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HMRC internal manual

Employment Income Manual

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Calculation of Chargeable Overseas Earnings - Section 23 ITEPA 2003

Part 2 Chapter 5 ITEPA 2003

Section 23

Section 23 sets out three steps to calculate how much of an employee’s general earnings are chargeable overseas earnings.
 
Step 1: identify the full amount of overseas earnings for the tax year.
 
Overseas earnings are defined in section 23 as the general earnings for a tax year in which:

  • the employee is resident but not domiciled in the United Kingdom and remittance basis applies
  • the taxpayer does not meet the conditions in section 26A (see EIM40102)
  • the employment is with a “foreign employer” (see EIM40031), and
  • the duties of the employment are performed wholly outside the United Kingdom.

Section 232 or Part 5 (deductions allowed from earnings),

Section 262 CAA 2001 (capital allowances to be given effect by treating them as deductions from earnings),

Section 188 to 194 of FA 2004 (contributions to registered pension schemes).

‘Wholly’ is qualified by section 39 ITEPA 2003 (see EIM40204).

Step 2: subtract any amounts that would (assuming they were taxable earnings) be allowed as deductions from those earnings under:

Step 3: where the duties of an associated employment are performed in the United Kingdom, apply any limit imposed by section 24 (see EIM40103).

Chargeable overseas earnings: taxable amount

Section 22 provides that the taxable earnings will be the full amount of chargeable overseas earnings remitted to the United Kingdom in the tax year whether the earnings are for that year or some other year and whether or not the employment is held at the time that the earnings are remitted. See EIM40302 for guidance on the meaning of remitted to the United Kingdom.
 
Since 6 April 2008 any general earnings that are not chargeable overseas earnings within section 22 because of the operation of the steps in section 23 will be taxable under section 15 (until 5 April 2008 they were taxable under section 21). The example at EIM31771 illustrates the interaction between sections 15 and 22 where Step 2 applies.

Practical issues

An employee may maintain that general earnings are chargeable overseas earnings taxable on remittance under section 22 rather than on receipt under section 15 (or under section 21 if before 6 April 2008). This is likely to lead to a significant reduction in the amount of taxable earnings. You should examine the facts closely before accepting that earnings are chargeable overseas earnings within section 22. In particular you should find out whether the employer has any place of business in the United Kingdom.