EIM40102 - Taxable earnings: employee resident and ordinarily resident in the United Kingdom: "chargeable overseas earnings"

Part 2 Chapter 5 ITEPA 2003

Sections 22 to 24

Section 22 applies to the general earnings for a tax year in which an employee is resident and ordinarily resident but not domiciled in the United Kingdom to the extent that they are chargeable overseas earnings for that year.

From 6 April 2008 any general earnings that are not chargeable overseas earnings will fall within Section 15 (see EIM40101). Until 5 April 2008 these general earnings were taxable under Section 21.

Calculating chargeable overseas earnings

Section 23 sets out three steps to calculate how much of an employee's general earnings are chargeable overseas earnings.

Step 1: identify the full amount of overseas earnings for the tax year.

Overseas earnings are defined in Section 23 as the general earnings for a tax year in which:

• the employee is resident and ordinarily resident but not domiciled in the United Kingdom,
• the employment is with a "foreign employer" (see EIM40031), and
• the duties of the employment are performed wholly outside the United Kingdom.

'Wholly' is qualified by Section 39 ITEPA 2003 (see EIM40204).

Step 2: subtract any amounts that would (assuming they were taxable earnings) be allowed as deductions from those earnings under:

• Section 232 or Part 5 (deductions allowed from earnings),
• Section 262 CAA 2001 (capital allowances to be given effect by treating them as deductions from earnings),
• Section 592(7) ICTA 1988 (contributions to exempt approved schemes),
• Section 594 ICTA 1988 (contributions to exempt statutory schemes).

: where the duties of an associated employment are performed in the United Kingdom, apply any limit imposed by Section 24 (see EIM40103).

Chargeable overseas earnings: taxable amount

Section 22 provides that the taxable earnings will be the full amount of chargeable overseas earnings remitted to the United Kingdom in the tax year whether the earnings are for that year or some other year and whether or not the employment is held at the time that the earnings are remitted. See EIM40302 for guidance on the meaning of remitted to the United Kingdom.

Since 6 April 2008 any general earnings that are not chargeable overseas earnings within Section 22 because of the operation of the steps in Section 23 will be taxable under Section 15 (until 5 April 2008 they were taxable under Section 21). The example at EIM31771 illustrates the interaction between Sections 15 and 22 where Step 2 applies.

Practical issues

An employee may maintain that general earnings are chargeable overseas earnings taxable on remittance under Section 22 rather than on receipt under Section 15(or under Section 21 if before 6 April 2008). This is likely to lead to a significant reduction in the amount of taxable earnings. You should examine the facts closely before accepting that earnings are chargeable overseas earnings within Section 22. In particular you should find out whether the employer has any place of business in the United Kingdom. If you can trace an accounts file for the employer, ask the accounts Inspector for instructions on the employer's residence status.

See EIM40103 for advice on dual contract arrangements.