We have been approached by many clients who operate tax equalisation programmes for their globally mobile employees, who have incurred additional tax burdens unnecessarily for foreign domiciles working in the UK.
Overseas Workday Relief (OWR) is a valuable exemption only available to foreign domiciled UK tax residents, which treats part of the earnings from a UK employment wholly or partly performed abroad as if it were a foreign source of income.
However, the calculation for an expatriate employee’s earnings for their UK and non-UK duties can become more complex when the employee participates in the employer’s tax equalisation programme.
Careful consideration needs to be given not only in how the earnings are split between UK and non-UK duties but also to any UK / foreign taxes and social security paid on the employees behalf or reimbursed. It is important to clarify that the elements of their total employment package, including salary, benefits and taxes / social security to be excluded from UK reporting do specifically relate to non-UK duties. This can be further complicated if amounts are reimbursed to the employee which are then remitted to the UK and become taxable.
It is also important to ensure the correct reliefs and allowances have been claimed when calculating the net income for tax equalisation purposes. For example where an employee (from the US) has earnings assessable in the UK under the remittance basis, in strictness relief for pension contributions provided by article 18 of the Double tax treaty (between the US & UK) should be apportioned by reference to their earnings. However, the Pensions Tax Simplification Newsletter No 24 article included guidance which confirmed that it is not necessary to apportion the individual’s US pension contributions on the basis of their UK and non-UK earnings, however certain restrictions apply based on the UK tax earnings and annual maximum in the UK for pension contributions.
Finally, changes brought in by the new deemed domicile legislation from April 2017 can have an impact on individuals who claim OWR.
If you require any assistance in reviewing the position for your employees, please do not hesitate to contact Karen Groat or your usual AAB contact.
To find out more about Karen and the Payroll and Employment Taxes team, click here.