Split Contracts Hmrc

On the basis of the above-mentioned legal advice, HMRC considers that a dual contractual arrangement based exclusively or mainly on a geographical distribution of professional tasks without commercial support is countervailable, given that there is in fact only one profession with tasks inside and outside the United Kingdom. In such cases, HMRC`s offices should thoroughly investigate the facts and circumstances, including economic justification and context, and estimate a worker for tax if the evidence shows that there is indeed only one job. Dual contractual arrangements are advantageous when a non-UK resident worker works partly inside and partly outside the UK. The scheme is structured in such a way that the employee has two employment contracts; one with a UK employer for work in the UK and another with a foreign employer for non-UK work. If the employee claims the transfer basis described above, only income from the contract with the UK employer is taxable in the UK (provided the employee does not transfer the foreign employer`s income). The interest of an employer is not that the employee works in a specific geographical area, but in an economic activity that benefits the employer. An employee may perform tasks abroad that directly benefit the UK employer`s business. In the performance of these tasks, the employee does not work for the foreign employer, but for the British employer abroad. If the agreement was genuine, the employee would not be paid by the foreign employer to work for the UK employer overseas. If that is what the treaty requires, it would indicate a lack of commercialization.

Conversely, an employee who performs tasks in the UK that directly benefit the foreign employer`s business works for the foreign employer in the UK. It is difficult to imagine that contracts that may require an employee to work for the benefit of a UK employer while being paid by a foreign employer or vice versa would be offered by employers who are not associated. The requirement that there are no tasks to be performed in the UK for the transfer base to be applied means that in cases where a person also needs to take on another role in the UK, dual contracts can be implemented to reflect both roles. A role will be based in the UK and a UK treaty will be executed to regulate the tasks and responsibilities of that role. The second role is usually performed for a non-UK company under a second contract with that company, which regulates the tasks and responsibilities distinct from that second role. Second role tasks must be fully performed outside the UK One way to use the transfer base for employees is through the use of dual contracts. This guide provides an overview of how these contractual situations work, the difficulties that may arise during their use and the anti-tax avoidance legislation that came into force on 6 April 2014. There may be an important tax advantage in dividing a contract into two parts: if there is a separate contract for self-employment with tasks that are only performed abroad, this can lead to significant tax savings. HMRC is aware of this possibility of tax planning and accepts it in principle (EIM 40103). In fact, HMRC accepts the double contract as an example of an agreement that does not normally need to be declared under the tax avoidance disclosure provisions (see “192-110ff”) (but subject to a reservation regarding “innovative arrangements” and see below).

HMRC believes that a dual contract agreement is unlikely to work unless there are two separate jobs. For example, an employer based in France “A” sends an employee “B” based outside the UK to open an office in London for its UK subsidiary “C”. A requires B to work in its Paris office and manage its existing portfolio of French clients two days a week. For the other three days, C requires B to work in London. This should provide an appropriate basis for B to have separate employment contracts with A and C. Where economic reality shows the existence of separate employment contracts, it is sometimes argued that contractual clauses prohibiting the performance of tasks related to the foreign employer`s activities in the United Kingdom prevent HMRC`s offices from claiming that the employee has fulfilled his or her obligations as a foreign employer in the United Kingdom. These arguments are based on the fact that UK tariffs are “ultra vires”. The graph above illustrates a typical situation observed in a hedge fund company. Under this agreement, the employee`s earnings are deposited by the Cayman company into a non-UK bank account and held overseas. The net income from employment in the United Kingdom is paid into the United Kingdom. Written contracts have been designed to adequately reflect actual employment relationships and contain correct job descriptions, details about the compensation package, etc.

The two roles can exist independently, and line managers, payroll, expense procedures, etc. are completely separate. We are investigating whether, given HMRC`s increasingly aggressive view of double contracts, they may one day be effective in minimising the UK`s tax obligations to non-UK residents. Dual contract agreements have always been very useful when an employee resides outside the UK and has employment obligations both inside and outside the UK. They work by dividing employment contracts; one for UK tariffs and one for non-UK tariffs, usually with two companies employing in the same group (although the non-UK contract must be with a “foreign employer”). Employment abroad must be performed “entirely outside the United Kingdom”, although tasks performed in the United Kingdom that are “incidental” to tasks performed outside the United Kingdom are considered to be performed outside the United Kingdom for those purposes. The result is that profits made outside the UK, if actual, are not subject to UK tax unless they are “transferred” to the UK (overall, brought into the UK in some way). Of course, a tax burden may apply in the country where the non-UK customs duties are exported.

Difficulties It has always been difficult to convince HMRC that there is a separate employment contract outside the UK, as the tasks are “fully performed outside the UK”. It is crucial that there are indeed two completely distinct and different professions, each with different roles. This can often be difficult to prove. For example, it would not be sufficient for a human resources manager to perform tasks in the United Kingdom under an employment contract and then act as human resources director for the rest of Europe under a separate employment contract. To advocate for two separate professions, HMRC generally takes into account the following factors: separate email addresses, line lines, business cards, telephone sets, etc. would be required at least. Any employment contract must also make it clear that the person has very different responsibilities in each jurisdiction. HMRC`s view HMRC issued a tax bulletin in April 2005 challenging double contracts on the grounds that employers merely assigned geographical locations for the same tasks, rather than dividing different roles. The content of HMRC`s interpretation casts doubt on the effectiveness of double contracts. This is, for example, an employee who fulfils some of the “essential obligations of his employment abroad during his stay in the United Kingdom – for example, `responds to an urgent appeal from the United Kingdom`. HMRC would not consider this to be `incidental` to non-UK tariffs because, as they claim, it is `of equal importance to foreign tariffs`, although the author may deny this. HmRC will examine the commercial reality of the agreements and in particular the distribution of compensation between UK and non-UK contracts.

If compensation outside the UK is not proportionate to the tasks performed abroad, HMRC may attack the arrangements. What happens if it goes wrong? HMRC suggests that the consequences would be different depending on why the agreements failed. If hmrc considers that there is only one job, the UK employer would be liable for all income tax and social security payments due in connection with employment outside the UK, plus penalties and interest. The study may well go back years if the precautions have been in place for a long time. It should be noted that hmrc may reopen the previous six taxation years for investigations and up to the last twenty years if they suspect fraud on the part of the employer. If the agreements fail because the employee performs tasks in the UK that are more than “ancillary” to non-UK tariffs, all non-UK income would be subject to UK tax, but the non-UK employer would only be liable to HMRC for tax if it has a taxable presence in the UK if necessary for the operation of PAYE. If the employer pays the tax due on behalf of the employee, the employee is deemed to have received a taxable benefit equal to the amount of tax paid, which will be deducted from the employee`s marginal tax rate. What should you do? It should be noted that HMRC takes an approach to dual contracts and ensures that these agreements go beyond a simple geographical division of tasks. The nature of the tasks must also be taken into account – many double contract agreements are concluded for senior managers who may have a “business advisory role”, so it is almost impossible to clearly distinguish two distinct professions. .