United Kingdom: HMRC Releases Draft Legislation to Replace SP1/09
The U.K. government has published a consultation, including draft legislation, on putting the Statement of Practice 1/09 (SP1/09) into statute. This consultation document is entitled “Legislation of Statement of Practice 1/09 (SP1/09): Summary of Responses and Draft Legislation.”
Her Majesty’s Revenue & Customs (HMRC) has been wanting to incorporate SP1/09 in legislation for some time.2 But for many months there have been questions about how best to do this and many concerns have been raised by interested parties, including tax practitioners, employer’s groups, corporate entities, and others.
Background
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.
SP1/09
HMRC has indicated for some time that it wants to incorporate SP1/09 in legislation. (For related coverage, see the following issues of Flash International Executive Alert: 2009-057 (18 March 2009), 2010-056 (5 March 2010), and 2011-106 (28 June 2011). On 6 December 2011, the government announced it would defer incorporating the Statement of Practice into legislation until Finance Bill 2013.
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. (For more details of the statutory residence test, see Flash International Executive Alert 2012-118 (21 June 2012).)
It is, however, the government’s intention to continue with OWR and HMRC has now published this consultation, including draft legislation, on putting the statement of practice into statute.
A Closer Look at SP 1/09 and Its Scope
Finance Act 2008 introduced new rules to determine the type and amount of income or chargeable gains remitted to the U.K. when a transfer was made to the United Kingdom. HMRC accepted that these rules imposed an additional administrative burden in some cases and, therefore, when the conditions of SP1/09 are met, a simplified calculation can be used. Under SP1/09, U.K. resident but not ordinarily resident employees do not have to apply the “mixed fund” rules to calculate remittances of employment income, but as a simplification can calculate remittances by reference to the total amounts transferred to the U.K. during the whole tax year, rather than by reference to individual transfers on a transfer-by-transfer basis.
KPMG Note
SP1/09 is very widely used by expatriate employers and employees, and is important to business. The government is seeking to put this non-statutory practice on a statutory footing to provide expatriate employees and their employers with greater clarity and certainty. The government’s aim is to preserve the features and details of the current practice.
Broadly speaking, SP1/09 excludes from the current complicated statutory mixed fund rules transfers made by employees who are resident but not ordinarily resident in the U.K. and perform duties both inside and outside of the U.K. who make transfers from an account which is held solely in the employee’s name and contains only employment income from a single employment.
Employment income in this respect includes:
• employment income;
• relevant foreign earnings;
• foreign specific employment income (including termination payments and the proceeds from employee share schemes); and
• employment income subject to a foreign tax.
In addition, HMRC will also accept that SP1/09 also applies if any of the following additional sources of income or gains are held in that account:
• interest arising on the account;
• gains arising from foreign exchange transactions in respect of funds in that account;
• gains arising on employee share scheme related transactions; and
• proceeds from employee share scheme related transactions in respect of amounts paid by the employee acquiring shares.
Where an account is held in joint names and one of the account holders is a spouse or civil partner with no income or gains of his or her own (apart from a share in any interest that arises on the joint account), SP1/09 can apply to the account.
SP1/09 does not apply if transfers are made from a mixed fund account containing:
• income or gains of more than one employment, or
• income or gains or more than one individual (e.g., a joint account that holds the income or gains of an individual and his or her spouse or partner).
Proposed Legislation
According to HMRC, the proposal to put SP1/09 on a legislative footing has been broadly welcomed. A number of responses suggested further extensions of SP1/09 and simplification of the mechanics of operating the accounts. The government has accepted most of these suggestions.
The calculation to replace the mechanics of SP1/09 will be known as the “special mixed fund” rules. These special mixed fund rules will only apply where an employee meets certain conditions:
• 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.
Nomination and Existing Accounts
A new feature of the draft legislation is a requirement to nominate a bank account by writing to HMRC giving details of the account. This nomination must:
(a) identify the account;
(b) specify the date with effect from which the account is nominated; and
(c) include such other information as the Commissioners may reasonably require.
This nomination cannot be back-dated. The consultation document states that this nomination is required so that the legislation can apply to existing accounts, i.e., the international assignee’s home country account held before the assignment.
The nomination can be withdrawn in writing at any time.
KPMG Note
A difficulty with the proposed legislation is that an account will only qualify for the special rules from the date it is nominated in writing and the nomination cannot be back-dated. This will create practical difficulties for assignees arriving in the U.K., since they will not know they need to make the nomination until after they have arrived in the U.K. and discussed this with a tax adviser.
There are also circumstances when it is not clear when an employee first becomes resident and consequently when the nomination needs to be made.
There is, therefore, likely to be a period until the nomination is made when the mixed fund rules apply. It is hoped that the government will reconsider this point, perhaps to allow some element of back-dating.
Joint Accounts
To provide a further simplification, the government is proposing to allow any joint account to be nominated, as long as the additional account holder does not nominate the account as his or her own qualifying account, or make any economic contribution to the account (apart from generating interest arising on the account).
Single Qualifying Accounts
A SP1/09 account is currently required for each employment. The draft legislation allows mixed employment income from more than one employment to be held in a single qualifying account. The government proposes to allow taxpayers to have only a single qualifying account at a time. This avoids any complexity which would arise as a result of transfers made between qualifying accounts, whilst still alleviating the administrative burden that SP1/09 was intended to address.
Tainted Accounts
Where any funds other than permitted types of income and gains are introduced into a qualifying account, the account will become tainted and will no longer qualify for the special mixed fund rules.
The government proposes that where funds causing the account to become tainted are removed within 30 days beginning with the day on which the individual became aware or ought reasonably to have become aware of the payment, the account will continue to be treated as a qualifying account. If the tainted funds remain within the account beyond 30 days, the account will be subject to the mixed fund rules for the whole of the tax year in which the non-permitted funds were paid into the account.
An individual will not be able to take undue advantage of this rule by repeatedly tainting the qualifying account.
Income and Gains from Employee Share Schemes
Special mixed fund rules will continue to apply to income and gains from employment-related securities (ERS) in the same way as they do currently under SP1/09. There will still be an exception for the sale proceeds from employee share schemes where the employee is able to sell the shares but decides to retain them for a period before disposing of them. The proposed legislation has been drafted on the basis that ERS income may be deposited into the qualifying account in limited circumstances.
Types of Income and Gains Permitted in a Qualifying Account
The restrictions on the types of income and gains that may be deposited into a qualifying account follow the position under SP1/09. Specifically, the types of income and gains that may be deposited into a qualifying account are:
• mixed employment income;
• a capital gain arising when foreign currency is converted into sterling;
• proceeds from the disposal of certain employment-related securities or employment-related securities options; and
• bank interest arising on the account.
Apportionment
For many years HMRC has accepted apportionment based on the number of days worked abroad and in the U.K., except in cases where this would be clearly inappropriate. This treatment will be preserved by apportioning mixed employment income on a ‘just and reasonable basis’. HMRC will continue to accept apportionment based on the split between U.K. and non-U.K. work-days calculated at the end of the year, except where this would be clearly inappropriate. The consultation paper contains detailed examples on apportionment where there is more than one employment.
Transfers to and from a Qualifying Account
The government proposes to allow any transfer into a qualifying account which consists wholly of, or derives wholly from, the following categories of income:
• mixed employment income;
• a capital gain arising when foreign currency is converted into sterling;
• proceeds from the disposal of certain employment-related securities or employment-related securities options; and
• bank interest arising on the account.
Next Steps
The government is seeking views on the draft legislation by close of business on Friday, 7 December 2012. The legislation will then be included in Finance Bill 2013.
KPMG Note
It is disappointing that the government has not decided to go further and, rather than legislate SP1/09, modify the relief so that the requirement to keep funds outside the U.K. was removed. KPMG LLP (U.K.) believes that this would make the relief more beneficial to the U.K. economy by removing the encouragement to keep earnings outside the U.K. rather than spend or invest them in the United Kingdom.
However, we do welcome the additional easements that the government is proposing and prefer statutory reliefs rather than statements of practice.
We believe that the nomination procedures need to be amended so that the nomination can be back-dated to when the individual first qualifies for OWR. This is because, as they currently stand, most international assignees, in the year of arrival, will only have a “qualifying account” for part of the year of arrival and not for the full period that they qualify for OWR. This will not be a simplification, but be more complicated than the current rules.
KPMG will be discussing the draft legislation with HMRC. If you have any particular concerns which you would like us to raise with HMRC, please contact your usual KPMG adviser.
Source: KPMG