Earnings from Employment

Guidance notes on the Basis of Assessment.

The basis on which earnings are taxed in the UK is determined according to whether the employee in that year is:- Resident, ordinarily resident and domiciled in the UK or
Either resident, ordinarily resident or domiciled outside the UK

There are special rules in respect of bonuses and benefits in kind which are outside the scope of this information sheet.

Incidental Duties carried out in the UK

If ones employment duties are substantially performed outside the UK any incidental duties carried out in the UK are treated as if they were performed abroad. There are special rules for seafarers and airline pilots.

Working Abroad full time

If one leaves the UK to work abroad for at least one year and providing the following are points are met the individual will be treated as both not Resident and not Ordinarily resident.

Aabsence from the UK and employment abroad last for at least a whole tax year.
Visits to the UK are less than 91 days pay

If the above points are met, the individual is treated as non resident from the date of departure until the date of return.

Quite often Employers are ameinable to “extending” contracts to facilitate the meeting of such criteria, or the employee may decided to seek further employment outside the UK.

Employee who is resident, ordinarily resident and domiciled in the UK

The full amount of such earnings received in a tax year is taxable earnings in that year. Regardless if they were for that year or for another year and regardless of whether the employment is held when the earnings were received.

Employee resident, ordinarily resident or domiciled outside the UK

Earnings for a year when the employee is UK resident and ordinarily resident but not UK domiciled.

Liability depends on whether the earnings are “chargeable overseas earnings”. If they are chargeable overseas earnings, the full amount of such earnings remitted to the UK in a tax year will be, treated as taxable earnings in the UK for that year regardless of whether they were for that year or another year and whether or not the employment is held when the earnings are remitted.

If they are not chargeable overseas earnings then the full amount of such earnings is liable to UK tax.

“Chargeable overseas earnings” are earnings from an employment with a foreign employer, the duties of which, are performed, wholly outside the UK. Where the duties of any associated or group employments are not performed wholly outside the UK, then the chargeable overseas earnings are restricted to a reasonable proportion of the aggregate earnings, from all employments having due regard to the nature and time devoted to the duties performed both in and outside the UK. A foreign employer is deemed to be an employer not resident within the UK.

Earnings for a year when the employee is resident but not ordinarily resident in the UK.

Liability will depend on whether the earnings are UK sourced or foreign earnings. UK sourced applies if they are in respect of duties performed in the UK or from an overseas Crown Employment but subject to UK tax.

The full amount of UK sourced earnings received in a tax year will be taxable earnings in that year regardless if they are for that year or another year and whether or not the employment is current. If they are foreign earnings the full amount of such earnings remitted to the UK in a tax year is taxable earnings in that year regardless of whether they are for that year or another year.

Apportionment of earnings

Where a person is resident but not ordinarily resident in the UK and performs duties of a single employment both inside and outside the UK. Earnings will fall taxable in respect of the UK duties and on amounts remitted to the UK in respect of non UK duties. Apportionment between UK and non UK duties, is generally a question of fact using a time apportionment basis for days worked inside and outside the UK, unless this basis is clearly inappropriate. In incidents where none of the earnings are paid in the UK, remittances will generally be taken in the first instance out of income assessable in respect of UK duties.

UK based earnings for a year when the employee is not resident in the UK, the full amount of such earnings received is fully taxable in the UK.

Definitions

Earnings consist primarily of salary, wages, fees, bonuses, gratuities, benefits consisting of money or monies worth and anything else constituting and emolument of the employment.

Monies Worth means something of direct monetary value to the employee or capable of being converted into money or something of value.

Receipts basis

Earnings consisting of money or benefits are “received” at the earliest of:-

When the payment is actually made
When the person becomes entitled to such payment
Where the person concerned is a Director of a Company where a period of accounts ends or has already ended has been so determined.

Remittances

Earnings are remitted to the UK at a time when they are paid, used or enjoyed in the UK or brought into the UK in any manner or form.

There is special relief by way of an election is available for delayed remittances because of the Laws of the Country or Territory in which they were received, or, the possibility of obtaining non local currency which could be transferred to the UK.

Allowable deductions

Certain expenses are allowable against earnings. Expenses in relation to earnings taxed on a receipts basis are generally allowable against earnings taxed on a remittance basis.

Travelling Expenses

Overseas Duties of a UK employer

Where the duties of an employment by a UK resident and ordinarily resident employee are performed abroad deductions may be made according to the following circumstances:-

Where a duty is performed are wholly outside the UK
Travelling expenses incurred by the employee from the UK to the overseas destination and return on the termination of the assignment.
Board and lodgings expenses outside the UK provided by or reimbursed by the employer To enable the employee to perform the duties of the overseas employment.

Incidental duties performed in the UK are for these purposes treated as performed outside the UK.

Expenses are allowable in respect of travel facilities provided or reimbursed by the employer between the UK and the place of performance outside the UK of any of the duties of the employment for either:-

The employee provided that such duties can only be performed outside the UK and that such travel is wholly and exclusively for the purpose of performing those duties; or
For the spouse and any minor children aged under 18 accompanying the employee or visiting him during a period of absence from the UK provided that the continuous period of absence is for 60 days or more. There is a limit of 2 return journeys per person in any tax year.

Employees of a non UK employer

A deduction may be allowed in respect of travel facilities provided or reimbursed by a non UK employer to perform duties of the employment in respect of:-

Travel facilities between the Country outside the UK where the employee normally lives and the place in the UK in order to perform the UK duties; and
For the employees spouse and children over 18 to visit him during the period of absence from the home Country, where the duties in the UK are for a continuous period of 60 days or more.

However no deduction is available if either of the two years immediately proceeding the date on which he arrives in the UK he was either not resident in the UK or was not in the UK for any purpose.

Seafarers

There are separate and distinct rules in respect of a Seafarer whose employment consists of the performance of duties on a Ship. The UK for these purposes includes the UK sectors of the Continental shelf.

Aircraft Crew

If the voyage does not extend to a port outside the UK or the individual is UK resident and either:-

The voyage begins or ends in the UK; or
it is part of a voyage that did not begin or end in the UK.

Please be aware of potential new rules to be introduced in the Spring 2008

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