Where an option is granted to an employee resident but not
ordinarily resident in the UK who performs the duties of the
employment both in and outside the UK, HMRC will treat part of the
gain on exercise of the option as relating to an employment not
within the charge to UK tax.
Unless the facts show otherwise, the appropriate way to
apportion any gain on exercise is to follow the international
consensus reached by the Organisation for Economic Co- operation
and Development (OECD) for the purposes of relief under double
taxation treaties. For options exercised up to 5 April 2005, the
basis of the apportionment is to apply the ratio of overseas
workdays to total workdays over the entire period between grant and
exercise. For exercises on or after 6 April 2005, the UK will look
at the ratio over the period between grant and the date when the
options vested (i.e. became exercisable). The overseas workdays
proportion of the gain will not fall within Chapter 3C.
In many cases, the UK’s practice of treating part of the gain as relating to an employment not within the charge to UK tax will mean that the individual will not suffer tax on the same income in the UK and a treaty partner State. However, mismatches may occur, especially where the treaty with another State apportions the gain on an alternative basis to the domestic approach. 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 relating to unrelieved workdays (see examples at ERSM70423).
The portion of the gain which is regarded as within the charge
to UK tax will be treated as the amount of the notional loan for
the purposes of Chapter 3C, subject to any deductible amounts
allowed by ITEPA03/S446T.
Any tax charge under ITEPA03/S446S or ITEPA03/S446U will not
be subject to a further adjustment for overseas workdays.
If a series of options are exercised in successive years,
then the taxation of each needs to be looked at individually.
The proportion of the gain on exercise attributable to
overseas workdays should be calculated solely by reference to
periods when the employee was not ordinarily resident in the UK.
Where an employee becomes ordinarily resident between grant and
exercise or grant and vesting (as appropriate), the proportion of
the gain attributable to the period of ordinary residence will fall
wholly within Chapter 3C without relief for overseas workdays.
Workdays will not normally be seen on the SA returns. Officers should consider their normal enquiry and risk parameters when deciding whether an enquiry should be opened to check a computation provided. Officers should also check that the non-UK workdays claimed appear reasonable: cases are commonly seen of, e.g. non-UK workday claims for weekend days or bank holidays, which on enquiry prove to be incorrect.
