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Internationally mobile employees – UK tax implications

Internationally mobile employees are those who work in different countries around the world.

In this blog, we will focus on employees going to work in the UK.

The taxation of these individuals varies depending on how they are paid and when and why they spend time in the UK.

Cross-border employment

Under UK law, three central concepts dictate 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.

The concept of UK domicile is discussed in our recent blog here.

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. 

Statutory residence test

The rules surrounding whether an individual is resident in the UK for tax purposes changed from 6 April 2013. Under the basic rule, an individual is treated as UK tax resident for a tax year if he or she meets for that year:

the automatic UK residence test, or

the sufficient ties test

You can find more about the Statutory Residence Test here.

If an individual satisfies at least one of the automatic overseas tests, the individual is not UK tax resident for that tax year, i.e. the automatic overseas residence test takes priority over the automatic UK residence and sufficient ties tests.

In general, non-UK residents are only liable to UK taxes in respect of UK-source income – in the case of employment income this 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.

As part of the statutory residence test, there is a particular relief from UK income tax for certain non-domiciled individuals who have elected to be taxed on the remittance basis on their unremitted ‘general earnings’ from employment related to duties performed overseas. This relief is called the Overseas Workday Relief.

Employment-related securities

The rules changed from 6 April 2015, such that the gain arising on employment-related securities (ERS) is time apportioned over the vesting period of the award in order to reflect the period over which the gain was earned. Therefore, income arising in respect of ERS held by internationally mobile employees will generally be apportioned on a time basis, with only the part that relates to UK duties being subject to income tax.

There were also amendments to the NICs provisions in respect of ERS held by internationally mobile employees in April 2015. There will only be a NICs liability on ERS income earned for days during the relevant period when the individual was subject to NICs. The amendments operate by disregarding, for NICs purposes, income earned over the vesting period when the individual is not within the UK NICs’ regime.

Double Tax Treaties

Most of the UK’s double tax treaties provide that an employee who comes to work in the UK on a short-term basis (generally for less than 183 days in the tax year or any period of 12 months) is taxed only in their home country.

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.

There are some specific provisions in double tax treaties which help protect an internationally mobile employee against 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.

This is a complicated area of tax law and needs to be looked at on a case by case basis, so feel free to get in touch if you have any specific questions.