Tax administration and allowances The UK taxing authority is known as Her Majesty s Revenue and Customs (or HMRC for short) and the tax year runs from 6 April to the following 5 April. There is no system of joint filing and married couples must submit separate tax returns. For tax resident individuals, a personal allowance of tax free income is available (this is 7,475 for tax year ending on 5 April 2012). Non residents who are UK citizens or EEA nationals can also claim a personal allowance. The personal allowance reduces for individuals with annual earnings of more than 100,000, (reducing to nil at 114,950 for 2011/12). In addition, certain non-domiciled individuals may be required to give up the personal allowance (more information on this is provided below). For 2011/12, the first 35,000 of earnings above the personal allowance (where available) is taxed at 20%, the next 115,000 is taxed at 40% and any balance above that is taxed at 50% (different tax rates apply for capital gains, dividends and certain savings income). There are also social security taxes, known as National Insurance Contributions, on top of the income tax rates. The employee rates for 2011/12 are 12% on earnings between 7,224 and 42,475 and 2% on earnings above 42,475. The UK does not have itemised deductions or similar. The main tax reliefs are limited to contributions to pension schemes or UK registered charities. Certain tax qualifying investments are available, including Individual Savings Accounts (ISAs). It is worth noting that investments that are qualifying in the UK are unlikely to have similar status outside of the UK and the tax advantages may be lost if you are still required to file a tax return as a resident or citizen of your home country. How is tax collected? Employees working in the UK are subject to Pay As You Earn (PAYE) tax withholding on cash payments and certain benefits. This applies even where an individual continues to be paid from outside of the UK. If you are an employee moving to the UK, you will be required to complete Form P46 (or P46 Expat), which provides both personal registration with the UK tax authorities and will ensure that you are included under the UK entity s tax withholding reference. These forms will be provided to you by your employer. If you do not receive one of these forms to complete, you should contact your employer immediately. Following receipt of Form P46, HMRC will issue a tax code to your employer and this code is used to determine the total deduction withheld each pay 1
period. The code can include taxable benefits, pension relief, underpaid tax for prior years etc and will differ significantly from one individual to another. The standard tax code for 2011/12 is 747L (which would mean that a full tax free allowance of 7,475 is being applied against income). At the end of each tax year, your employer will provide a Form P60 (details of pay received through payroll and tax withheld for the year) and may also provide Form P11D (details of non cash benefits provided, such as company car, private medical insurance etc). These forms are then used to prepare your tax return, if one is required (see below). This may consist of a few questions or they may request a full breakdown of information and additional personal details. If HMRC suspects that a taxpayer has been fraudulent, they have up to 20 years to raise assessments of underpaid tax. If a taxpayer wants HMRC to calculate their tax or is completing a paper return, they must submit their tax return by 31 October following the tax year end. In other cases, the return must be filed electronically by 31 January following the tax year end (this is the date that tax agents will typically work towards). There are no requirements for or ability to file extensions and an automatic penalty of 100 will apply if you are late. If you are self employed or in a partnership, you will declare income through the filing of a tax return form and generally make tax payments twice a year, by 31 January and 31 July respectively. Tax returns The first thing to note is that not everyone in the UK is required to file an annual tax return. The typical taxpayers that must file are: Anyone earning more than 100,000 in a tax year All self employed taxpayers Taxpayers claiming non resident, not ordinarily resident, or non domicile status Anyone that has been issued with a tax return by HMRC Any individual that has not had full tax withholding at source (note that if a taxpayer is aware that they will owe tax for a particular year they are required to request a tax return if one has not been issued failure to request a return can result in a penalty charge!). The UK has a system of self assessment which means that a taxpayer will prepare and submit their tax return without any backup, such as dividend or interest vouchers. Following the submission of a return, HMRC has a year from the filing deadline to open an enquiry. The full amount of any tax due must also be settled by 31 January following the tax year end, if interest and potential surcharges are to be avoided. In addition, if you have significant income not taxed at source, you may need to make payments on account. If this is the case, the first instalment will also be due by 31 January with the second payment due by the following 31 July. Payments on account are only generally required for those that are self employed, or where a taxpayer has a significant underpayment on their return and expects to owe a similar amount for the following year. It is possible to reduce or cancel a payment on account, however if a taxpayer does reduce too far, an interest penalty will be charged from the original due dates when the return is filed. Tax Residence status The basis on which an individual is taxed in the UK is largely dependent upon their residence status. This status has as much to do with the intended length (and purpose) of stay on arrival as days of actual presence. The tests are based predominantly on case law and are subject to frequent change as new cases are heard and appeals filed. In general, if you have come to the UK for a settled purpose, for example to live or work in the UK for three years or more, you will be considered resident and ordinarily resident from the date that you first arrive. 2
If you expect to remain here for less than three years, you may be considered resident but not ordinarily resident, although other factors such as ownership of property can have an impact on this. If you expect to remain in the UK for less than two years, you will normally be regarded as resident but not ordinarily resident in any tax year in which you spent 183 days or more, or otherwise non resident. If you have come to the UK for no fixed purpose, you will be deemed resident and ordinarily resident from the year of arrival if you expect to spend an average of 91 or more midnights in the UK over a four year period. If you do not expect to spend this length of time in the UK, but end up exceeding this average, you will generally be treated as resident and ordinarily resident in the UK from the start of the fifth tax year. This is a particularly complex area of UK taxation with significant recent changes in HMRC interpretation. It is therefore essential to obtain specific advice relevant to your situation. Domicile status An individual can also claim non domicile status if this is beneficial. Domicile is less governed by the length of an assignment, and individuals who do not intend to remain in the UK permanently are likely to be able to claim non domicile status. An individual who is considered non domiciled in the UK will usually only pay UK tax on overseas investment income and gains to the extent that the income or proceeds are remitted to the UK, so this can be a very useful tax break. For the first seven years of tax residence, a non domiciled taxpayer has two options: 1. Declare worldwide personal income and gains; or 2. Only declare overseas personal income and gains if remitted to the UK, but give up the UK personal tax free allowance and capital gains tax allowance By concession a taxpayer that is in the first seven years of residency can elect option 2 without giving up the UK personal (and capital gains) tax allowances if their total overseas income and/or gains are less than 2,000 during the tax year. Once a taxpayer has been resident in the UK for more than seven tax years, option 2 remains available, however the taxpayer must then make an annual payment of 30,000 to HMRC to maintain this privilege! Tax Planning There are a number of tax planning strategies that may be available to individuals moving to the UK which can significantly reduce the liability to UK tax. Many of these opportunities will require the correct structuring of a taxpayer s financial affairs at the time of moving, and advice should therefore be sought at an early stage to maximise any applicable tax savings. In general, tax savings can be made for individuals who: Are assigned to the UK by an overseas employer for a period of up to 2 years (see A below) Intend to remain in the UK for up to three years and will have business trips outside of the UK (see B below) Are in receipt of non UK investment income or gains on the sale of non UK assets (see C below) A: Detached duty relief HMRC will allow relief from income tax for travel and subsistence payments if they are incurred in the performance of the duties of the employment. This relief is commonly referred to as Detached Duty or Temporary Workplace relief. To qualify for relief an individual must be working away from their normal work location for a period of no longer than 24 months. This would typically apply to individuals that are seconded to the UK by an overseas employer for a fixed term assignment and not to individuals that move to the UK to take up a new UK employment (as to back up the temporary nature of the workplace, an existing relationship with a home country employer must remain). Where an individual qualifies for relief, the following expenses may be claimed: 3
- The cost of travelling from home (or indeed anywhere) to the temporary workplace; - The reasonable cost of accommodation near the temporary workplace (including utilities); - Daily subsistence costs (to cover the cost of meals). It should be noted that these expenses relate to the employee only and not their family. The rules are complex, but can provide a significant tax planning benefit. It is recommended that advice is sought at an early stage as it will be necessary to retain receipts and/or proof of payment in order to substantiate any claims. B: UK tax exemption for non UK working days An individual who intends to remain in the UK for less than 3 years will generally be regarded as resident but not ordinarily resident in the UK. Such individuals will be entitled to claim UK tax exemption on the proportion of their employment income relating to days spent working outside of the UK. However, a condition of claiming this relief is that at least the amount being claimed as a deduction must have been paid and retained outside of the UK. If any amount of this claim is remitted to the UK, the tax relief available will be reduced accordingly. To take advantage of this tax relief, you should ensure that your net pay is delivered to a non UK bank account. If you are being paid by a UK employer, this can be achieved by using an offshore account with any of the major banks based in the Channel Islands or Isle of Man. Whilst such branches remain part of the UK banking system, the jurisdictions are considered to be outside of the UK for taxation purposes. It is also important to note that the account should be in the sole name of the employee (although a joint account is fine provided that the spouse does not receive income directly to that account). You should also note that where an overseas workday claim is made of more than 2,000, you will not be entitled to the UK personal allowance, so the exemption being claimed must be larger than the allowance to make the claim worthwhile. C: Non domicile claims If you are considered non domiciled in the UK, you will not be required to declare or pay UK tax on any non- UK investment income or gains on the sale of non UK assets, provided any such income or gains are kept outside of the UK. Leaving the UK A taxpayer that leaves the UK under a full time employment contract will generally become non resident if they expect to be absent from the UK either for at least a complete UK tax year. A taxpayer leaving on 1 September 2011 would need to be absent until at least 6 April 2013 (the tax year outside of the UK is then 2012/13). If a taxpayer is moving abroad for another purpose (other than full time employment), they would only be considered non resident if the absence is expected to last for at least three years and there are no immediate plans to return. Even then, HMRC may seek evidence that a taxpayer has made a clear and definite break with the UK before approving such a claim. To maintain non resident status, a taxpayer must not spend an average of 91 or more midnights in the UK by way of return visits each tax year over a rolling four year period. By concession, a taxpayer that does expect to be abroad as outlined above will be considered not resident from the day following the date of physical departure. In addition, a restriction may apply if a taxpayer leaves the UK but does not establish a tax home overseas (for example, the family remains in the UK home for the duration of assignment). A taxpayer will need to submit a completed Form P85 to HMRC on departure. This form is generally used to claim non resident status in the UK, from which point only UK source income remains taxable. 4
The typical income that a non-resident taxpayer will need to report to the UK authorities will be: specified period, they will normally cease payments in the home country and commence payments in the UK. UK investment income (bank interest / dividends) Gains on sale of UK assets owned at departure (unless taxpayer is absent for at least five full tax years) Stock / share option income where the grant was made prior to leaving the UK (taxed on workdays from grant to vest/exercise depending on treaty) UK rental income Earnings relating to UK workdays (in certain cases) If a taxpayer is seconded to the UK from a country other than the above (and remains employed by their home country employer), they will normally be required to pay UK Class 1 contributions from 52 weeks after their arrival. Where an individual transfers to the UK as a local hire (on a UK employment contract), they will generally be required to pay into the UK system from day one. In addition, a non resident taxpayer must report details of days spent back in the UK, including the number of those that are spent working and number of separate trips made, if they continue to have a UK filing requirement. National Insurance Contributions (NIC) A taxpayer s requirement to pay UK NIC will depend upon which country they have come from, who their legal employer is and how long they expect to remain in the UK. If they are liable and an employee, they will be required to pay Class 1 Contributions. Pension In certain cases, it is possible for a taxpayer to continue to participate in an overseas pension plan and gain the same tax advantages as a UK plan. This would mean that contributions would be tax deductible (subject to a maximum) and employer s contributions would be tax free. Each country will have a different agreement with the UK but as an example, a U.S. 401k pension plan, where contributions continue as part of UK service, would be specifically allowable under the UK/US treaty provided that the assignee was a member of the plan prior to arrival in the UK. If a taxpayer is seconded to the UK by an overseas employer within the European Economic Area (EEA), they will generally be required to continue to pay in the home country (and gain exemption from UK NIC) where the secondment is expected to last no longer than 24 months. For longer assignments, depending on the agreement between the member states in question, a taxpayer may be able to pay only in the home country for up to five years. To make the claim the home country employer will be required to complete form A1 in order to obtain a Certificate of Coverage. If a taxpayer is seconded to the UK by an overseas employer based outside of the EEA, but in a country which has a reciprocal social security agreement with the UK, they may also be able to remain in the home country scheme for two to five years. If a taxpayer expects their assignment to last longer than the Use of tax treaties The UK has the largest network of Double Tax Treaties covering over 100 countries and used effectively, these can avoid a situation where a taxpayer becomes liable to both UK and overseas tax on the same item of income. A tax treaty will dictate which country has the right to tax which item of income, whether this is employment, capital gains, dividends, pension income etc. Treaties can often be used to provide exemption from tax on employment income, where an individual is seconded to the UK by an overseas employer for a limited period. The exact requirement will depend on the particular home country, however in general an individual that is seconded to the UK for a period of less than 183 days may be able to claim tax exemption in the UK. However in most cases this will only work if 5
the salary costs are not recharged to the UK entity, so keeping below 183 days is not always sufficient! Further advice The above guidance is intended to be general in nature and as everyone s position will be different, advice should be sought before relying on this. In addition, tax legislation is constantly changing and it is always good practice to review your tax situation on a regular basis. Web: www.globaltaxnetwork.co.uk Email: help@globaltaxnetwork.co.uk Global Tax Network - London 3rd Floor 14 Austin Friars London EC2N 2HE Tel: +44(0)20 7100 2126 Fax: +44(0)20 7256 5992 Global Tax Network - Surrey Norwich House 14-15 North Street Guildford Surrey GU1 4AF Tel: +44(0)20 7100 2126 Fax: +44(0)14 8344 9181 6