RDRM31125 - Remittance Basis: Introduction to the Remittance Basis: Foreign Income and Gains: Employment income - provided through third parties
General
This section provides an overview of the legislation that applies from 6 April 2011 when new legislation was introduced at Part 7A ITEPA 2003. See the Employment Income Manual (EIM45000+) for detailed guidance on the treatment of employment income provided by third parties - sometimes referred to as ‘disguised remuneration’.
The tax legislation on employment income provided through third parties tackles arrangements which:
- involve third parties (including trusts or other vehicles used to reward employees),
- also seek to avoid or defer the payment of income tax.
The legislation also deals with pension schemes which are not registered pension schemes,
Broadly speaking, if third party arrangements are used to provide what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former, or future employment, then an income tax charge arises.
The rules contain detailed exclusions. These prevent the legislation from catching certain arrangements. Generally the exclusions are targeted at arrangements which are not tax avoidance arrangements.
If the legislation applies, it deems an amount to count as employment income.
Remittance Basis
For years up to 5 April 2013 - the 2012-2013 tax year and before
It is important to note that different rules apply to remittance basis users who are resident, ordinarily resident but not domiciled in the UK and those who are resident but not ordinarily resident.
In the case of a remittance basis taxpayer, amounts that are identified under Part 7A ITEPA as ‘employment income provided through third parties’, are ‘Taxable Specific Income’ (TSI).
To the extent that amounts of TSI are remitted to the UK by a remittance basis taxpayer, TSI is ‘foreign specific employment income’ (ITA07/s809Z7(4B)). See RDRM33020 for what is meant by ‘remitted to the UK’.
The meaning of ‘TSI’ is defined in Part 7A ITEPA 2003 and depends upon the individual’s residence and domicile status. For that reason TSI has two possible meanings (ITEPA03/s554Z9 and s554Z10). See EIM45800+ for more information.
Non-domiciled but ordinarily resident
Where an individual is resident and ordinarily resident but not domiciled in the UK and has an employment that is:
- under a contract with a foreign employer - that is an employer who is not resident in the UK
and
- the duties of that employment are performed wholly outside of the UK
and
- they elect to pay tax on the remittance basis in respect of their foreign income and gains of the relevant tax year
an amount identified under Part 7A ITEPA03 as TSI is ‘foreign specific employment income’ that is only chargeable to UK tax to the extent that it is remitted in whole or in part to the UK.
See EIM45805 for more information.
Not ordinarily resident
Where an individual is resident but not ordinarily resident in the UK (their domicile status is not relevant) and has an employment that is:
- under the terms of a contract with a UK employer
and
- some of the duties of that employment are performed wholly outside of the UK (sometimes referred to as ‘overseas work days’) not including earnings for employment overseas by the Crown
and
- they elect to pay tax on the remittance basis in respect of their foreign income and gains of the relevant tax year
an amount identified under Part 7A ITEPA03 as TSI is ‘foreign specific employment income’ that is only chargeable to UK tax to the extent that it is remitted in whole or in part to the UK.
For years from 6 April 2013 - the 2013-2014 tax year onwards
With the introduction of the statutory residence test (SRT), the concept of ordinarily resident, and by default not ordinarily resident no longer exists. Now only individuals who are UK resident but non-UK domiciled can claim the remittance basis.
From 6 April 2013 the meaning of TSI will depend on whether the individual:
- meets the s26A ITEPA 2003 requirement (s554Z10 ITEPA03)
- does not meet the s26A ITEPA 2003 requirement (s554Z09 ITEPA03)
An individual will meet the requirements of s26A for a tax year if any of the following apply:
- Non-UK resident for the previous 3 tax years
- UK resident for the previous tax year but non-UK resident for the 3 tax years before that
- UK resident for the previous 2 tax years but non-UK resident for the 3 tax years before that
- Non-UK resident for the previous tax year, UK resident for the tax year before that and non-UK resident for the 3 tax years before that.
The residence status before 3 years of non-UK residence is not relevant for the purposes of these provisions.
See EIM45810 for more information