributions (NICs)

The general rule is that employees pay social security charges in the country where they work. Unlike double tax treaties, international social security agreements do not allow for apportionment of income.

Income from shares and share options is generally subject to NICs. However there are special rules that grant internationally mobile employees some relief from a double charge to NICs on this income. The first step is to identify the relevant period in accordance with the income tax rules. The income is then treated as if it had accrued evenly over the relevant period. NICs are not charged in respect of any days in the relevant period which meet one of three conditions. The first condition is that the employee did not meet conditions of residence or presence in the UK. The second condition is that the employee was subject to the social security system of another European Economic Area (EEA) member state or Switzerland. The third condition was that the employee was subject to the social security system of a country with which the UK has a reciprocal social security agreement.

Internationally Mobile Employees: UK Tax

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions