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HMRC internal manual

Employment Income Manual

Termination payments and benefits: section 401 ITEPA 2003: exceptions: 'foreign service': definition

Section 413 ITEPA 2003 

EIM13680 explained that a payment or other benefit which falls within section 401 ITEPA 2003 may be fully excepted from a charge to income tax if a sufficient proportion of the employee’s service counts as ‘foreign service. Foreign service has a special meaning for this purpose.

Meaning of ‘foreign service’

For a payment or other benefit within section 401 ITEPA 2003 to which the exception may apply, it is necessary to establish whether a sufficient proportion of the employee’s service counts as ‘foreign service’. ‘Foreign service’ means service to which a), b), c) or d) below apply:

a) Service in or after the tax year 2013 to 2014 to the extent that it consists of duties performed outside the United Kingdom in respect of which earnings would not be relevant earnings.

b) Service in or after the tax year 2013 to 2014 if a deduction equal to the whole amount of the earnings from the employment was or would have been allowable under Chapter 6 of Part 5 ITEPA 2003 (deductions from seafarers’ earnings)  (see EIM33000).

c) Service in or after the tax year 2003 to 2004 but before the tax year 2013 to 2014 such that any earnings from the employment would not be relevant earnings.

d) Service in or after the tax year 2003 to 2004 but before the tax year 2013 to 2014 such that a deduction equal to the whole amount of the earnings from the employment was or would have been allowable under Chapter 6 of Part 5 ITEPA 2003 (deductions from seafarers’ earning) (see EIM33000).

This guidance deals only with the legislation relating to periods of service after 5 April 2003. If service before 6 April 1974 is involved, see EIM13705.

If there is a period of service when there are no earnings from the employment, apply the guidance as if there were.

Up to 5 April 2008, ‘relevant earnings’ means earnings to which section 15 or section 21 ITEPA 2003 as then enacted applies (see EIM40002). So if the earnings fall within any other provision, the period counts as ‘foreign service’.

From 6 April 2008, ‘relevant earnings’ means earnings which are for a tax year in which the employee is ordinarily resident in the UK and to which section 15 ITEPA 2003 applies (see EIM40002). So if any other situation applies to the earnings, the period counts as ‘foreign service.

Combine the periods within the duration of the employment that count as ‘foreign service by applying the definitions above and then give the full exception if any one of the requirements from the table below are met (see example EIM13970).

Total period of service down to the relevant date Requirement for full exception to be given
All cases of whatever duration Three-quarters or more of the whole period of service comprises of foreign service.
More than 10 years The whole of the last 10 years comprises of foreign service.
More than 20 years One-half or more of the whole period of service (including any 10 of the last 20 years) comprises of foreign service.

For this purpose treat successive employments with different members of the same group of companies as if they were a single continuing employment where the payment takes account of that service, see example EIM13975.

With effect from 6 April 2018, the exception from income tax is no longer available where certain criteria are met. EIM13680 lists these criteria and the circumstances in which the exception is no longer available.

EIM13692 explains how to treat termination payments that are no longer excepted from a charge to income tax for ‘foreign service’ because the employee, or former employee was UK resident for the tax year in which the employment was terminated.

Note: a taxpayer with some foreign service who does not meet the requirements in the table above may be able to claim a foreign service reduction instead, see EIM13700.