This article is the first in a series of three in which we discuss the different ways individuals can obtain relief for income relating to services performed outside of the UK, commonly referred to as Overseas Workday Relief (OWR).
In this initial piece, we cover OWR available for employees on their basic salary and any bonus payments (hereafter referred to as earnings). The second piece will discuss the scenarios in which OWR can be claimed for stock based compensation, and the final instalment will look at the use of OWR when taxing fund managers on carried interest as well as the record keeping required for those making an OWR claim, should HMRC ever enquire into their tax affairs.
If OWR is a relatively new concept to you, this first article gives you a detailed insight into the rules of the relief and who it is available to.
Overseas workday relief for employees
Employees who are neither domiciled nor deemed domiciled in the UK and who spend time working outside the UK may be able to benefit from claiming overseas workday relief (OWR). This relief can result in the overseas portion of their employment income being exempt from UK tax. To claim this relief, the employee must be:
- non-domiciled in the UK and claiming the remittance basis of taxation; and
- paid for their overseas duties outside the UK and keep this payment offshore (i.e. they must not remit (bring) this payment to the UK).
The relief can only be claimed for the first three UK tax years that the employee is resident in the UK and is not allowed if the employee has been a UK resident in the three tax years immediately preceding the first of the tax years in which the overseas workdays relief is claimed. This results in some employees claiming relief for 36 months and others for 25 months.
Where UK residence starts late in the tax year, there is a short period of relief for the first tax year and so, where possible, it can be beneficial to delay the start of the UK residence until the next UK tax year. From the fourth tax year onwards, all employment earnings are generally subject to UK tax, unless a payment (for example a bonus) is received relating to a prior year in which OWR was claimed.
The employee claiming OWR will only pay UK tax on the portion of earnings attributable to UK workdays provided the overseas workdays portion is kept offshore.
The relief can be claimed on cash based employment earnings such as:
- profit sharing allowances; and
- other cash based payments.
The relief can also be claimed against non-cash employment benefits such as medical insurance. The split between overseas and UK duties is determined by the location of the work days during the period the payment is earned. For example, salary will normally be allocated based on the workdays in the tax year (6 April – 5 April). A bonus payment paid for work performed in the previous calendar year will be allocated based on the calendar year workdays.
HMRC is increasingly focusing enquiries into this relief. They review in detail the overseas workdays, looking at flights, location and hours of work. Anyone claiming this relief must therefore track their work days with clear evidence to support the classification.
What can be remitted to the UK?
It is vital that any amount remitted to the UK does not exceed the UK portion of employment earnings. As the UK portion is subject to UK tax, there is generally no issue with remitting this amount to the UK; however, the overseas portion must remain outside the UK and not be remitted, otherwise it will fall within the scope of UK taxation.
For example, if an individual receives £10,000 of employment income in the tax year and it is paid into an offshore account and 30% of their workdays relate to UK services, £3,000 can be remitted to the UK. If they were to remit £4,000, they would be deemed to remit the UK portion as well as £1,000 of overseas earnings, which would be subject to UK tax.
Setting up a qualifying account is very important
When the individual has a qualifying account, the remittances are compared against the UK earnings by looking at the whole year as one period rather than reviewing each individual transfer during the tax year. If there is no qualifying account, each transfer needs to be reviewed and this can result in a larger taxable remittance.
The qualifying account:
- is a checking or deposit account;
- is located outside of the UK;
- upon the first deposit of earnings, has a balance of £10 or less;
- contains only employment income, proceeds from employment income related securities and/or interest income earned on the account funds;
- can be a joint account, but their spouse must not deposit funds into the account; and
- should be set up as soon as the employee becomes UK resident.
The second article in this series will discuss the scenarios in which OWR can be claimed for stock based compensation.
Luke Jenkinson is a senior associate in the private client team at Andersen in the UK, focusing on UK and U.S. personal taxation