The new rules of Chapter 5A of Part 2 of ITEPA 2003 apply to UK-resident employees on the remittance basis. Their broad effect is to restrict the amount of income from employment-related securities on which UK income tax is charged on the arising basis to that part of the income that is related to
Frequently, employees who are eligible to make a claim under a
double taxation treaty will also be those to whom Chapter 5A of
Part 2 of ITEPA 2003 applies.
It may be the case that the effect of Chapter 5A will remove
the need to make a claim under a treaty, either for time
apportionment, or for foreign tax credit relief. Alternatively, a
time apportionment claim may make the application of the Chapter 5A
rules academic. Sometimes, however, the interaction of Chapter 5A
and tax treaties will be more complex.
Where securities or securities options are acquired after 5
April 2008 (see
ERSM160400 for commencement rules),
Chapter 5A of Part 2 of ITEPA taxes “foreign securities
income” (see
ERSM160610) only to the extent that it
is remitted to the UK. In many cases, the new rules of Chapter 5A
will mean that the individual will not suffer tax on the same
income in the UK and a treaty partner State. See example 3 at
ERSM161360.
However, mismatches may occur, especially where the treaty
with another State apportions the gain on an alternative basis to
the domestic approach. One example of this is the UK/US Double
Taxation Treaty. The US taxes the US workday proportion of a share
option gain based on the workdays between grant and exercise, while
Chapter 5A (which reflects OECD guidelines in this area) taxes the
proportion of the gain based on UK duties between grant (referred
to in the legislation as the “acquisition” of the
option) and vesting (see
ERSM160760)
Where income is doubly taxed as a result, Foreign Tax Credit
Relief is available in respect of foreign tax suffered on any part
of the gain that has been taxed in the UK. If all or part of an
amount of employment income arising from employment-related
securities or employment-related securities options is foreign
securities income, then, if that part is not remitted (see
ERSM161100 for the meaning of
remittance), it will not be subject to UK tax as employment income.
In these circumstances, foreign tax paid on an amount of foreign
securities income that has not been remitted to (and therefore not
been taxed in) the UK will not be available for credit against the
UK tax charged on the “UK portion” of the income.
See examples at
ERSM161340 et seq.
As has been mentioned 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 by means of time apportionment. In many cases, the new rules of Chapter 5A will mean that time apportionment under a treaty claim is not required because the UK’s domestic taxing rules achieve the same end. However, the effect of Chapter 5A apportionment is to make “foreign securities income” assessable in the UK on the remittance basis, whereas treaty time apportionment exempts a proportion of specific employment income from a UK tax charge. Where this is the case, the relief available under the Treaty will take precedence over the rules of Chapter 5A. In addition, mismatches can occur between the apportionment required by the new remittance basis rules and that offered by a particular treaty and, again, the relief available under the treaty will take precedence.
