Joint Forum on Expatriates Tax and NICs

Minutes of meeting 28 February 2008

Present

HM Revenue & Customs (HMRC)

Stuart Douglas - CAR Residency
Andrew Edwards - CAR Residency
Mike Staples - CAR ESSU
Don Macarthur - Business Customer Unit
Mark Frampton - PAYE NIC Policy Technical
Graham Lewis - PAYE Technical
Martin Dwyer - CPTT
Shirley Davies - CPTT
Paul Hindley - LBS Banking
Peter Robinson - PAYE Employer
Amanda Robinson - CT & Vat

Visitors

Barry Cocks - KPMG LLP
Colin Ben-Nathan - KPMG LLP
Amanda Sullivan - BDO
Eleanor Meredith - PwC LLP
Nigel Duffey - PwC LLP
Martin Benson - Baker Tilly
Peter Ashby - Grant Thornton LLP
Matthew Fox - Grant Thornton LLP
Andrew Buckle - Deloitte & Touche LLP
Philip Paur - Deloitte & Touche LLP
Phil Davis - Ernst & Young LLP
Steve Wade - Ernst & Young LLP
Mavis Sargent - ACCA
Martin Taylor - H W Fisher
Nigel Doran - Macfarlanes
Mahesh Varia - Travers Smith
Elaine Gibson - IPP
David Treitel - ICAEW
Benjamin Webb - CBI
Ishbel Huggins - Shell plc
David Martin - ICI plc
Linda Mansfield - Rio Tinto plc
John Harvard - British American Business
Lucie Holland - Zurich plc

The meeting took place in Room 327 22 Kingsway London WC2B 6NR

Introduction

Delegates were reminded that security remains a serious issue for HMRC and as a consequence it was important for all to give confirmation of their intention to attend the Joint Forum well in advance of the meeting dates so that the necessary security lists may be drawn up accurately.

Action points and issues log

Don Macarthur confirmed that the various action points arising from the previous meeting were intended to be covered by reference to specific agenda items. Furthermore, Martin Dwyer explained that he had prepared an issues log to ensure that individual aspects under consideration were not overlooked. This log will be continually updated and currently shows that some issues have been resolved. The majority of the open issues were to be addressed via agenda items during the current meeting. Specific items for which activity is ongoing include:

SA Returns and individuals paid below the personal allowance threshold

This issue dated back to the Q & A log of 18 April 2007. Shell plc had indicated that they had particular problems in this area and wished to share these with HMRC and hopefully find a solution. Shell plc were invited to follow this up with a meeting with representatives of CPTT to assist HMRC’s understanding of the practical problems which arise.

Carter impact on expatriate employers

Shirley Davies announced that in the next couple of weeks she hoped to be in contact with external representatives regarding the revised form P46 (Expat) which has been updated to take into account comments made during consultation.

Online filing

Shirley Davies confirmed that a meeting had been arranged for 14 March 2008 to discuss issues relating to online filing. The purpose of this meeting was to give external representatives an opportunity to flag up to HMRC full details of the specific problems which they have encountered when attempting to file tax returns online.

Q & A Log

A series of questions relating to a concession available to non-executive directors and its impact for National Insurance contributions (NIC) purposes had been answered by Mark Frampton. It was confirmed that these answers adequately satisfied the enquiries raised.

Residence and domicile

Andrew Edwards provided feedback on specific issues as follows:

Section 690 ITEPA 2003 Directions

HMRC were confident that a way has been found to allow these directions to continue beyond 5 April 2008. However, this will require a change to existing legislation, which Ministers are considering.

IR20

There will be some consultation regarding the replacement of booklet IR20 and it is anticipated that this will begin in April 2008. The proposal is to issue a new version of the booklet in autumn 2008 and update the HMRC internal guidance by November 2008.

Foreign service relief

It is HMRC’s intention to amend the proposed legislation to ensure that this preserves the current position regarding entitlement to foreign service relief in respect of termination payments.

Trailing spouses

Concern has been expressed during the consultation period about whether spouses who come to the UK with their partners will have to file a return to claim the remittance basis, particularly where there will be little or no income or gains to declare. HMRC believe that there is a way forward that can be achieved for those individuals who do not trigger the proposed £30,000 charge, but this would need a change in the legislation. Proposals have been put before Ministers. All individuals who meet the criteria for the £30,000 charge and wish to claim the remittance basis will have to complete an SA return.

£30,000 charge

This will be payable through SA returns only. It will not be possible to make this payment through the PAYE (Pay As You Earn) system.

Personal allowances and code numbers

Because the remittance basis must be claimed on an SA return there will be no requirement for employers to identify potential claimants of the remittance basis and seek coding adjustments to remove any entitlement to personal allowances in 2008-09. However during 2008-09 HMRC will be discussing with representative bodies and employers whether it would be sensible to deal with some remittance basis users through PAYE in 2009-10 and subsequent years.

Permanent Home and Vital Interest tests

HMRC intend to produce additional guidance to better clarify how these tests should be applied and what factors are relevant. This guide will be part of wider guidance available in autumn 2008 but it is being given priority and if possible, the relevant extracts relating to these issues will be released earlier than that.

Rebasing

This will be applied to accrued gains held within offshore trusts but rebasing will not extend to personally held assets or gains.

Offshore mortgages

he proposed legislation does catch offshore mortgages and ensures that interest payments relating thereto will be treated as remittances. Ministers have yet to decide whether the current treatment of existing mortgages will be allowed to extend beyond 5 April 2008. The general feeling from the external representatives was that any clarification on Budget day would leave insufficient time for individuals to restructure their affairs if necessary. HMRC were aware of the concerns in this area as they had been clearly made during the consultation period. Ministers had been advised accordingly.

The £1,000 limit

Irrespective of whether income arises through a trust or company, if UK tax legislation treats the income as taxable on an individual, it will count towards the £1,000 limit.

Section 720 ICTA 1988

HMRC intend that the promised guidance will also include commentary relating to Section 720 ICTA 1988 and provide clarification in respect of the ' motive test'.

Non-UK pension schemes

Clarification was requested in respect of income which may be imputed to be that of an individual and how this sat with the proposed legislation. It was agreed that Andrew Edwards would take this issue away and report back in due course.

Trust notification

Matters relating to notification that a trust had been set up were considered to be addressed by comments within the letter issued by Dave Hartnett in December 2007.

Transit days and counting of these for residence purposes

HMRC have received feedback on this issue during the consultation period and will take these representations into account when producing the final legislation. There will be some changes to the proposals as originally announced.

Creditability of the £30,000 charge

Discussions are ongoing about whether or not the £30,000 charge should qualify for credit under the terms of the Double Taxation Treaty. HMRC are seeking to redraft the proposed legislation so that this charge falls within the scope of creditable taxes in accordance with Double Tax Treaty interpretation. Ultimately, however it will be for other countries to decide whether or not they are prepared to give credit.

Treaty residence

HMRC confirmed that Treaty residence should be regarded as integral to the yearly accounting test for the purposes of determining whether or not the £30,000 charge is appropriate.

Mixed funds

HMRC confirmed that the draft rules regarding remittances from mixed funds will be enhanced to take into account representations made during the consultation period. The rules will be more descriptive and the guidance clearer but the principle contained in the current draft will remain.

£30,000 – will payment be regarded as a remittance?

HMRC confirmed that if payment of this amount is made via a UK account it would be regarded as a taxable remittance. In order to ensure that this position did not arise individuals would have to ensure that the payments made came direct to HMRC from an overseas account.

Mixed funds

The HMRC principle is that the current rules will apply to earnings/income arising in the period to 5 April 2008 and the new regime will apply to earnings/income arising from 6 April 2008. It is HMRC’s intention to make the guidance clear in this respect.

Foreign CGT losses

Consultation has produced ideas in this area and Ministers are considering proposals based on these.

Remittances

Consultation has produced a number of comments and ideas around tracing and tracking remittances and gifts between relatives. Ministers are currently considering what approach they wish to take in this area.

Review of the forum

The Co-Chairmen introduced the planned review of this forum, reiterating their intention to focus participants’ time effectively by prioritising and where possible resolving issues of importance to members. They invited feedback on how the Forum has performed.

Positive points included:

the number of attendees who regularly participate and those who wish to gain admittance
publication of the meeting notes on the internet making details of the issues and outcomes widely available
resolution of some issues
effective use of sub-committees, in particular the service process and procedures sub-committee

Negative points included:

the Wilkinson case insofar as it hampers the way that historically workarounds and concessions were applied in the expatriate arena
a failure to resolve some serious issues despite the duration over which they have been discussed, for example:

1. economic employer concept
2. accountancy fees
3. bonuses
4. pensions
5. Section 222 ITEPA 2003
6. the scope of modified PAYE

HMRC accepted that there was some frustration in relation to these topics and that experience showed that the use of sub-groups appeared to represent the most successful way of providing the necessary focus to achieve an outcome.

Most delegates felt that the Forum provided a useful opportunity for communication of parties involved in expatriate taxation work and for providing a focal point through which practical and technical issues could be both identified and addressed, but there was room for improvement in bringing issues to a resolution. Some representatives of business felt that the Forum had too many attendees, particularly those representing the various accountancy firms. Businesses wished to engage with HMRC to reach solutions which impacted on business efficiency and productivity and sometimes protracted technical debate got in the way of this.

Several delegates suggested that the way forward lay in a clearer two-tier approach. The main forum would prioritise and bring coherence across all issues as well as tracking progress, which arguably required a broad membership from business, accountancy and legal representatives and from all relevant HMRC areas. Working groups would be established from time to time to progress and resolve specific issues, with limited attendance from those with particular interest or expertise in HMRC and externally.

HMRC representatives explained that there was a limit to the resources which they were able to devote to the issues raised through the Forum. Whilst it may appear that there were lengthy periods of inactivity, issues were being taken forward but particularly where legal opinions or discussions with overseas authorities were required, delays were almost inevitable.
A request was made for future notes of meetings to anonymise contributions.
The delegates were asked to complete a questionnaire to offer their frank views regarding the Forum, its make-up and performance as well as the way it should be used going forward. This information will be collated and taken into consideration in firming up on the way ahead.

Pensions

It was generally accepted that there was a need for some clear and simple guidance to help taxpayers, employers and practitioners understand how the new post ' A' Day legislation applies. At the previous meeting held on 5 December 2007 HMRC had requested feedback regarding any practical and technical difficulties which were causing particular concern. The notes to that meeting included specific technical answers provided by HMRC to questions that had been raised by the ‘Big 4’ and no further correspondence had been received in this respect.

HMRC were prepared to engage with external representatives to address areas of difficulty but they did not consider it appropriate to do so without the necessary specific feedback that had been requested. An opportunity to provide feedback on both continuing technical and practical difficulties was extended until the end of April 2008 following which a sub-group would be tasked to consider the specific issues and where possible, produce solutions.

Written confirmation of the technical and practical difficulties experienced by employers and their advisers should be forwarded to Jane Truelove with a copy to Martin Dwyer no later than 30 April 2008. HMRC does not intend to issue individual responses but will invite interested parties to a meeting to discuss these issues in general terms in due course.

It may be of interest to Forum members to note that CAR Pensions are intending to use Shared Workspace as a means of collaborating with the outside world on the development of the Registered Pension Scheme Manual. Initially this will be for new material only eg Finance Bill material.

Further information on this can be found on changes to the Registered Pension Scheme Manual.

Bonuses

HMRC had now obtained solicitor's advice on this issue which confirmed that in some circumstances HMRC had placed an over-emphasis on the conditionality associated with the bonus payment. The advice suggested that HMRC should change its emphasis and follow Lord Oliver’s observations in the case of Bray v Best which would require consideration of the facts and circumstances of each case, which would in practice involve a review of the relevant documentation to see whether or not these contained any evidence to suggest that the reward was for a particular period or not.

HMRC recognised that there would be a need to publish guidance with examples and hoped to work through a sub-group with external participation to assist with this. The change of emphasis will apply to all open cases and it is recognised that there will need to be some clarity regarding the transition period. HMRC would also need to clearly state its position regarding SA returns filed in accordance with HMRC's previously stated view as expressed within the notes of the meeting held on 18 October 2007. It was confirmed that CPTT will not target individuals for a Section 9A enquiry purely on the basis of their filing an SA return in accordance with the previously stated HMRC position.

HMRC would like to engage further with external representatives to clarify their position and to better understand the make up of current incentive compensation packages and the extent to which they typically include conditional elements. A meeting will be held in London on 8 May 2008 to take this forward. If any Forum member wishes to be involved please send an e-mail to Lindsey Williams by 30 April 2008 and details of the time and venue will be provided.

Accountancy fees

HMRC have been approached by KPMG LLP to consider a methodology for quantifying accountancy fees attributable to individuals whether they be tax equalised or not. Correspondence continues but it was noted that different representatives take different stances on the issue with some resisting any suggestion of a taxable benefit. Business representatives felt that whilst the subject of accountancy fees was an irritation it was by no means one of the more pressing issues on their agenda. Nevertheless, the general view of the external representatives was that they would welcome an opportunity to debate the technical position with the HMRC specialist to hear precisely what underpinned the stance which HMRC had maintained to date. HMRC agreed to facilitate such a meeting in an attempt to provide the clarity required in this area.

HMRC propose to meet with interested parties to discuss the issue of accountancy fees at the aforementioned meeting to be held in London on 8 May 2008, since it is likely that the matters of bonuses and accountancy fees will attract a similar audience. If any Forum member wishes to be involved please send an e-mail to Lindsey Williams by 30 April 2008 and details of the time and venue will be provided.

Demibourne

HMRC had circulated papers on this topic with the agenda. The intention was to produce a legislative solution to the Demibourne problem so that it may apply across the board and this would include the expatriate arena. An informal consultation process had begun and the proposed amended PAYE regulations had been circulated to interested parties. The intention was that the new regulations would apply where there has been a PAYE failure and the income in question had been reported on an individual’s tax return and tax paid thereon under SA.

The aim of the legislation was to statutorily limit the recovery of PAYE failure liabilities from the employer and transfer the debt to the employee. There would be no need to amend the individual's SA record and no credit for PAYE tax which should have been deducted would be available to the individual employee to the extent of the tax specified in a direction. Penalties would continue to be chargeable on the employer in respect of the PAYE failure but the precise penalty regime was still under review and it was not clear at this stage whether penalties would be attracted by the full extent of the PAYE failure or only on any net amount not transferable to the employee.

Questions were raised regarding retrospection and it was confirmed that if a Regulation 185 credit had been claimed prior to the date the new legislation comes into force, there is no possibility of this new legislation applying for earlier years.

There was no intention to change the NIC regulations as the NICs Regulations already provide for the set-off of Class 2 and 4 contributions wrongly paid against Class 1 (employee) contributions properly due.

The legislative solution will also cover the Construction Industry cases. HMRC were asked what would happen where a contractor was required to pay over tax deductions for earlier years where the earnings had been reported on SA returns and tax paid. The HMRC representative indicated that there were no plans to make changes to the CIS Regulations but did agree to take this question away and report back in due course.

Following the meeting HMRC can now confirm that Regulation 9(4)(a)(ii) in the CIS Regulations allows HMRC to direct that a contractor is not liable to pay an amount which has already been paid via SA, although this power can only be exercised where a Regulation 13 determination (determination of amounts payable by contractor) has not already been made.

Short-term business visitors

HMRC acknowledged that the economic employer issue had been the subject of debate involving the Organisation for Economic Co-operation and Development (OECD) for a number of years. Indeed, it was a specific agenda item for an OECD meeting due to take place this week and once details of these discussions were clear HMRC would feed-back additional commentary to the Forum. In the event that the OECD discussions provided no resolution to this issue HMRC agreed to produce some guidance clarifying its position.

Foreign tax credit relief

HMRC were able to confirm that a response from the Internal Revenue Service (IRS) to a letter dated 31 August 2007 had been recently received. Relevant extracts were read out during the meeting but it was agreed that HMRC now need to take stock of the limited information which the IRS have provided and decide whether or not this enables them to agree that foreign tax credit relief is due in the UK as claimed in a number of SA returns or that alternatively, suitable cases should be identified for referral to the Competent Authority. HMRC acknowledged that a number of enquiries remained open in this area and confirmed that this position would continue until such time as the contents of the IRS reply had been fully digested. HMRC agreed that Forum members would be advised of the HMRC view before guidance was given to individual caseworkers regarding how they should proceed with individual cases.

The external delegates asked that the notes of this meeting be accompanied by relevant extracts from the letter issued by HMRC to the IRS on 31 August 2007 (see Appendix 1).

M Dwyer HM Inspector of Taxes

Appendix 1: Extracts from the letter issued by HMRC to the IRS on 31 August 2007

‘The issue arises from the operation of Article 24(6) in the UK which deals with Elimination of Double Taxation – specifically, the circumstances in which foreign tax credit relief will be given in the UK where the US has taxed a UK resident who is also a US citizen. Whilst this might seem to be a matter for the UK, a number of cases have arisen where HMRC would like to have a better appreciation of how the US views the tests at Article 14(2) (Employment Income) of the treaty in order to consider the application of Article 24(6) further.

This issue is an open point in a number of enquiry cases currently being worked by HMRC. Whilst no individual case has requested the Mutual Agreement Procedure, HMRC has temporarily suspended further work on this matter in the cases affected to await the outcome of this correspondence with the IRS. For this reason, HMRC would appreciate an indication of whether a substantive response would be possible by the end of November and, if not, when such a response is likely to be available.

Background

This request contains a number of scenarios that have been based on real cases. In each case the individual is a UK resident and a US citizen who is in receipt of employment income. In each case, some duties have been performed in the US. US tax has been paid and a claim for foreign tax credit relief (FTCR) made to the UK.

Article 24(4) of the treaty states that subject to UK law:

' (a) United States tax payable under the laws of the United States and in accordance with this Convention …. on income from sources with the United States ..... shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits'.

As Article 1(4) preserves the right of the US to tax its citizens as if the Convention had not come into effect, then the UK accepts that the US tax paid in the scenarios discussed fulfils the requirements of Article 24(4)(a). The UK has been considering the operation of Article 24(6)(b). In the context of the taxation of US citizens this states:-

' in the case of income from sources within the United States, the United Kingdom shall take into account for the purposes of computing the credit to be allowed under paragraph 4 of this Article only the amount of tax, if any, that the United States may impose under the provisions of this Convention on a resident of the United Kingdom who is not a United States citizen' .

So, the scenarios require the UK to have regard to Article 14, the Employment Income Article of the treaty. In the cases considered so far there has been no question that the individual is treaty resident in the UK. Paragraph 1 of Article 14 would mean that employment income would be taxable only in the UK unless the employment was exercised in the US. As stated previously, all scenarios have some period of time spent in the US which takes us to paragraph 2 of the Article.

' Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable year or year of assessment concerned;

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and

The Issue

This is whether the exemption offered by Article 14(2) of the treaty would be available in the scenarios discussed if the individual was a non-US citizen. In all cases, there is no question of the 183 days in any 12 month period test being breached in the US. What is not clear is how the US would approach the test at Article 14(2)b in the case of a non-US citizen in the scenarios discussed.

The Scenarios

Scenario 1

Individual is Chief Executive Officer (CEO) of UK company which is the parent company of an international group. The UK company has subsidiary companies in the US which the individual visits during the course of any year in his role as CEO. The entire salary is paid by the UK company. However, a proportion of the salary is recharged to the US by an apportionment of the cost centre containing the salary in the company books.

What is the US view of the interpretation of Article 14(2)b in this situation?
The UK acknowledges that the costs of the remuneration could be said to be met in the US due to the recharge. However, the UK would expect to look at the relationship between the individual, the UK company and the US subsidiaries to determine whether the duties performed in the US could be said to be for an ‘employer’ in the US.

It is recognised that the facts will differ from case to case. Generally speaking though, if the individual was visiting the US subsidiaries as part of the oversight role that comes with the CEO position, the UK would anticipate the test at Article 14(2)b.

Alternatively, if the individual was in the US to head up a project specifically linked to the business of one of the US subsidiaries, there could be an argument that he was carrying out employment duties for that US subsidiary as opposed to the group overall.

Does the US agree with the UK that the test at Article 14(2)(b) is not simply a question of looking at whether costs are deducted in the US? That the test requires a consideration of the duties being performed and the role in which they are undertaken?

Scenario 2

Individual is employed by US company. He is then assigned to a UK company for a period of 3 years but performs some duties during this period in the US. The entire salary is paid by the US company to the individual but then the entire cost is recharged to the UK company (regardless of the location of the duties).

In the context of Article 14(2)(b), what effect, if any, does the assignment to the UK have in terms of determining the ‘employer’?

As an aside to this, HMRC has been told that it is usual in the US for there not to be any formal contract of employment. Can you confirm that this is the case or provide further background on this matter?

In the scenario described it is clear that the remuneration is initially ‘paid by’ the US company but this is later reimbursed. Could a non-US citizen claim that the Article 14(2) exemption was available on the basis that the remuneration was being paid on behalf of an employer resident in the UK?

Would the US consider the outcome to this scenario to be altered if the UK company was paying the remuneration upfront?

From the US perspective, does the relationship between the individual, the US company and the UK company have significance here? For example, would the US view the ‘employer’ as shifting to the UK when the assignment began such that the nature of the duties performed in the US should be considered in the light of the tests in the Model Commentary to determine if there was an employer in the US for Article 14(2)b?

Scenario 3

An international group (parent in the UK) has a US company within the structure that appears to exist to facilitate the transfer of US persons to group operations around the world. (HMRC is advised that this enables the individuals to maintain participation in certain US pension schemes). The individual is resident in the UK and based in London but spends some time working in the US.

Can the US comment on the relevance, if any, that the US based company has in the consideration of the tests at Article 14(2)(b) given that it seems to have no economic activity itself?

In one particular example of this situation there does appear to be a contract with the US company which stipulates that the individual will be employed and rewarded elsewhere in the group (this is the reason for the earlier query on formal contracts of employment). In terms of Article 14(2)b, the UK would anticipate looking at the duties that are performed in the US to determine whether there was an employment relationship with any other US entity. Would the US concur with this? Is the question as to where the costs are ultimately borne within the group of relevance in the US view of the situation?

If the US has published any papers on its approach to the matters to be considered in respect of the exemption within the Employment Income Article could you send copies for our information?

Way Forward

It is hoped that on receipt of a response from the IRS that it will be possible for HMRC to issue guidance to its caseworkers as to the approach adopted in the US to enable the majority (if not all) of the existing cases to be cleared.

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