UK Employment Arrangements: UK Plans Tax Measures Against Dual Contracts

Sullivan & Cromwell LLP - 6 December 2013

The UK government published its Autumn Statement on 5 December 2013. In his speech the Chancellor of the Exchequer announced, among other proposed changes, that the government would “end the abuse of dual contracts”.

In this context, the term “dual contracts” refers to employment arrangements in which an employee enters two separate employment contracts with related employers (or the same employer), one covering duties to be performed inside the UK (a “UK contract”), the other duties to be performed outside the UK (a “non-UK contract”). In circumstances in which the employee:

  • is resident for tax purposes, but not domiciled in, the United Kingdom;
  • carries out duties under the non-UK contract wholly outside the United Kingdom (except for “merely incidental” duties); and
  • does so for a foreign employer,

the income paid under the non-UK contract is taxable in the United Kingdom only to the extent “remitted” (brought in) to the United Kingdom.

For some years HM Revenue and Customs has subjected these arrangements to close scrutiny, focusing in particular on whether there are truly two separate employments (or just a geographical split of a single employment) and whether any duties required by the non-UK contract that are performed in the United Kingdom are truly “incidental”. The requirement that duties of the foreign employment be performed outside the UK causes particular compliance complications for mobile employees in the era of instant communications. Incidental duties are defined very narrowly.

The Autumn Statement gives little detail on the proposal, saying only, “From April 2014, UK tax will be levied on the full employment income where a comparable level of tax is not payable overseas on the overseas contract.” This – including what is a “comparable level of tax” – should be fleshed out in draft legislation when the government publishes its draft Finance Bill for 2014 on Tuesday 10 December.