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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Employment

The second condition for exemption under Article 15(2) is that the remuneration which is the subject of the claim must be paid by, or on behalf of, an employer who is not United Kingdom resident.

What follows is guidance regarding when a claim can be accepted and when an enquiry into the claim may be required. It is not intended to replace or expand the commentary on the application of Article 15 in the OECD Model Tax Convention on Income and Capital.

The fact that an individual formally remains an employee of an overseas company does not on its own satisfy the test in Article 15(2)(b). Not only must the claimant remain an employee of the overseas company but the remuneration in respect of which the exemption is claimed must be paid by the overseas employer and not, for example, by a United Kingdom subsidiary company to whom the employee may have been seconded. Any statement on this aspect of a claim should be checked to ensure that it is consistent with

i) other information in the papers (for example what does the return show?)  

and

ii) the position in other similar cases involving the same United Kingdom employer.  

If there is any doubt you should ask the agents to provide a statement from the United Kingdom company or the overseas employer, to confirm the extent to which, if at all, the overseas employer has continued to pay the claimant’s remuneration either directly or by reimbursing the United Kingdom company.

Cases where remuneration continues to be `paid by’ the overseas employer, but there is a recharge of the cost of that remuneration to the United Kingdom company to whom the employee has been seconded, are frequently a cause of difficulty. Claims should not be accepted where

  • the employee remains formally employed by a company which is not resident in the United Kingdom

and

  • he is seconded to work for a United Kingdom resident company

and

  • the United Kingdom company for practical purposes functions as his employer during the United Kingdom assignment

and

  • the United Kingdom company bears the cost of the employee’s remuneration, either by a direct recharge or as part of a management charge made by the non-resident employer.

WHEN DOES A UNITED KINGDOM COMPANY FUNCTION AS AN EMPLOYER?

Guidance on the criteria for identifying the employer for the purposes of the Article is to be found in paragraphs 8 to 8.28 of the Commentary on Article 15 of the OECD Model Double Taxation Convention which should be considered in cases of difficulty and CAR PTI advisory will also be able to provide assistance. The starting point is whether under the domestic laws of the State of Source the services rendered in that State are provided in an employment relationship and that will determine how that State applies the Convention, i.e. whether the services are provided under a contract of service or under a contract for services. Where an employee works in the business of a United Kingdom company and that company obtains the benefits and bears any risks in relation to the work undertaken by the employee then that company is likely to be treated as his employer.

The mere fact that the United Kingdom company has borne the cost of the employee’s remuneration is not on its own sufficient for that company to be treated as the employer. A United Kingdom company would not be regarded as the employer where the employee continued to work in the business of a non-resident company even though working at the premises of the United Kingdom company - for instance, an employee sent to the United Kingdom company to service equipment supplied by a non-resident company. In this situation the services are being provided under a contract for services between the two companies and not under a contract of service with the United Kingdom company.

Paragraphs 8.16 to 8.27 of the Commentary provide other examples of cases where services are rendered under a contract of employment and where, alternatively, they are provided under a contract for services between two enterprises.

The following guidance may also be of assistance in practice. In the case of very short term secondees it is unlikely that an employee would be sufficiently integrated within the business of the United Kingdom company for that company to be regarded as his employer. For that reason it may be accepted that a United Kingdom company with whom an employee does not have a formal contract of employment should not be treated as the employer for the purposes of Article15 where that employee is in the United Kingdom for less than 60 days in a tax year and that period does not form part of a more substantial period when the taxpayer is present in the United Kingdom. The 60 days are to be counted using the “days of physical presence method” set out paragraph 5 of the Commentary. Basically, if a person is physically present in the United Kingdom during any part of a day then that counts as a day in the United Kingdom for the purposes of this rule.

Further details about how this 60 day rule is applied can be found in Tax Bulletin issue 68.

AVOIDANCE CASES

Claims should not be admitted where payment by an overseas company forms part of an arrangement to avoid United Kingdom tax. PAYE Technical will advise in cases where, for example, the overseas employer is based in a tax haven or the employee is nominally employed by a company which exists to provide his services to the United Kingdom user of those services. Cases where an employment which existed prior to the employee’s assignment to the United Kingdom continues during that assignment usually do not cause difficulty. Cases where the employee has taken up a new formal employment with an overseas company at the time of assignment should be reviewed critically.

`ON BEHALF OF’

Payments may be made `on behalf of’ a non-resident employer in cases where the payment is physically made by a United Kingdom company. It may be accepted that remuneration has been paid or benefits provided `on behalf of’ a non-resident employer if that non-resident ultimately bears the cost of such remuneration and benefits. Claims should not be admitted where a United Kingdom company pays remuneration or incurs the cost of benefits and does not receive reimbursement from the overseas employer. Such payments and costs are incurred in the interest of the United Kingdom company and not on behalf of the overseas employer.

Unless the claimant offers evidence that the United Kingdom company was reimbursed the cost of the taxpayer’s remuneration and benefits by the non-resident employer (and this can be checked with the relevant HMRC corporation tax specialist or Customer Relationship Manager dealing with the United Kingdom company’s Corporation Tax affairs) a claim under Article 15(2) should be resisted.

Where it is argued that remuneration has been paid `on behalf of’ an overseas employer, even though a United Kingdom company has paid the individual’s remuneration and the overseas employer has not reimbursed the cost, it should be pointed out that it is unlikely that, in these circumstances, the cost of the remuneration could be regarded as wholly and exclusively incurred for the purposes of the United Kingdom company’s trade and that, therefore, no deduction should be claimed for the cost of the remuneration in computing the United Kingdom company’s taxable profit. Reference should be made to the tax case of Robinson v Scott Bader and Co Ltd (54TC757) which considers the inadmissibility of remuneration paid on behalf of another employer.

The decision in the Scott Bader case makes clear that the object of the person making the payment is decisive in determining whether or not a deduction is permissible in accordance with ICTA88/S74.

In relation to seconded employees there are three possible situations

  • the payment to the employee is made solely in the interests of the overseas company;
  • the payment is made partly in the interests of the United Kingdom company and partly in the interest of the overseas company

or

  • the payment is made solely in the interests of the United Kingdom company.

Only in the third case is a deduction available to the United Kingdom company in computing its profits.

BENEFITS

Even where basic remuneration continues to be paid by the overseas employer it is common for benefits (for example, the use of a flat) to be provided at the cost of the United Kingdom employer to whom the employee has been seconded. Subject to the other conditions in the Article, the basic remuneration may be exempt from United Kingdom tax but the condition in Article 15(2)(b) is not satisfied in relation to benefits in these circumstances because they are not `remuneration paid by, or on behalf of,’ the overseas employer (unless the cost of the benefits is borne by the overseas employer through a recharge).