The effect of a double taxation treaty was discussed at
ERSM161310. If the UK is not the
country of residence when a chargeable event happens, then the
employee may be resident in a territory with which we have a double
taxation treaty. If so, they will be able to make a claim that the
UK restricts its liability to the amount derived from employment in
the UK. This is commonly referred to as "time apportionment".
The most common situation where this arises is with share
options. The Organisation for Economic Co-operation and Development
(OECD) has published a paper setting out in detail the
international consensus on how these should be taxed where work has
been carried out in more than one territory. The UK's approach
follows this and is set out, with examples, in
Tax Bulletin 76. Equivalent guidance on NICs can
be found in
Tax Bulletin Special Edition 8. For periods
before April 2005 see Tax Bulletin 55 and DT1925+.
In the UK, share option gains are time apportioned on the
basis that the right to exercise an option is earned by service
from the date of grant forwards to the date the option vests, by
reference to the number of workdays in each country during that
period. This treatment applies to options exercised from 6 April
2005 onwards (unless the Double Taxation Agreement in question
specifies otherwise - e.g. UK/US Treaty) and is in accordance with
OECD recommendations.
For options exercised before 6 April 2005, the gain is time
apportioned over the period from grant to exercise.
In view of the fact that there is an OECD consensus on the
treatment of share options, HMRC is prepared to apportion gains for
the purposes of the domestic charge under Part 7, where there are
overseas workdays in territories having double taxation treaties
with the UK, without a claim under the treaty. In cases not
involving share options, it will be necessary for a claim to be
made under the treaty before any apportionment can be made.
Whilst the principles outlined in
ERSM161300 will apply where shares are
acquired other than via an option, the underlying facts may be
different and sometimes a reduction in UK liability may not be
available under a double taxation treaty.
Up until 6 April 2008, HMRC maintained that while, in
general, the right to exercise an option was earned by future
service from the date of the grant forwards, restricted securities
(including forfeitable securities) should usually be regarded as a
reward for service up to their award, but with a blocking period
where the securities could be lost or before of which the recipient
was unable to obtain the full benefit in cash terms. HMRC’s
position was that for treaty relief, the reward from restricted
securities was normally earned up to the date of the award and that
the primary taxing rights belonged solely to the territory where
the work was carried on up to the date of grant, not after it.
Following the changes of Finance Act 2008 to the taxation regime
for NOR and non- domiciled employees in receipt of
employment-related securities, there is statutory recognition that,
in general, the period in which a restricted or forfeitable
security will be earned is the period between the award of the
security and the lifting of the restriction or forfeiture
condition. From 6 April 2008 HMRC will apply this approach to new
and existing open cases for the purposes of treaty time
apportionment, whether or not the rules of Chapter 5A of Part 2 of
ITEPA 2003 apply and regardless of whether the securities were
awarded before 6 April 2008.
This is the general approach. As with the new rules of
Chapter 5A, where the facts of a case point to the conclusion that
the reward relates to employment carried on during a different
period than that between award and lifting of restrictions, say,
for example a period from some time prior to the award to very
shortly after it, then the earnings period would be regarded as
that which accorded most closely with the facts.
