UK Employment Arrangements: UK Revises Proposed Tax Measures Against Dual Contracts

Sullivan & Cromwell LLP - 4 April 2014

The UK government has published this year’s Finance Bill, which contains revised draft legislation to “end the abuse of dual contracts”.  Dual contracts have in particular been used by employees resident, but not domiciled, in the United Kingdom to benefit from the UK’s remittance basis of taxation for their income from overseas duties, while also working in the UK for a related employer.

Under the proposals, where:

  • the employee holds separate employments inside and outside the UK;
  • the employers are the same or “associated” with each other;
  • the UK employment and the relevant employment are “related”; and
  • the credit that the UK would allow for foreign tax on the income is less than 65% of the UK’s top rate of tax for employment income (currently 45%),
the employee will be taxed as the income arises, not when it is remitted to the UK.

Following consultation, the government has narrowed the proposals:
  • the rules will not catch employments held separately for regulatory reasons;
  • they will not catch employees simply because they are directors unless they are also significant shareholders;
  • the threshold in the comparative tax rate test has been reduced slightly, from 75% to 65% of the top rate of income tax; and
  • the PAYE rules will not apply to income caught by the new measure: employees will account for tax on it through the self-assessment tax return process.
The new rules would apply from 6 April 2014 onwards.

The proposals are almost certain to become law, but details may still change.  Employers and employees operating dual contract arrangements should monitor the proposals as they develop.