Employees not domiciled for tax purposes in the UK who are splitting their working time between the UK and overseas are entitled to claim an exemption from paying UK tax on their income relating to non-UK duties (as opposed to their total employment income). This briefing sets out one possible way to achieve that.
One option is the use of dual contract arrangements, whereby UK duties are performed under the terms of a UK employment contract and overseas duties are performed under the terms of a non-UK employment contract. However there are circumstances, particularly where the non-UK employment contract is held in a low tax jurisdiction, where this route is not available.
If the dual contract option is not possible from a tax perspective, or practical from an administrative perspective, Overseas Workday Relief (OWR) may be available for non-domiciled employees who:
- Spend part of their working time overseas;
- Are paid for those duties overseas; and
- Do not bring (remit) those funds to the UK.
By claiming OWR, eligible employees are liable to UK tax on their UK employment but do not pay UK tax on unremitted earnings relating to overseas duties. Earnings for these purposes includes salaries, fees, bonus, commission, profit sharing or any other cash based payment received by reason of employment. Benefits in kind taxable as salary, for example the receipt of shares not through the exercise of a share option or under the terms of a tax advantaged share scheme, will also be included as earnings for OWR.
OWR can be considered for the first three tax years in the UK provided the employee was not UK tax resident in the immediately preceding three tax years. The first tax year available for OWR is the year of arrival and therefore an employee arriving in March would likely be entitled to OWR for 25 months (the one remaining month of the tax year arrival plus the subsequent two tax years) whereas an employee arriving a month later would be entitled to OWR for 36 months.
Careful planning of arrival can therefore maximise the potential relief available, although it should be noted that if in part of the year of arrival the non-domiciled employee was also non-UK resident, payments relating to non-UK duties for that period would not be subject to UK tax even if remitted.
There is no restriction to the number of tax years in which an individual can claim OWR, providing the test regarding being non-resident for three consecutive tax years is met. Therefore a non-domiciled employee partly working in the UK for three years who then works full-time outside the UK for the following three tax years before returning to work partly in the UK for another three years would be entitled to OWR for six of those nine years. This is, of course, on the assumption that the employee remains non-domiciled in the UK and is not deemed to be domiciled by reason of the number of tax years they are resident in the UK over a 20 year reference period.
How relief is given
OWR is claimed via a self assessment tax return for that tax year. It is, however, possible for employers to assist. Employers can, subject to agreement by HM Revenue & Customs (known as a Section 690 agreement), limit the operation of PAYE to the amount of salary payments expected to relate to UK duties and remitted payments for overseas duties, thereby speeding up the OWR claim through the payroll. Any balance of OWR to be claimed or additional tax to be paid will be settled by the employee through their self assessment tax return.
Please note that OWR is only relevant for income tax and there is no similar relief for NICs.
Key points in practice
The remittance basis rules are complex. It is important to make sure the employee understands these for the relief to be effective. Ideally, advice should be taken before the employee arrives in the UK to minimise the risk of unintended remittances.
For advice regarding any of the issues raised here, please contact your usual Saffery Champness partner.