United Kingdom – HMRC Issues Second Consultation On Draft Legislation To Replace SP1/09

In October 2012, the U.K. Government published a consultation and draft legislation designed to put Statement of Practice 1/09 (SP1/09) into statute.  Following receipt of the responses to that consultation, HMRC has now published a second consultation document, together with revised draft legislation.  The new consultation document is called “Legislation of Statement of Practice 1/09 (SP1/09):  Second Summary of Responses and Draft Legislation”.1

As we reported in Flash International Executive Alert 2012-185, Her Majesty’s Revenue & Customs (HMRC) has wanted to incorporate SP1/09 into legislation for some time but questions have been raised by a number of interested parties on how best to do that.

BackgroundUnited Kingdom   HMRC  Issues Second  Consultation On Draft  Legislation To Replace  SP1/09

Resident but Not Ordinarily Resident Employees

Currently employees can be regarded as U.K. resident and ordinarily resident (ROR) or resident and not ordinarily resident (RNOR). The distinction is important because, with one exception involving employments with no U.K. duties, ROR employees are taxable on their worldwide earnings whether remitted to the U.K. or not. RNOR employees are taxable on their earnings for U.K. duties whether the employee’s earnings are paid in the U.K. or not.

RNOR employees, however, can elect for the remittance basis such that their earnings for non-U.K. duties are only taxed in the United Kingdom if remitted to the United Kingdom. This relief is commonly known as “overseas work-days relief” (OWR).

The statutory rules for calculating the relief are, however, complicated and consequently to relieve the administrative burden for the taxpayer, SP1/09 provides for a simplified calculation.


The current OWR relies on being resident but not ordinarily resident and claiming the remittance basis. Following the introduction of a statutory residence test from 6 April 2013, it is proposed that the concept of “ordinary residence” will be abolished for most purposes. It is, however, the government’s intention to continue with OWR and this second consultation sets out the changes to the draft legislation published in October 2012.

Responses to the October 2012 Consultation

According to HMRC, ten responses were submitted in response to the October 2012 consultation.  As a result of the review of these responses, changes are now being proposed by the Government and revised draft legislation has been issued for further consultation.

The legislation still proposes the introduction of the “special mixed fund” rules which will apply when the following conditions are met:

 The employee qualifies for Overseas Work-day Relief (this replaces the requirement in SP1/09 that he or she be Resident and Not Ordinarily Resident);

• The employee claims the remittance basis and has earnings for U.K. and non

U.K. work-days (“mixed employment income”);

• The employee nominates an account for use as a mixed fund to which the special mixed fund rules will apply; and

• Only certain types of income and gains are paid into the account.

Where all these conditions are met, the special mixed fund rules will allow an employee to set aside the transaction-by-transaction basis of the normal mixed fund rules, and instead the employee will be able to aggregate transfers from the account on an annual basis (or for part of a year, if the account is not a qualifying account for the whole of the U.K. tax year). Employees who do not meet the simplified special mixed fund conditions will be required to operate the more complicated existing mixed fund rules in full.

Changes to the draft legislation

Nominated accounts

The draft legislation published in October 2012 contained provisions to nominate a bank account as a “qualifying account” for the purposes of the special mixed fund rules. The account could be an existing account and the nomination of a joint account was also allowed (unlike the requirements in SP1/09 where a new account must be opened in the taxpayer’s name only).  However, the nomination of a qualifying account could only apply from the date the nomination was made. The election could also only be made after the individual became resident and had U.K. and non U.K. workdays. These conditions made the nomination process impractical.

As a result of the responses to the consultation, the Government has concluded that the proposed nomination process was not feasible and the requirement in SP1/09 where only a new account can be a qualifying account will be included in legislation.  Nomination of the account as a qualifying account will still be required but this nomination can be made after the end of a tax year when an individual files a U.K. tax return.  A qualifying account cannot be nominated by more than one person at any one time.


In our response to the consultation, we had made the point that the proposed legislation created practical difficulties for assignees arriving in the U.K., since they would not know they needed to make the nomination until after they have arrived in the U.K., and discussed this with a tax adviser.  We had also made the point that there are also circumstances when it is not clear when an employee first becomes resident and consequently when the nomination needs to be made.

KPMG LLP (U.K.) therefore, welcomes the fact that the nomination can now be backdated.

Number of qualifying accounts

The original proposals allowed taxpayers to have only one qualifying account at any one time. Although responses to the consultation indicated that it may be beneficial in certain circumstances for taxpayers to be allowed to have more than one qualifying account, the Government has decided not to make any changes to these sections of the draft legislation. However, as part of the further consultation, they have asked for interested parties to comment on how a “pooling” system could operate in order to allow for more than one qualifying account to exist at one time.

Tainted accounts

Only certain types of income may be held in a qualifying account.  As soon as nonpermitted income is transferred to the account, it becomes “tainted” and no longer qualifies for the special mixed fund rules.  The October 2012 legislation allowed for one “error” – that is the transfer to a qualifying account of non-permitted income – within a rolling 12 month rolling period without the account becoming tainted.  The error was allowed provided the income was transferred out of the qualifying account within 30 days of becoming aware of the error or within 30 days of when an individual could reasonably be aware of the error.

Following the consultation, the government now proposes to allow two errors within the rolling 12 month period without the account becoming tainted.  Again this is subject to a reversal of the errors within 30 days as set out above.  If more than 2 errors are made, the account will no longer be allowed to be a qualifying account and the strict mixed fund rules will apply to remittances from that account.  This change is not currently reflected in the draft legislation published this month but the Government’s intention is that it should be included in the Finance Bill which will be published on 28 March 2013.

Application of the legislation

In response to the consultation, the Government has agreed that taxpayers who are currently using SP1/09 can continue to use the rules as set out there after 6 April 2013, should they wish to do so and for as long as they would have been entitled to use the special mixed fund rules.


KPMG LLP (U.K.) welcomes the “grandfathering” of the relaxation set out in SP1/09.  This will mean that taxpayers who are already used to one set of restrictions do not have to rearrange their affairs for a very limited time in order to meet the restrictions in the new legislation.

Next Steps

The Government has posed 5 additional questions on which it is consulting before the draft legislation is included in the Finance Bill.  As the Finance Bill will be published on 28 March 2013 the time for responding to this new consultation is short.  Responses must be received by HMRC by close of business on 25 February 2013.


KPMG LLP (U.K.) still believes that the consultation documents and draft legislation are a missed opportunity in respect of overseas workday relief.  The Government could have amended the overseas workday provisions to introduce measures allowing remittance of this income to the U.K. to encourage business and stimulate the U.K. economy.  However, as previously stated, we do welcome the additional easements offered in the draft legislation and welcome the introduction of statutory reliefs rather than statements of practice.

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1. See:  http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_032591


Source: KPMG

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