The growth of local businesses in the oil & gas sector into international service companies with a global presence has led to a significant number of local employees leaving the UK.
Some have done so on traditional expatriate assignments, some on “rotation”, and others permanently or indefinitely.
On the flip side, a continuous stream of new entrants into the North Sea, selecting Aberdeen for their operational base, together with the long-standing skills shortage in the industry, has led to an increasing number of people coming to Aberdeen for employment.
So how do we go about taxing internationally mobile employees?
Generally, but with some exceptions, the UK will seek to tax people who are resident here on their worldwide income, and people who work here, whether or not resident, on their employment income.
To enable this to happen, the UK has three concepts that help determine how an individual is taxed in the UK: residence, ordinary residence and domicile.
Ideally, a person leaving Britain will want to break UK residence and will no longer be liable to UK tax, and a visitor to the UK will want to claim Not Ordinarily Resident status to benefit from a tax break on overseas workdays – where the employment requires both UK and non-UK duties.
The difficulty in advising employers and their assignees on taxation planning and compliance is that there is little by way of statutory definition covering the three concepts above.
Therefore, much of the accepted practice in this area has been derived from case law, some of which dates back almost 100 years.
Recently, HMRC revised its guidance on these concepts to reflect much more recent case law.
The changes will have the greatest impact on the residence status of people coming to the UK, and on the ability of people leaving the UK to break residence.
The potential impact on the oil & gas sector will be to increase the cost of employment by virtue of higher income tax liabilities, a cost that is difficult to pass on to employees, because they view the tax breaks associated with working overseas as one of the main incentives to do so.
UK inbound assignees
For people coming here, historically the key factor in determining their tax position was the intended or expected length of stay.
In the revised guidance the intention has been deemed irrelevant and the focus has shifted to determining whether the individual’s purpose is settled or temporary.
To secure the optimum income tax position and thus minimise the potentially significant costs of bringing people to Aberdeen, it is important to demonstrate proof of coming to the UK for a temporary purpose.
In the absence of supporting evidence, or with evidence to the contrary, HMRC may well review cases with the benefit of hindsight to argue if and when someone’s purpose in the UK became settled. In theory, this could be from day one.
Inbound assignees with indefinite UK contracts or open-ended assignment agreements are likely to be regarded as ordinarily resident from day one, and therefore unable to take advantage of overseas workday relief in respect of any duties performed outside the UK.
Employers and inbound assignees should:
o Carefully review the purpose and duration of each assignment to the UK to assess whether overseas workday relief is available in an effort to minimise the UK tax burden
o Ensure that their assignment documentation – visa, assignment letter/contract – properly reflects the intended length of the assignment in order to support valid claims
o Ensure that they keep all available documentation to support claims relating to their purpose and time in the UK
UK outbound assignees
For someone who leaves the UK permanently or indefinitely, additional emphasis will be placed on demonstrating that he or she has sufficiently cut ties.
A definite break in the pattern of UK life is now required in order to support a claim that residence has been broken.
Simply focusing on days spent abroad and visits to the UK is no longer sufficient.
One area of difficulty has been agreeing a definition of “full-time work abroad” in the context of the modern-day business traveller.
This is a vital concept because someone who leaves the UK to take up full-time employment abroad for a period that includes an entire tax year can break UK residence regardless of any continuing ties.
It is helpful in the context of the oil & gas industry, where many local people work overseas, to have a clear distinction between people who leave the UK for full-time employment and those who leave for other reasons.
It may be easier to break UK residence in the former case, but assignees overseas need to understand that duties performed back in the UK during visits here may jeopardise a claim to have broken UK residence under the “full-time work abroad” test.
Employers and outbound assignees should:
o Carefully review the circumstances of such assignments to consider the strength of claims to break UK residence
o Be very careful about the nature of any work they do in the UK in the intervening period in cases where there is reliance on the “full-time work abroad” condition for breaking UK residence
o Carefully consider the impact of any continuing ties with the UK in cases where there is no reliance on the above condition for breaking UK residence
The good news is that the chancellor announced the introduction of a statutory residence test, to be implemented by April 2012.
This is a positive move that should help to limit the uncertainty surrounding the tax position of internationally mobile employees.
Hopefully the test will be straightforward and not vague, as is the case with HMRC’s recently revised guidance.
Exceptional circumstance
For outbound assignees, recent and current political unrest in the likes of Tunisia, Egypt, Libya, Bahrain, Syria, Algeria, Yemen and so on could result in an earlier than expected return to the UK, or a significant increase in the days spent here while it is unsafe to be in the overseas location.
This could have a major impact on breaking UK residence.
However, help is at hand because HMRC will not normally count days spent at home because of exceptional circumstances, such as illness, family bereavement, political unrest or natural disaster.
At the time of writing, the Foreign and Commonwealth Office (FCO) stated there were no restrictions on travel to Tunisia or Egypt.
However, HMRC has confirmed that exceptional circumstances will cover the period January 15-20 and the week after for Tunisia, and the period January 29-February 15 and the week after for Egypt.
In respect of Libya, the FCO advise against all travel to the country and advise British nationals to leave.
Exceptional circumstances commenced on February 20 and will apply for the period covered by their advice and the week after.
Similar advice relates to the other countries mentioned, so exceptional circumstances will commence on relevant dates and will apply for the period covered by their advice and the week after. The FCO website gives detailed advice.
Care must be taken if the exceptional circumstance extends to months rather than weeks, because presence in the UK for 183 days or more in the year will lead to UK residence, or the failure to break UK residence, irrespective of the reason.
Therefore, if the exceptional circumstance drags on the relief may become irrelevant.
The potential impact of an exceptional circumstance is not limited to those currently on assignment.
For example, anyone who was prevented from starting their 15-month full-time assignment to Japan in March because of the natural disaster, expecting 2011/2012 tax year to be the entire tax year abroad, may find that a delayed start will mean the assignment cannot cover an entire tax year, thus preventing them from breaking UK residence.
It is extremely important that UK outbound assignees and their employers carefully review the position where exceptional circumstance has brought about disruption to travel and work schedules.
In cases where this will have a bearing on breaking UK residence, the financial consequences could be costly and, in my experience, lead to a disagreement between employer and employee over who is picking up the tab.