Global Employer Services NewsFlash

United Kingdom – dual contract arrangements – revised draft legislation published

27 March 2014


Earlier today the government published revised draft legislation on the ‘artificial use of dual contracts by non-domiciles’ as part of Finance (No. 2) Bill 2014.  Most of the changes anticipated following the announcement made at the time of the recent Budget are included but there are a number of points worth noting.  In this Newsflash we have:

  • Summarised the key features of the draft legislation,
  • Highlighted the main changes since the original draft legislation was published on 16 January 2014, and
  • Provided an overview of the areas where uncertainty still remains.

Deloitte’s view

Employers and employees impacted by the new legislation will welcome the changes made to the original draft.  The changes demonstrate that representations made during the period of consultation that followed publication of the original draft have been taken into account.

Key features of the draft legislation

The new measures will impact UK resident, non-domiciled employees who are taxed on the remittance basis, do not qualify for overseas workday relief and are employed under separate contracts of employment with the same or associated employers for duties performed in the UK and outside of the UK.  The remuneration received under the non-UK contract will be taxed on the arising basis unless the arrangements fall outside of widely drawn parameters.

The arrangements will be caught by the new provisions if all four of the following conditions are met unless condition 5 is also met.

The first four conditions are:

  1. The employee has both a UK employment and one or more non-UK employments,
  2. The UK and non-UK employers are associated with each other,
  3. The UK and non-UK employments are ‘related’ to each other,
  4. The foreign tax credit available in respect of the non-UK employment is, currently, less than 29.25%.

The fifth condition is that, as a result of regulatory requirements imposed under the law of the relevant jurisdiction, it would not be lawful for the duties of the non-UK employment to be performed under the UK contract and it would not be lawful for the duties of the UK employment to be performed under the non-UK contract.

The new measures will apply to employment income received under the non-UK employment insofar as it is ‘for’ 2014/15 or a subsequent tax year.

Deloitte's View

Employers impacted by the new measures now have a much greater degree of certainty over how the new rules will operate in practice which will help them plan for the future and communicate effectively with employees impacted by the new rules.

Main changes since the original draft legislation was published on 16 January 2014

The main changes made to the draft legislation since it was first published on 16 January 2014 are as follows:

  1. The legislation has been amended to make clear that the earnings received under the non-UK contract are not subject to tax withholding under the UK’s Pay As You Earn (PAYE) system.
  2. Under the original legislation, any employment income received on or after 6 April 2014 would have been taxed on the arising basis even if it was ‘for’ 2013/14 or earlier.  Following representations made by Deloitte (and others), this has been amended with the result that the new measures will only apply where the income received is ‘for’ 2014/15 or a subsequent tax year.  Where necessary we expect an apportionment to be made.
  3. Condition 5 has been added and provides a tightly drawn exception from the new measures where a dual contract arrangement is in place because the law of the UK and the territory in which the duties of the non-UK employment are performed requires the employment duties to be performed under separate contracts.
  4. Directors who do not have a material interest in either the UK employer or the non-UK employer will no longer be regarded as having related employments for the sole reason that they are a director of one of the companies.
  5. For the non-UK contract income not to be chargeable on the arising basis non-UK tax must be notionally creditable at a rate of not less than (currently) 29.25% against the non-UK contract income.  Previously this was going to be 33.75%.

Deloitte's View

Each of the above changes is welcome although a 29.25% level of foreign tax is still unlikely to be achieved by non-residents working only part of their time in the non-UK jurisdiction and it is disappointing that condition 5 has been so tightly drawn.  There may well be cases where the law of an overseas jurisdiction requires the employment duties in that country to be performed under a separate, local contract of employment without the law of the UK requiring the employment duties in the UK to be performed under a separate UK contract.  There may be cases where an individual performs duties outside of the UK that are subject to regulation in the relevant jurisdiction whereas the duties performed in the UK are different in nature and not subject to regulation.  As drafted, condition 5 would not be met and so the exemption for arrangements implemented for regulatory reasons would not apply.  Deloitte intends to raise this concern with the government to see whether the regulatory requirement could apply to one employment rather than both.

Areas of continuing uncertainty

The UK and non-UK employments may be regarded as ‘related’ for a number of different reasons including where the employee is:

  1. A senior employee of the UK or non-UK employer, or
  2. One of the employees of either the UK or non-UK employer who received the higher or highest levels of remuneration.

The terms ‘senior employee’ and ‘higher or highest levels of remuneration’ are not defined.

Deloitte's View

In practice the uncertainty of the above terms is of limited practical consequence.  An individual’s seniority and level of remuneration are only two possible factors that will be taken into account in deciding whether or not their employments are related.  As a result, even if an employee is not regarded as a senior employee and is not one of the employees who receives the higher or highest levels of remuneration, their employments may nevertheless be regarded as related.

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