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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employee resident but not ordinarily resident in the United Kingdom: text of Statement of Practice 1/09 for 2009/10

SP1/09 Employees resident but not ordinarily resident in the UK: General earnings chargeable under Sections 15 and 26 Income Tax (Earnings and Pensions Act) 2003 (ITEPA) and application of the mixed fund rule under Sections 809Q onwards of the Income Taxes Act 2007

The full text of SP1/09 that took effect from 6 April 2009 is below.

Overview

  1. Section 25 and Schedule 7 Finance Act 2008 introduced changes to the remittance basis affecting the taxation of employment income where the employee is resident but not ordinarily resident in the UK. Amongst other issues, they introduced rules to determine the kind and amount of income or chargeable gains remitted to the UK where a transfer is made out of a mixed fund.
  2. This statement of practice (SP1/09) sets out how HMRC will treat transfers made from an offshore account holding only the income or gains relating to a single employment and the apportionment of earnings where an employee is taxed on the remittance basis.
  3. Statement of Practice 5/84 (SP5/84) is withdrawn and incorporated as part of this new Statement of Practice 1/09 with effect from 6 April 2009.

Details of SP1/09

Transfers made from an offshore account holding only the income or gains relating to a single employment

  1. Sections 809Q ITA onwards set out the rules to determine the kinds and amount of income or chargeable gains remitted to the UK from a fund containing more than one kind of income and capital, or income, or capital of more than one tax year. Such a fund is defined in Sections 809Q and 809R as a “mixed fund”. Where amounts are transferred to the UK out of a mixed fund, Section 809Q(3) requires that the individual’s tax liability is calculated by reference to each individual transfer. This transfer by transfer approach is referred to below as the “mixed fund rule”. This is a change to HMRC’s previous practice, with respect to employees to whom SP5/84 applied, which was to allow the tax liability to be calculated by reference to the total amount transferred to the UK during the tax year as a whole.
  2. In the circumstances outlined in this SP, HMRC will accept that certain individuals who are resident but not ordinarily resident in the UK do not have to apply the mixed fund rule and can continue to calculate their tax liability by reference to the total amount transferred out of a mixed fund during the tax year as a whole, rather than by reference to individual transfers.
  3. Employees who are resident but not ordinarily resident in the UK and who perform duties of an office or employment both inside and outside the UK, do not have to apply the mixed fund rule in respect of transfers from a particular account where:
  • the mixed fund is an account held solely by the employee; and
  • the account only contains employment income from a single employment, plus

    • any interest arising only on that account;
    • any gains arising from foreign exchange transactions in respect of the funds in that account,
    • any gains arising on employee share scheme related transactions,
    • any proceeds from employee share scheme related transactions, not otherwise covered at paragraph 7, in respect of amounts paid by the employee in acquiring the shares.
  1. For these purposes, the employment income from that employment may include:
  • employment income (Section809Q(4)(a));
  • relevant foreign earnings (Section 809Q(4)(b));
  • foreign specific employment income (including termination payments and the proceeds from employee share schemes)(Section 809Q(4)(c)); and
  • employment income subject to a foreign tax (Section 809Q(4)(f)).
  1. Employees who are resident but not ordinarily resident in the UK may also choose not to apply the mixed fund rule if the account contains only income or gains of a kind listed at paragraphs 6 and 7 above, but for more than one tax year. Where this is the case, the ordering rules at Section 809Q(3) shall be applied - i.e. on a last in first out basis.
  2. Where the employee applies this SP, amounts transferred out of the account to the UK will be treated as comprising the kinds of income and gains in the order set out in Section 809Q(4) for the tax year as a whole.
  3. Accounts containing income or gains of more than one employment are not covered by this SP.
  4. Accounts containing income or gains of more than one individual are not covered by this SP.

Apportionment of earnings

  1. Employees who are resident but not ordinarily resident in the UK are chargeable to UK tax under Section 15 ITEPA on general earnings wherever received for duties performed in the UK. They are also chargeable under Section 26 ITEPA on general earnings for duties performed outside the UK but only to the extent that the earnings are remitted to the UK.
  2. Where the duties of a single office or employment are performed both in and outside the UK, an apportionment is required to determine how much of the general earnings are attributable to the UK duties. Apportionment of general earnings is essentially a question of fact, but for many years HMRC has accepted time apportionment, based on the number of days worked abroad and in the UK, except where this would be clearly be inappropriate. For example, in the case of an employee with 200 working days in the UK and 50 working days outside the UK, the proportion of general earnings attributable to the UK duties would be 200/250. This practice does not, of course, apply where the charge arises under Section 15 and relief is due under Part 5 Chapter 6 ITEPA (deductions from seafarers’ earnings).
  3. Where an employee resident but not ordinarily resident in the UK performs the duties of a single office or employment both in and outside the UK and is remunerated wholly abroad, he is permitted, by a broad interpretation of the decision in the case of Sterling Trust Ltd v CIR (12TC868), to say that any remittances made to the UK are made primarily out of general earnings for that year in respect of duties performed in the UK assessable under Section 15, and only any balance out of general earnings chargeable under Section 26 on remittance.
  4. However, where part of the general earnings are remitted to the UK, it was the practice of HMRC to regard the proportion of the earnings remitted to the UK, as being in respect of duties performed both in and outside the UK, and to treat that proportion of such earnings as were attributable to duties performed outside the UK as remitted to the UK for the purposes of Section 26.
  5. The practice changed with effect from 6 April 1983 when HMRC introduced a simplified procedure for employees who
  • are resident but not ordinarily resident in the UK;
  • perform duties of a single employment both in and outside the UK, so that they are potentially chargeable under both Sections 15 and 26 in respect of general earnings from that employment; and
  • receive part of their general earnings in the UK and part abroad.
  1. In such cases, provided the general earnings chargeable under Section 15 are arrived at in a reasonable manner (i.e. in the absence of special facts, the proportion of the general earnings, including benefits in kind, relating to UK duties is arrived at on a time basis by reference to working days), HMRC is prepared to accept that a charge under Section 26 will arise only where the aggregate of general earnings remitted to the UK exceeds the amount chargeable under Section 15 for that year; and to restrict the charge under Section 26 to the excess of the aggregate over the charge under Section 15.