The new expatriate tax regime in the UK The Statutory Residence Test (SRT) and related reforms are a radical change to the UK’s personal tax code. What will their medium term impact be on UK plc and their mobile employees? In the recent Budget, the Chancellor confirmed that from 6 April 2013 the UK Government will introduce a statutory test of personal tax residence and reform the tax treatment of employees who are not ordinarily resident in the UK. Both reforms replace a diverse and confusing body of existing law and practice. One of the main objectives of these reforms is to give taxpayers certainty as to their residence position whilst ensuring that most people would be unaffected by the new rules. We believe the Government has had some success with its objectives, but there are some key elements of the new rules that could have a profound impact on the tax treatment of a sizeable minority of taxpayers. We have considered how the new law will ultimately impact employee mobility and, in our view, the news is good for UK business as long as the full benefits of the new rules are realised. However, those benefits will come with some extra cost which should not be discounted. Human Capital Services May 2013
Transcript
The new expatriate tax regime in the UK
The Statutory Residence Test (SRT) and related reforms are a radical change to the UK’s personal tax code. What will their medium term impact be on UK plc and their mobile employees?In the recent Budget, the Chancellor confirmed that from 6 April 2013 the UK Government will introduce a statutory test of personal tax residence and reform the tax treatment of employees who are not ordinarily resident in the UK. Both reforms replace a diverse and confusing body of existing law and practice. One of the main objectives of these reforms is to give taxpayers certainty as to their residence position whilst ensuring that most people would be unaffected by the new rules.
We believe the Government has had some success with its objectives, but there are some key elements of the new rules that could have a profound impact on the tax treatment of a sizeable minority of taxpayers. We have considered how the new law will ultimately impact employee mobility and, in our view, the news is good for UK business as long as the full benefits of the new rules are realised. However, those benefits will come with some extra cost which should not be discounted.
Human Capital ServicesMay 2013
2 Human Capital Services The new expatriate tax regime in the UK
A rise in ’local‘ moves into the UKWe believe there will be an increase in the number of foreign nationals relocating to the UK on local employment terms and conditions. Employees move to the UK on such terms for a number of reasons. Some are recruited locally as permanent hires and are effectively migrating economically to the UK for work. Others are relocated to the UK temporarily as an international assignee as part of a long term trend away from costly tax equalised assignments.
The change in rules on overseas workday relief that are being introduced along with the SRT make the UK a more financially attractive place to live and work. The advent of the 45% top rate of tax from 6 April 2013, and a relatively modest employer social security rate of 13.8%, will compound this trend. Senior executives with international responsibilities will be able to come to the UK and pay an effective rate of tax of 30% or possibly less, making the UK as attractive a place to be as it has been in any of the 20 years running up to the financial crisis.
A key factor in this is the certainty the new rules give over the period of time employees will be able to claim overseas workday relief. Provided that they qualify for the relief at the date of arrival (they are non–UK domiciled and have not been a resident of the UK in the past three years), they will be entitled to tax relief for overseas workdays for the year of arrival and the subsequent two years. This is irrespective of their actual intentions at the start and throughout this period. In particular, the new rules allow employees to purchase houses in the UK and still qualify for the maximum relief which is not the case under the existing regime. Buying a property in London is still a popular activity of foreign executives coming to the UK to work and this will become more so in the future as it will no longer impact their tax status.
The new rules align well with the Government’s recent changes in other tax law which make the UK a more attractive headquarter location for international corporate tax structures. Such structures need material management capacity in the UK and organisations looking to benefit from the UK’s current fiscal and operating environment often need to relocate a number of senior executives to the UK as part of their reorganisation. These changes will make such moves easier and more tax efficient.
On this basis we expect to see more moves to the UK on local terms and conditions with the overseas workday relief offered as an incentive to relocate. There will be a continued trend away from traditional tax equalised arrangements and more hiring or relocating of talented individuals on a ‘local plus’ basis, (essentially local employment with some ‘assignee type’ benefits). A return to the partial tax equalisation of some benefits may also become popular with the employer, delivering a halfway house rather than providing full tax equalisation.
This change will happen at all levels in an organisation and will not only benefit international organisations relocating here. A broad trend within UK plc is to increase the diversity of its boards and senior management to better penetrate emerging markets. The new rules will allow UK companies to offer its top talent several periods of employment in the head office, en route to a board position, with significant fiscal benefits to go along with the lifestyle benefits associated with the UK.
Reduced costs of compliance for inbound assigneesRegrettably, relief for overseas workday relief continues to be available only if the earnings are paid and retained offshore. This is problematic as the existing law on remittances of overseas income makes it virtually impossible to maximise the tax relief for employees who need to remit funds regularly to the UK. In recognition of this, the Government is faced with implementing a complex set of rules to allow people claiming overseas workday relief to manage their tax affairs and UK expenditures in a more straightforward manner.
On the strength of the proposed rules, we believe well advised and diligent taxpayers should be able to manage their tax affairs with overall reduced costs as we expect that there will be far fewer disputes about whether or not overseas workday relief is available in the first place. For those who have put in place the right banking structures, this should lead to a reduction in professional costs and employee downtime as positions taken on tax returns do not need to be defended.
3Human Capital Services The new expatriate tax regime in the UK
It is possible that HMRC will change the focus of their enquiries away from the entitlement of the relief and concentrate instead on the mechanics of claiming the relief (have bank accounts been properly managed under the new rules etc.?). This could significantly raise compliance costs for the non–diligent and be a complication even for those who are well prepared. However, we believe such a change is unlikely because we do not anticipate such enquiries would yield enough of a return to make them worthwhile.
Increased costs of managing outbound assigneesBy contrast, we predict extra costs for companies relocating UK based employees abroad which could be detrimental to UK plc. Success in emerging markets requires high powered human capital to be located there and the UK has long had a relaxed regime on tax residence for employees working abroad. However, the SRT introduces a new, statutory definition of full–time working abroad which will make it much harder for UK based employees leaving the UK on assignment to break residence, particularly if the nature of their roles requires them to return to the UK on business (which is increasingly common as key stakeholders and customers remain in the UK).
Strictly, the ’right‘ answer for this population will be to minimise time in the UK, particularly the time spent working. It will be difficult for employees to do this and for employers to monitor it because the law imposes strict constraints on circumstances that have not had to be monitored closely in the past.
The new rules could, therefore, increase tax reimbursement costs for companies as more employees remain liable to UK taxation whilst working abroad and may also increase the indirect costs associated with managing their assignees.
Employers will react to this in one of two ways, depending on how they view the employees and their view of tax risk more generally.
For assignments where both the overseas role and ongoing UK responsibilities remain critical, employers are likely to offer more tax support throughout the life of the assignment. Compliance costs will increase and UK outbound assignees will see an expanded range of tax services being made available to them. They will also see a much greater level of scrutiny into their personal circumstances, particularly when it becomes necessary to file tax returns when the employee is a tax resident of both countries.
For other employees, where the need to work in the UK is less critical, much will depend on the employer’s view of its own tax risk. Some employers will adopt enterprise wide solutions for tracking employees coming to the UK, so as to avoid any shocks where employees have recurrent visits to the UK of a level that were not anticipated on departure. Other employers will be tempted to push–down the operational obligation to monitor visits to the employee and in practice push the onus onto HMRC to show that employees have exceeded the permitted workday limits.
We expect employers will work with their tax advisors to identify which category employees fall into as well as to analyse what process might be the most appropriate and most efficient for tracking the data. It may be that in a large number of cases, the employee will retain responsibility for this and employer monitoring will be applied only to those with a genuine business need to be working in the UK whilst assigned overseas. It will be interesting to see, over the next few years, how successful this approach is in practice.
Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
Human Capital Services The new expatriate tax regime in the UK
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.
www.ey.com/uk
1368883.indd (UK) 05/13. Creative Services Group Design.
ED None
About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.
ConclusionThe SRT, and associated reforms being developed in support of it, will be a key benefit for UK plc by reducing the costs of relocating employees in the UK. To this end, it is a helpful alignment of personal tax policy with wider trends in UK corporate tax policy, both of which can be said to support the UK’s commitment to lead the G20 in competitiveness.
However, the new rules will also increase the cost of moving those employees into the developing markets where UK plc needs to excel to succeed which is an unwelcome side effect.
Whilst this latter development is unhelpful, it is worth noting that both developments are part of wider trends in tax policy and compliance. Over the past 20 years organisations have been forced to devote more and more resource to managing human capital tax risks and at the same time developed countries have frequently improved the very favourable tax regimes that are offered for foreign national employees.
The key issue will be how quickly organisations react to the risks and opportunities that the new rules set out. Typically it can take a number of years before a change in law that creates more complexity and risk as well as opportunity prompts organisations to change their behaviours. Our view is that companies’ first reaction to the new rules will be to consider relocating more employees to the UK but many will take longer in adapting to the need to more closely manage the tax risks of employees leaving the UK.
In any event, it will be important in delivering the full long-term benefits to UK plc, and the country as a whole, that the new rules are policed with a light and pragmatic touch, especially in the first few years.
