Taxation of international executives
Are there special residency considerations for short-term assignments?
If an individual spends 183 days or more in the United Kingdom in a tax year, he/she will be regarded as resident in the United Kingdom for the whole of that year. The tax year runs from 6 April to the following 5 April. For determining U.K. residence, usually a day is counted if the individual is present at midnight.
Short-term assignees spending less than 183 days in the U.K. may be considered non-resident, however there could be circumstances under which a short term assignee, who is in the U.K. for more than 16 days in a tax year, could be classed as U.K. resident for that year.
Such short-term assignees would need to consider the rules in the new Statutory Residence Test, which applies for tax years from 6 April 2013. It is therefore important that each assignee takes advice on their particular circumstances. Further detail regarding the U.K.’s Statutory Residency Test (“SRT”) are included in the main body of this note.
If a short-term assignee is deemed to be U.K. resident for a year, there may be some reliefs and exemptions available to restrict their exposure to U.K. tax to income attributable to U.K. sources/duties only. Again, due to the complex nature of the rules, the assignee will need to take specific advice regarding their circumstances.
Are there special payroll considerations for short-term assignments?
If a short-term assignee is in the United Kingdom working for an entity in the United Kingdom, it is likely that that entity will have a responsibility to operate Pay-as-you-earn (“PAYE”). However, if it is anticipated that the employee will be able to claim tax treaty relief and not have a tax liability, the U.K. entity might well be able to enter into arrangements with HMRC under which it does not have to operate PAYE, provided it agrees to certain undertakings.
What income will be taxed during short-term assignments?
Subject to tax treaty relief, all of the income relating to U.K. duties will be taxable.
If the assignee is not resident in the United Kingdom, income relating to non-U.K. duties will not be taxable.
If the assignee is U.K. resident for the tax year, but is non-U.K. domiciled and claims the remittance basis of taxation and meets the prescribed statutory conditions are met, Overseas Workday Relief (“OWR”) may be claimed. The effect of OWR is that the assignee’s earnings related to non-U.K. duties will not be taxable in the U.K. if not brought into (i.e. remitted to) the United Kingdom. Otherwise, income relating to non-U.K. duties will be taxable.
Again, the rules relating to remittance of funds to the U.K. are complex. It is, therefore, important that the assignee seeks advice on their particular circumstances to ensure they do not accidentally create an additional U.K. tax liability.
Are there any additional considerations that should be considered before initiating a short-term assignment in the United Kingdom?
It is very likely that the tax treaty between the assignee’s country of residence (home jurisdiction) and the U.K. (host jurisdiction) will be relevant; the U.K. adopts the economic employer approach when interpreting the employment income article.
Detailed records should be maintained of the time which the assignee spends in the U.K. and of his/her work activities, both in the U.K and elsewhere, during the assignment.
The appropriate structuring of bank accounts should be considered before the employee commences work in the U.K. if there is any chance that he/she will become resident there.
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