- Catherine Gannon
- Updated: Mon, 19th Dec 2016
Being transferred or seconded abroad for business changes your employment terms and tax position. If you have share awards or a performance bonus surprise tax charges can arise. HMRC vigorously enforce anti avoidance legislation. We explain the law so you avoid interest and penalties for under reporting tax.
International assignments services include:
We work with employees and directors transferring out of the UK or returning back into the UK focusing on the contractual position and tax. We work with a network of immigration specialists who can secure the appropriate visas.
You can be sent abroad to do business in two ways:
- Under a secondment agreement; or
- Under a transfer of employment agreement.
Under a secondment of employment you are ‘lent’ by your current employer, for example the UK subsidiary, to another company, typically a client or a foreign subsidiary – the host. The idea is that you perform the services for the host for a specified time. Your employer remains as the current employer.
Risks for the employee placed on secondment
They key risks for an employee seconded abroad are:
- Loss of employment status;
- Increased tax liability.
Loss of employment status
There is a risk that you lose your employment status with the current employer during a secondment. If you receive instructions from the host company it can be argued in some cases the host becomes your employer. Your employment rights when performing a mix of UK and foreign duties on a secondment is a grey area and care is required. This is because there may be more limited rights, if any at all, in the host jurisdiction.
- Losing employment with the UK employer means losing the right to claim unfair dismissal in the UK and a right to a bonus with the employer. The damages for the unfair dismissal are currently capped at just under £80,000.
Increased tax burden
There is also a risk of an increased tax burden. Depending upon the length of the secondment and the duties performed you could become subject to tax in a jurisdiction which carries higher tax rates than the UK. An indemnity from the employer can solve this problem. The employee could face higher compliance costs if the tax reporting position becomes more complicated.
Solution to risks arising on secondment
We usually recommend that a secondment agreement is prepared to protect your position. We do review secondment agreements and pick out areas which may be a cause for concern. Matters such as the governing law should be considered and addressed.
If you are being transferred to a foreign office:
- Your employer will terminate your current employment (with or without notice); and
- The foreign company will offer you a new employment agreement.
Issues arising upon transfer abroad
Based on our experience, we find issues can arise under a transfer abroad relating to:
- A change in the jurisdiction under which you are protected; and
- Lack of continuity of benefits and term of continuous employment.
Change in the jurisdiction
You will be an employee of the foreign host and subject to local laws. You may lose your entitlement to share options if you are transferred to a foreign employer. Loss of HMRC approved status usually means there is an increased tax liability upon exercise. The problem can be solved if there is an indemnity from the employer to cover any additional tax.
Loss of benefits and term of continuous employment
Another area to look out for is benefits such as death in service, permanent health care and pensions. The rules of benefit plans do vary and do require review. Often the plans cannot be continued by the employer. In this type of case the employee should be seeking a cash payment towards finding personal alternatives.
If you have worked for your current employer for at least two years you are entitled to redundancy pay. You are also capable of bringing a claim for unfair dismissal. Entering a new employment contract with a foreign office is likely to mean the loss of these protections. When your UK contract terminates, employees should seek a cash payment as compensation for the loss of these protections.
Governing law applying to an employment contract
Generally, parties to a contract can choose which country’s law is to apply to the employment contract (governing law). But other mandatory laws may also apply and regardless of the governing law an employer chooses.
If the employment contract terms are contradictory to the employee’s host country, then local laws prevail in setting the standard. There can be debate about who is the host country. Here the provisions of double tax treaties may assist. Not all treaties are identical. The position has to be looked at on a case by case basis.
The rules are similar where the employee is also a director.
Position if the employment contract is silent
If the employment contract does not specify which country’s laws are applicable, then one of the following typically applies:
- the law of the country where the employee routinely works;
- if there is no country where the employee routinely works, then the law of the country where the employer’s headquarters are located;
- if extenuating circumstances connect the contract more closely with another country, then that country’s law.
According to the European Court of Justice, long, uninterrupted periods of work in a country does not necessarily establish jurisdiction in that country.
Determining jurisdiction under an employment contract
In practice, many factors are considered. The factors include:
- the permanent residence of the employee;
- the country where taxes are paid; and
- the currency of the payment and the benefits of the various countries.
Tie breaker position
According to the European Court of Justice, whenever there is a conflict between one country’s law and another, the laws that are most favourable for the employee should be applied, since they are the weaker party.
Dual employment contracts
Split or dual employment contracts are common where an individual employee, typically a director, performs duties in and outside of the UK. The contracts split the duties and income earnt from UK and foreign employment.
Often there are good commercial reasons for having a split employment contract. However, HMRC has anti-avoidance legislation to review the split employment contract and tax foreign income in the UK. The detailed rules are fact specific. We do advise on how the HMRC rules will impact on an employee’s tax position.
We review proposed contracts and explain the implications. Our review often helps the employee to negotiate a better package.
Taxation of internationally mobile employees
Tax issues arise in a variety of circumstances. We are often asked about taxation where the employee or director:
- Travels the world as part of their employment and has no particular fixed base;
- Receives a termination payment which covers duties in the UK and elsewhere;
- Works in jurisdictions with different tax regimes.
Taxation of international employees is “tricky”. It requires considering not only the UK regime, the position under double taxation treaties, but also the facts, evidence and documentation. In outline, HMRC practice is as follows.
When did you earn the income?
If you work internationally HMRC will look to tax your UK income. Problems arise when:
- You receive foreign income when in the UK;
- You receive UK income, e.g. termination income, when you work abroad;
- A bonus vests in respect of duties performed in a different country.
HMRC regards the income as earned in the tax year to which the earnings relate. These earnings could involve several tax years, as you could have left or arrived part way through the UK tax year.
If your earnings span several tax years, HMRC apportions your earnings on a just and reasonable basis. There must be good records, if you wish to claim some earnings do not relate to a particular UK tax year. These records must survive HMRC scrutiny.
Payments on termination – Foreign service deductions
Termination payments by UK companies under a settlement agreement can benefit from a £30,000 tax free payment. The tax free treatment can be extended if the employee qualifies for a foreign service deduction.
A termination payment above £30,000 received by an employee who spent some or all of his time outside of the UK can qualify for:
- Foreign service exemption – the whole of the termination payment will be tax free if the employee can show that his foreign service constituted at least three quarters of the employee’s total employment or at least 10 years of his employment was abroad;
- Foreign service relief – any excess over £30,000 will be pro-rated and a relief will be given in respect of the foreign element of employment.
Foreign service deductions are often overlooked before the settlement agreement is signed. We bring it to your attention before you sign.
Internationally mobile employee taxation examples
Not UK resident, performs some duties in UK
Dan is not resident in the UK. He has always lived abroad, but performs some duties in the UK. For this he is paid a sizeable bonus. HMRC will seek to tax Dan’s salary and bonus, in proportion to the time he spent performing duties in the UK.
Not UK resident, does not perform UK duties
David is not resident in the UK. He does not perform any UK duties. He is paid the same salary and bonus as Dan. HMRC will not tax David’s income since he does not perform UK duties.
UK resident, does not pass 3 year non-resident test
Derek is resident in the UK. He does not pass the three year non-resident test. He performs duties outside the UK for a foreign employer. HMRC taxes Derek to the extent he remits income to the UK. We would advise Derek to have a dual contract of employment. These contracts can protect the remittances to the UK. However, recently HMRC has clamped down on the use of dual contracts of employment to avoid UK tax.
It can be possible for employers to seek a ruling from HMRC.
Tax on share and option awards for internationally mobile employees
HMRC have attempted to tackle tax avoidance in this area by bringing in legislation designed to provide clarity on the tax treatment. The legislation covers all types of share awards including but not limited to: EMI options, CSOP, unapproved option plans, LTIPs, SAYE, Employee shareholder shares and SIPs.
If you hold shares by virtue of employment you may to lose them when you go to work abroad for the same employer. It is worth checking the rules.
If you dispose of shares whilst outside of the UK the gain made on disposal may be exempt from UK capital gains tax. This is fact specific and we can clarify the position for you.
The position is more difficult with options that may have been granted whilst you were resident in one country and which vest or become exercisable whilst you are resident in another country.
You received a share option but soon after you are seconded or transferred abroad for business. Your option is subject to a one year cliff and will vest over the next four years. Your secondment will last two years. What is your tax position?
Taxation of share options depends on the employees’ tax residency at the time of option grant, option vesting and option exercise.
Taxation of option grant
Option grants are exempt from tax in the UK for UK resident employees but are taxable to income tax in some jurisdictions. It is usually possible to get a double tax treaty relief but not all jurisdictions offer the relief. A non-resident employee who performs UK related employment duties may have to pay income tax on option grant in the UK.
Taxation on vesting if employee is abroad
Share options subject to vesting may be taxed in the UK or abroad, depending on the facts and the wording of the provisions. If the options vest when the employee is working abroad it will depend on the local laws whether there will be an income tax charge on vesting. Vesting is not subject to UK tax so internationally mobile employees may want vesting to occur before they leave the UK.
Taxation on acquisition of shares
Most jurisdictions tax the acquisition of shares on the exercise of options, including the UK. If you exercise the option when abroad the income tax charge will arise on the unrestricted tax market value of the shares. This can usually be deducted from the UK tax liability.
Track record in resolving issues relating to international assignments
We have worked on a wide variety of cases all of which bring their own particular complexities. Issues resolved include:
- Reviewing and advising on a Secondment Agreement of a Business Development Director of a food and drinks business being seconded to Canada;
- Designing and implementing a multi-jurisdictional share option plan with a CSOP schedule for UK employees;
- Advised non-resident fintech director on his share options’ tax liabilities;
- Drafting Articles and Shareholders’ Agreement including flowering shares for a shareholder expanding a UK company into India.
Catherine is a solicitor and a Chartered Tax Advisor, a rare combination. She runs the tax team at Gannons which enables employers and employees to navigate both the law and the taxation of internationally mobile employees.