UK: Finance Bill 2014: dual contracts and use of intermediaries

The 2014 Budget contained various anti-avoidance measures – see our tax group's briefing here.  An important change for multi-national businesses is the introduction of legislation targeting the artificial use of dual contracts by non-domiciles in the Finance Bill 2014. The measure will tax non-domiciles on the overseas employment income it identifies according to the ‘arising’ basis. In other words, the income caught by this measure will cease to be eligible for remittance basis tax treatment. It is worth noting a few points on the draft legislation:

• Dual contracts have historically been used for resident non dom individuals; s.23 ITEPA provides broadly that for such an individual earnings from an employment with a foreign employer, where duties are performed wholly outside the UK ("chargeable overseas earnings") , are taxed on the remittance basis – hence the attraction in performing the non UK duties under a contract with a non UK employer. There are similar rules for calculating benefits from unapproved share schemes for resident non doms.
• These structures have been under attack by HMRC for a number of years, principally on the basis that the split was artificial or not adhered to in practice. Unless the roles are entirely separate it is hard to ensure that no duties are carried out in the UK for the non UK employer.
• This change, in effect, looks to remove the benefits of dual contract arrangements in many circumstances for all chargeable overseas earnings arising on and after 6 April 2014. Income which arises on or after this date but which is related to employment duties performed in a year prior to 2014-15 will not be subject to this change. The background notes (and the Autumn statement) state that the target here is the "artificial" use of dual contacts. However there is no motive test in the legislation. Instead if a number of prescriptive tests are met the new legislation applies and the overseas earnings are taxed as they arise, not as they are remitted.
• There are a number of conditions that have to be met for the new legislation to apply. As well as the employers being associated, the two employments have to be "related". This limb of the test goes to artificiality to some extent, but again it is widely drafted – where an employee is "senior" or receives the "higher or highest level of remuneration" (neither term is currently defined) the employments will be deemed to be related.
• The new rules only apply where the amount of overseas tax suffered on the income is broadly less than 65% of the current UK 45% top rate of income tax. In practice, though, it is often only worth considering putting in place these arrangements where there is a significant difference between the UK and overseas tax rates, so this test may not offer much comfort.
• Directors (or their associates) holding less than 5% of the company's ordinary share capital are expected not to be caught by these new rules, although this is assumed to be only in respect of director's fees and similar. An exemption is also created for employment duties performed overseas due to legal or regulatory reasons.
• Of course even if a dual contact arrangement survives these new rules, the existing pitfalls/difficulties with these arrangements remain, so advice needs to be sought on a case by case basis.
• HMRC's own tax impact assessment states that the measure will only impact around 350 individuals, although it is not entirely clear how this number was arrived at.

Other measures are aimed at the use of offshore intermediaries and false self-employment through intermediaries, to ensure that the proper tax and NICs are deducted by the intermediaries. Deductions will now be required unless the agency can show that the worker was not subject to supervision, direction or control by any person. End-users who provide the agency with a "fraudulent document" which falsely states that the individual is not subject to their supervision, direction or control will become liable for the relevant tax and NICs. Employers should check that their agreements with agencies do not include any such statements.