The latest guidance on split contracts for non doms

HMRC published guidance on the 19th March relating to two specific issues that arise in dual contract arrangements giving their view of:

• when duties performed in the UK are merely incidental to duties performed outside the UK; and

• the documentation that they expect employees and employers to make available in response to a dual contract enquiry.

What are split (or dual) contracts arrangements?

An employee works for two employers, normally within the same group of companies, one resident in the UK and one resident outside the UK, under two separate contracts of employment. The employee will be resident in the UK but will have a foreign domicile for UK tax purposes. Payments made for duties performed wholly outside the UK under the overseas contract, will be regarded as overseas earnings and will not attract UK tax liability.

When are duties in the UK merely incidental to duties outside the UK?

HMRC states that earnings for duties performed in the UK that are merely incidental to the overseas contract duties performed outside the UK, are not liable for tax. These incidental duties could include arranging travel, but each case would be decided on its facts. However, any earnings for the duties performed in the UK for the overseas contract, that are the same or similar to those performed outside the UK for the overseas contract, even if performed for a very short time, would be liable for tax.

Modern telecommunications facilitate mobile working, so an employee with dual contract arrangements may find it difficult to avoid performing his overseas contract in the UK. Taking phone calls or responding to emails directly relating to the overseas contract while working in the UK, could make an employee liable to pay tax on any payments made for those tasks. These could be classed as substantive duties by the HMRC.

It is also important to note that Directors duties are never merely incidental, so a director who performs duties overseas but attends meetings in the UK would not be able to claim that the meetings are merely incidental to his overseas duties. HMRC states that if the employee performs substantive duties in the UK under the overseas contract then all earnings from the overseas contract will be taxable.

What documentation needs to be made available?

HMRC will require access to some or all of the following documents for the period under review including:

diaries;

emails;

expenses claimsand supporting receipts;

telephone records and

client files

This documentation should be retained for two years. It is therefore essential for the employee to maintain stringent records otherwise the employer will be liable for significant PAYE and NIC costs.