Expatriate taxation - CIOT - The Chartered Institute of Taxation

___________________________________________ 

EXPATRIATE TAXATION: 

PRACTICES NOT LEGISLATED FOR 

2007 

RESEARCH PROJECT 

COMMISSIONED BY 

THE CHARTERED INSTITUTE OF TAXATION 

TAX POLICY SUB-COMMITTEE 

______________________________________________

CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 

Peter Ashby 2 6.2.07


FOREWORD 

My original brief is available as an Appendix (page 67), and I have included this to 

enable any reader who would like to trace the original thoughts for this research 

document. I have done this as the brief has evolved over time, the document having 

been written in the time frame of April to November 2006. 

I have “interpreted” the original brief to enable me to produce a document that 

captures “many” of the issues in expatriate tax that practitioners have to deal with on 

a regular basis for their client body as a whole, even though the majority of clients 

would have just a few of the issues, or none, affecting them in any particular year. 

I say “many” because I am aware that there are a few bespoke planning points that 

are not in the public domain, and that the client and adviser wish them not to be in 

the public domain. They are presumably in the Tax Avoidance Disclosure files of 

HMRC! 

The issues that are addressed are the most common contentious ones that I have 

seen in practice. In drawing up the list, I have consulted with fellow practitioners and 

used the benefit of my experience with PricewaterhouseCoopers. If I were to 

dedicate this document to anyone, it would be to those colleagues at PwC who have 

provided me with the material over the years. 

These areas are ones where there is no clear legislative or case law support for “a 

position of certainty” to be ascertained by the adviser or followed by taxpayers. The 

positions taken by most taxpayers advised by practitioners of expatriate tax are 

based upon a combination of precedent and the general consent of HMRC 

expressed insofar as the position taken has not been successfully challenged in a 

Court before or where HMRC do not take the point. 

All taxpayers are, of course, required to self assess their tax position. They are 

expected to be able to complete their SA return using only the sources of information 

available in the public domain. As will be seen, this is clearly impossible, even for a 

taxpayer advised by an expatriate tax specialist tax adviser. The reason is that 

positions have been agreed over the years based upon common sense, and have 

eventually become “law based upon custom and practice” rather than based on 

statute. More importantly, the positions have not been made generally available to 

the public. 

In outlining the areas of uncertainty I have, where possible, postulated some 

pragmatic solutions to the issues. Some of these will be familiar to expatriate tax 

specialists, but most are born out of areas where the taxpayer and HMRC will 

potentially disagree and for which there appears to be no alternative, in the event of a 

challenge, but to go through the Courts for a ruling. It is unusual to have so many 

issues that have been outstanding for many years, but expatriate tax has always 

been treated as an area requiring much less attention than most other areas of 

taxation because there is “so little taxation at stake”. 

This view of the amount of tax at stake has been expounded to me from a variety of 

HMRC sources, and is not attributable to any one individual. However, a few 

statistics will explain why this appears to be so. HMRC have said that they have 

about 55,000 expatriate cases registered with their expatriate specialist centres. The 

majority of these cases are dealt with by the Big 4 accountancy firms. HMRC also 



expect that most expatriates will work for firms who will use the undoubted expertise 

of the Big 4. 

My experience confirms that if expatriates did just use the Big 4 firms, then the 

number of 55,000 cases would be reasonable, and HMRC can be reassured that the 

tax returns will probably be correct and the tax at stake may be both relatively small 

and hard to extract. Ergo, there is not much tax at stake. 

However, what is missing from this analysis is that the tax returns of most expatriates 

will be dealt with by smaller practitioners, and this will involve expatriates who file 

their returns with the tax district based upon their place of work. This usually means 

there is not an expatriate specialist centre dealing with the return. 

Surveys in the early 90s estimated there to be at least 10 times that number of 

expatriates working in the UK. In addition, in the last few years there has been a vast 

influx of temporary workers from the expanded EU. The Government has no exact 

figures for these people, as they need no work permit and can cross the border and 

work in the UK provided they hold an EU passport. I know of no source that can be 

relied upon, but the expectation in the media is that there are in excess of 250,000 

people from the newly admitted EU countries working in the UK alone. Whilst the 

majority are students or employees earning less than the higher rate threshold, there 

will be many above that threshold. 

Assuming this logic is correct, the number of expatriates (ie people who are not 

domiciled in the UK but are working and living here for some temporary purpose) is in 

excess of 1 million (I suspect it is significantly greater but have no direct evidence to 

support this, but a recent study by the Government to ascertain what numbers of 

people are living outside the UK and who have some entitlement to a state pension 

suggested 5.9 million people. It is likely there is an equal number of people in the UK 

who are in the reverse position). If half of these paid no tax and another quarter paid 

minimal tax, the remaining quarter-million would be substantial taxpayers. 

Looking at just these last quarter-million expatriates working in the UK, they do earn 

significantly more than domestic workers. Most expatriates would not work 

temporarily in the UK unless they were offered assistance with such basics as 

relocation, travel, accommodation and cost of living adjustments. Many have 

schooling for their children at private schools. They also have some kind of 

allowance or adjustment to take account of higher taxes in the UK. It is therefore 

likely that expatriates’ average earnings are around £125,000 and their taxation bill is 

£40,000 a year. 

If there were 250,000 “typical” expatriates paying £40,000 tax each, that would mean 

£10 billion of tax is being paid by expatriates. That may only be 6% of the income tax 

being collected from individuals, but it is being collected from about 1% of the 

working taxpayers in the UK. 

They clearly deserve better attention than they have received over the years, and to 

have better clarity of information and Government advice on how to file their SA 

return seems a reasonable starting point given the majority of them do not 

understand to the most basic level tax rules in the UK, let alone how they apply to 

expatriate employees. 

A similar allegation could be made for most advisers and HMRC staff. No disrespect 

is intended, but I know from experience that all practitioners (including the Big 4) and 



HMRC have individuals with a less than complete understanding of the tax rules for 

expatriates. I would count myself amongst them. 

Why is this so Mainly because expatriates come from every country of the world to 

work in the UK, and they are rewarded differently depending upon the country and 

company from which they come. For all such cases, working out what is taxable 

requires the additional task of understanding what is being provided as earnings. 

Take the case of pensions. Pensions may come as funded, partly funded, promised 

but unfunded, as state-run or state-approved, with a variety of “tax advantages” 

depending upon the state of origin. The pension arrangements need to be 

understood before an expatriate can file his UK return. Tax relief for pensions has, of 

course, been “simplified” with “A” day, which, of course, means even fewer people 

understand it all in the short term. At the time of writing, tax relief for pension 

contributions for an expatriate may come in the following ways: 

1. Belonging to a UK approved scheme; 

2. Having a correspondingly approved foreign scheme if corresponding approval 

was applied for before 6 th April 2006; 

3. Claiming Migrant Member Relief for a qualifying foreign scheme; or 

4. Claiming treaty relief under a Double Taxation Agreement (eg the US, 

France, etc) 

I cannot see how any expatriate not advised by a competent tax professional could 

understand the availability of UK tax relief on his pension contributions. Surely even 

HMRC can see that the issue of more than 20 Pension Simplification newsletters and 

untold numbers of Statutory Instruments means that the average taxpayer simply 

cannot cope. I suspect most professionals will quail at the prospect of advising 

expatriates and their employers in this area (as I do). 

Reward in the form of equity is even more complex. I have seen stock option 

schemes both approved and unapproved, nil cost options, stock appreciation rights, 

restricted stock plans, deferred stock awards, Long Term Incentive Plans and many 

more. How does the HMRC tax reviewer or the taxation practitioner understand all 

these plans With difficulty. In fact, with such difficulty that I have not attempted to 

cover all the stock plans in this paper, as it would risk making the volume too great. 

This is why the CIOT (and I) believed it would be worthwhile to assess the issues 

outlined in this paper, and to ask HMRC to reconsider these areas to see whether 

there is scope to bring some more agreed solutions to the attention of taxpayers and 

practitioners. 

In theory, there is already a mechanism for this, as taxation professionals and certain 

representative bodies have a channel of communication with HMRC via what was 

known as the Expatriate Tax Forum. This has been running for about four years, and 

yet the list of areas below persists. 

The use of FAQs and answers in an exclusive expatriate area of the HMRC website 

would be a huge step forward. Dealing with the issues raised in this document, and 

having a resolution of the technical position which is also made available to the 

taxpayer and his adviser, would enable them to have more certainty over filing 

returns and paying tax. 



It would also be an absolute minimum requirement, should the Government decide 

that the Carter Report recommendation that tax returns be filed by 30 September 

become statute at any stage in the future, although it was refreshing to see that the 

particular provision relating to earlier filing has been watered down in the ministerial 

statement published on the HMRC website on 18 July 2006. 

HMRC statistics on the number of expatriate who fail the 31 January filing deadline 

would show just how likely it would be for expatriates to meet a deadline of 30 

September. 

Peter Ashby 

February 2007 



The table of issues below is in alphabetical order, as it is difficult to assess what is 

most important to any particular client or adviser. However, I have attempted 

to annotate each issue with a star rating, where three stars means it is a critical issue 

as it crops up regularly down to one star where it is nice to know the answer, and it 

may crop up from time to time, but possibly not even each year. 

Although the document is long, and I was regarded as a technical expert in expatriate 

taxation, this document is not able to be either a text book or an exhaustive list of 

issues that affect expatriates. As well as not addressing NIC or share-based 

remuneration at all, it cannot hope to be an authoritative conclusion on what is right 

in the issues addressed. That is for the Courts to decide should they be asked, or for 

the legislators to correct with fresh legislation to “clarify” what the position should be. 

Neither option is likely to happen in the near future, leaving it as imperative that 

HMRC and other interested parties should agree on the way these items should be 

treated in the interim. 

Finally, this document will by definition be out-of-date as you read it. After I had 

finalised the document, following various redrafts, along came the Special 

Commissioners case of SpC 568 and the domicile, residence and ordinary residence 

of Mr Gaines-Cooper. I thoroughly recommend the case is read, if for no other 

reason than it contains excellent pointers and use of the current case law applying to 

these areas. The case proves a number of things which this report set out to 

elaborate on, namely: 

1 IR20 cannot be relied on in court; 

2 Every case depends upon its own facts and so, in a way, there is little 

principle to draw from each case. (After all, for how many years have we been 

determining residence and domicile for tax Since 1799 according to this 

latest case!); 

3 There is a lack of statutory backing to the terms; 

4 There is no easy answer to the issues raised. As with every case that reaches 

the Special Commissioners, there are eminent tax brains on either side with 

opposed views; and 

5 We are a long way from being in a position where expatriates can file a 

correct return based upon what they can find in the public domain. 





TABLE OF ISSUES 

Issue Rating Pages 

1. Accounting Fees ** 5 -- 10 

2. Bonuses – when earned * 11 – 12 

3. Bonuses on a cash basis ** 13 – 14 

4. Domicile - general *** 15 –17 

5. Domicile - state or federal * 18 – 19 

6. Economic Employer Test *** 20 –22 

7. Foreign Tax Credits *** 22 – 28 

8. Garden Leave and Holiday Pay * 29 – 31 

9. Hypo-tax & other hypo-deductions ** 32 – 35 

10. Incidental Duties ** 36 – 37 

11. Judicial approach to IR20 *** 38 – 39 

12. Mobile Workers Regime ** 40 – 42 

13. Modified PAYE ** 43 –44 

14. Neglect and Penalties *** 45 – 47 

15. Ordinary Residence *** 48 – 53 

16. Relocation expenses ** 54 –58 

17. Relocation expenses and DDR *** 59 – 62 

18. Capital Gains Tax * 63 – 65 

19. SP 5/84 and overseas workdays *** 66 – 68 





1 Issue 1: Accounting Fees 

1.1 The issue is what is the taxable benefit in kind (BIK) for income tax and Class 

1A NIC purposes when the employer of a tax-equalised expatriate provides 

the expatriate with external assistance in completing HMRC forms and the 

annual self assessment tax return. 

1.2 It is a doubly important issue as it affects the employer, who is required to put 

the details onto the P11D and the P11D(b) as a BIK; the employee, who is 

required to put the benefit onto his tax return; and the adviser, as the 

employer will need guidance as to how much of the total cost is taxable as a 

BIK. 

Applicable law 

1.3 There is no specific section covering tax return assistance, so the catch-all 

ITEPA Part 3 Chapter 10 s201 applies. Clearly, this service will be an 

employment-related benefit within subsection 201(1), as subsection 201(2) 

defines “benefit” as including “a benefit or facility of any kind”. 

1.4 It has always been recognised that the filing of a tax return is a personal 

statutory obligation of the employee. The employee must complete and file 

the return if it is provided by HMRC under Taxes Management Act 1970 

section 8. Nobody else can sign the return, except in very limited 

circumstances. Therefore, when the employer assists the employee in filing 

his return by paying for an external adviser, it has provided “a facility” even if 

the employee feels there is no benefit in doing so. The usual reaction from the 

expatriate employee is that the only reason they are in the UK is because of 

work, and the only reason they are filing a UK return is because of work: 

therefore, there is no benefit to them personally. 

1.5 Section 203 provides the mechanism for putting a monetary value on the BIK. 

It is the well-known “cost to the employer in providing the benefit less any part 

of the cost made good by the employee to the persons providing the benefit”. 

1.6 Section 204 provides that the cost is the expense incurred “in or in connection 

with the provision of the benefit”, but there is an important qualification in 

brackets immediately following this definition, which says “(including a proper 

proportion of any expense relating partly to provision of the benefit and partly 

to other matters)”. 

1.7 The legislation therefore anticipates that some of the cost of a service may 

relate to the employee benefit and some may not. 

What is a proper proportion 

1.8 It is interesting to note that, on the withdrawal of the home computer initiative, 

it was recognised that, where the “primary purpose” in providing a computer 

was a business one, there would be no restriction of the exemption in ITEPA 

section 320 as the benefit to the employee is insignificant and the primary 

purpose of providing the computer is to provide a business asset to employee 

for him to use in doing his job. With the increasing number of people working 

from home, this is an understandable interpretation of what a proper 

proportion should be when the primary purpose of providing the facility is a 



business one. 

1.9 One would like to argue the same rationale for this BIK, but HMRC have been 

rejecting this supposition for years, so it is safe to assume that there will be a 

charge to tax and NIC for this BIK. 

Case law applicable 

1.10 The only case of any relevance is Pepper v Hart (References:[1993] 1 All ER 

42, [1993] AC 593, [1992] 3 WLR 1032). This case is relevant insofar as it 

established that, if it could be proved that the main reason for incurring an 

expense was not to provide a benefit to the employee but some other 

purpose, then there could be no expense said to be incurred in providing the 

benefit. 

1.11 This case is only relevant where there can be clear evidence that the cost to 

the employer is provided wholly for other purposes. There is clearly an 

analogy to be drawn with when schooling is provided to a child. There is 

bound to be some cost which is solely attributable to that particular child, eg 

provision of books, marking of homework, counseling, etc. However, their 

Lordships accepted that, if the cost (ie the school costs in providing the 

facilities for the other fee paying children) had already been incurred for 

another reason, then no part of that cost would be incurred in the provision of 

the BIK. Whilst there is a similarity between this case and accounting fees, 

HMRC have always differentiated this case from the accountants’ fees by 

arguing that the statutory requirement to file the tax return, which is the 

employee’s, is not minimal. 

Current practice 

1.12 The current practice is to accept that the external adviser does provide a 

service to the expatriate employee, but to argue that, where the employee is 

tax-equalised, there is recognition that the primary reason for the employer 

providing the assistance is that the employer is bearing the tax bill, not the 

employee. Empirical evidence abounds; very few employees outside 

expatriate employees are provided with this “benefit” because employers 

know that filling in the return is not their responsibility. They must provide the 

employee with a P60 and a P11D (and P11D(b)), then leave the form-filling to 

the employee. 

1.13 Employers with large expatriate programmes usually have a fixed fee per 

expatriate, and this fee is charged for a number of services. This includes 

employer and employee obligations. Given that the tax return element is 

small, you would think this is an area where a PSA (PAYE Settlement 

Agreement) under ITEPA Part 11 Chapter 5 would provide a solution. It has 

been rejected as a solution to date. 

1.14 As the reader may know, under a PSA the employer will make arrangements 

to settle the tax directly where he has provided a BIK which is minor, irregular 

and paid in circumstances where deduction of tax is impracticable. The 

employer is allowed to make approximations as to the amount of PAYE for 

each employee (under section 705) and pay the taxes (and NIC) due. 



1.15 Here the law actually recognises that there are administrative and efficiency 

savings to be made by both sides when the employer merely pays the tax of 

the employee on an estimated basis (ITEPA section 705(c)). This is clearly of 

assistance to the employee as well as the employer. There has never been 

any question of a BIK being required for this facility, primarily because the 

employer is merely exercising its own statutory right. 

1.16 However, it is clear that, when the external adviser provides the expatriate 

with a completed tax return, having gathered the data from various sources 

and run its computer software to print out the duplicate form, it has provided a 

facility, and this is a benefit which is chargeable as a benefit in kind and not 

as PAYE income. 

1.17 If a P11D is required, the key question is how much of the charge from the 

external adviser should be a BIK, and how much is just doing the business for 

the benefit of the company. When looking at the services offered, they can 

include: 

a) Preparing the tax return – a complex issue: see below; 

b) Doing the calculation of tax due – simple – no need to be done by the 

employee as HMRC will do it free, so no benefit; 

c) Calculating balancing payments due – simple – paid by employer as it is 

an expense which the employer is contractually bound to pay, and in any 

event the HMRC online software will do the calculation, so no benefit; 

d) Filling out arrival and departure forms - complex – see below; 

e) Giving tax advice - complex – see below; and 

f) Advising and/or operating PAYE and NIC – simple – wholly for employer 

so no benefit. 

1.18 It is worth studying points a) d) and e) in more detail to look at the proportions 

that may be relevant. 

1.19 Point 1 Preparing the tax return. Some advisers use a standard charge 

per expatriate, regardless of the true cost for each individual. This is done 

because, in practice, it would be impracticable to calculate the cost of each 

individual expatriate in a company, especially one with a large expatriate 

population. In arriving at a standard charge, the tasks required to be done in 

order to arrive at the tax return in a completed state waiting to be sent to the 

client can all be divided into tasks that can be shared between employer and 

employee. Getting the employment details right should be the employer’s 

task. For expatriates, a P60 and P11D are often complex to produce, and 

usually take time to compose. As these forms are statutory forms which the 

employer is obliged to complete, the cost of gathering the data in order to 

quantify the taxable value of the earnings and benefits is wholly the 

employer’s cost. Getting the extra details of the UK and non-UK workdays in 

order to determine what is taxable and what is not (eg workdays in and out of 

UK for SP5/84) is something that is needed to put on the return and also 

needed to calculate what liability the employer has to pay tax, ie dual 

purpose. 

1.20 The problem with the standard charge is that it varies from client to client and 

from adviser to adviser. The result is that it is not possible to evaluate what 



the standard BIK should be. 

1.21 Point 4 Filling out arrival and departure forms. These forms have no 

statutory basis, and so their completion is not essential – to the employee. As 

the employee derives no benefit from their completion and is not under a 

statutory obligation to complete the forms, there is arguably no BIK. Where 

there is modified PAYE/NIC, there is usually a requirement to complete the 

P86 as this form notifies HMRC of the status of the individual as well as their 

arrival, and thus the expectation of PAYE/NIC to be paid by the individual. 

This makes it a contractual obligation of the employer, and again no BIK is 

due. 

1.22 Point 5 Giving tax advice. As above, there is no statutory need for this item 

so it is a benefit – but for whom Where the aim is to reduce the burden of 

taxation on the employer, as is the case for tax-equalised employees, it 

should not be seen as a benefit to the employee. Rather, the employee is 

helping the adviser to reduce the tax burden of the employer. This remains 

true even if the tax is due and paid in the name of the employee, as the 

ultimate liability remains with the employer. In “modified-PAYE cases” there is 

even an agreement (within Appendix 6 of the HMRC Employment Manual) 

which makes it a condition that the employer guarantees payment of the 

employee’s tax. 

1.23 However, where the tax is to be paid by the employee who is not taxequalised, 

the liability is nothing to do with the employer, and there is clearly a 

benefit. This benefit could be for more than simple income tax, as is (but not 

always – it will depend upon the expatriate policy of the employer) the case 

with Inheritance Tax, Capital Gains Tax, tax on investments and assistance 

with the family’s tax obligations. 

Proposal 

1.24 This is such a contentious and complex area that it is beyond the wit of most 

to come to a strictly correct position without spending, in most cases, more 

time than the tax collected would warrant to calculate the BIK. It has certainly 

been the case for the last 20 years. 

1.25 However, there is already a precedent for evaluating a fixed rate for the 

taxable value of accountants’ fees for Lloyds Underwriters and for workman’s 

clothing. There should be serious consideration given to having a standard 

charge for expatriates provided with a tax return service by their employer’s 

advisers. The amount needs to be determined in consultation with the 

advisers and the employers. 

1.26 To understand where HMRC are coming from, if there are 50,000 expatriates 

being provided with a tax return service, and the standard charge was 

£100/150/200 per expatriate, and the tax rate were on average a gross-up tax 

of 55%, then the tax at stake would be £3M, £4.5M and £6M. 

1.27 However, for each employee, if the tax at stake were within this range, then 

the annual effort to determine how much extra tax they would derive, by both 

the taxpayer and his adviser, seems huge in comparison to the tax collected. 



What about expatriates that are not fully tax equalised 

1.28 Where the expatriate is “on his own”, ie is paid a gross salary and provided 

with benefits on which he pays his own taxes, there are no grounds for 

arguing that any part of the services is to do with the employer, and so all 

amounts paid would be a BIK. 

1.29 There are intermediate positions where the employer agrees to pay the UK 

tax if the tax bill in the UK is higher than the tax bill would have been at home 

but, if not, then no adjustment is made. These are termed “tax protection 

cases” and, in essence, the employer needs to have the same calculations of 

tax done to determine whether and to what extent there is a liability to 

compensate the employee. If there is an employer liability, tax planning 

would be for his benefit and not for the benefit of the employee, hence no 

BIK. The argument on the arrival and departure forms has less strength than 

for fully equalised expatriates, as the individuals are not permitted to be on 

modified PAYE and a case for including a BIK for this service could be made. 

I believe if it were, the forms would not be completed. 

1.30 The position for partly equalised expatriates is the most complex of all. If you 

are equalised on some components of earnings but not others, there is still a 

case for there to be only a standard charge, as the employer will still have to 

do the tax calculations required for the returns done by expatriates to ensure 

it is reimbursing the right amount of tax. This is where Pepper v Hart comes 

into play. Arguably, this case did clarify that, when the employer has to carry 

out a function solely for itself, then the fact that the employee derives a 

benefit is of no concern, and no cost needs to be attributed to the personal 

benefit, and thus no BIK arises. 

1.31 In the absence of an agreed rationale for calculating this BIK, there will 

continue to be endless debate. 



2 Issue 2: Bonuses: when earned 

2.1 The issue is over what time period a bonus is earned. This is not an issue for 

a domestic employee, as he is taxable on 100% of his lifetime earnings on a 

receipts basis. For expatriates, the issue is more complex, as employer and 

employee have to decide which period the bonus relates to and what the 

residence status was at the time the bonus was earned to determine how 

much PAYE is deducted, and what is actually chargeable as earnings on the 

tax return of the employee. 

2.2 The problem has been exacerbated by employer long-term incentive plans 

where the bonus may be earned over three, four or five years, which may be 

considerably longer than the assignment. 

2.3 For employers (or, more precisely, deemed employers for PAYE purposes), 

there is often no mechanism for capturing either the tax or the information 

needed to tax bonuses paid post-departure. 


2.4 ITEPA section 16 provides the only reference to determining when general 

earnings are to be taxed by relation to particular periods. 

2.5 Section 16(2) applies the logical explanation that earnings for a particular 

period are to be earned in that period. This clarifies earnings that are 

specifically related to periods of time. It does not apply to bonuses that are 

discretionary, except that, where there is a bonus pool for a particular period 

of time, then that period of time can reasonably be expected to be “the 

period”. 

2.6 The law is silent where it is not possible to determine the period other than to 

say that the apportionment of the bonus to particular tax years is to be on a 

just and reasonable basis. 

2.7 ITEPA section 17 does provide that, where the employment has ceased to be 

held, then the earnings period is deemed to be earnings for the last year in 

which the employment is held. 

2.8 Two main problems arise. First, what is “the employment” which is the source 

of the bonus Second, to which period does it relate (covered more fully in 

Issue 3 below) 

2.9 The first problem is of critical importance in determining the source of the 

bonus. It is also an area of debate in other areas of difficulty in expatriate 

taxation, as will be discussed in Issue 3 (pages 13-15) and Issue 6 (pages 24- 

26). 

2.10 With every expatriate employment, there are two possible employers. The 

home country employer is usually “the legal employer”, and the host country 

employer may well be “the de facto employer”. 



2.11 It seems logical to assume that, in respect of a bonus, there is only one 

employment giving rise to the bonus. However, it is possible for two or more 

bonus payments to be “lumped together” so that, although there is only a 

single payment to the employee, there may well be two bonuses from two 

employments being paid as the single sum. If this is the case, the bonuses 

need to be split apart and each component separately considered. 

2.12 “An employment” is defined as any employment under a contract of service in 

ITEPA section 4(1). The issue for all expatriates is therefore whether there is 

“an employment” under a contract of service with the host location. The 

expression is not defined any further in the legislation. 

2.13 Case law precedent is missing as far as the tax Courts are concerned, but 

there is some guidance in the employment law arena. Recent employment 

law cases of Brook St Bureau v Dacas (2004 Court of Appeal) and Cable & 

Wireless v Muscat (2006 Court of Appeal) have been decided on the basis 

that an existing contract of employment can be ignored, and an implied 

contract of employment can be deduced where a person does, in fact, work 

for a UK entity in the de facto role as an employee. 

2.14 The issue for expatriates is therefore whether the UK entity has become the 

employer for the purposes of UK tax law. If the answer is yes, then any 

bonus that relates in part to the UK employment will have to be apportioned to 

the UK on a just and reasonable basis. 

2.15 At the moment, there is no tax definition of employment and, as employment 

law is still young and developing, it is impossible to say where this will end up. 

However, there are so many factors that may be taken into account that the 

employee may be unable to determine who his employer is as regards his 

bonus payment. Factors that appear to be relevant are: 

a) Whether there is a legal contract of employment; 

b) Whether there is an assignment letter that is written in terms that make it 

clear that it is subsidiary to a pre-existing contract of employment; 

c) Whether the bonuses that are awarded to the employee are determined in 

the home or host country; 

d) Whether the bonus is linked to any duties performed in the UK; 

e) Which accounting entity bears the cost of the bonus payment; and 

f) Which tax jurisdiction the bonus payment is deductible in as regards the 

payer. 

Proposals 

2.16 The definition of employment needs to be given in tax law, as the absence of 

a definition may be, giving rise to potentially significant tax errors. 

A proposal for the second problem with this issue is suggested after the next 

issue, which is closely related. 



3 Issue 3: Bonuses on cash basis 

3.1 This issue relates to an unpublished concession that applies to an employer 

and all its employees as long as the practice is applied consistently across 

the board. The concession is that bonuses will be taxed in the UK if paid 

during a period of residence in the UK, regardless of when they are earned. 

3.2 The main problem is how it can be applied in practice to people who are not 

equalised, or if an expatriate is simply not prepared to have their tax done on 

anything other than the legally strictly correct basis. 


3.3 Bonuses are taxed as income under the basic charging ITEPA 2003 section 

62. There are two issues for expatriates in relation to bonuses. First, has the 

bonus been earned in the UK or in relation to chargeable UK duties 

Second, when has it been received as, of course, with the exception of 

directors, earnings are taxed when they are received, as defined in ITEPA. 

ITEPA section 16 looks at when earnings are to be taxed. This was dealt with 

in Issue 2. 

3.4 There is some guidance in section 17, which says that, if you have general 

earnings for a year in which you do not hold the employment, you can roll 

backwards or forwards until you find a year in which the employment is held. 

3.5 The case of Griffin v Standish (67 TC 317) offers the guidance that, where the 

bonus is expressed to be a bonus for a particular period, it will be the 

earnings for that period. This case predated the Finance Act 1989 change to 

the receipts basis. 


3.6 When an expatriate comes to the UK and subsequently receives a bonus for 

the period that he is working in the UK, a number of problems arise: 

a) Determining whether the bonus is related to the UK duties or not; 

b) Determining whether there are any deferral mechanisms in place, and 

whether these are effective in UK law; 

c) If the bonus is a long-term incentive bonus scheme, will the employer 

have the systems in place to recognise there may be UK tax due. (This 

is particularly an issue when the bonus is paid well after departure); 

d) Double taxation issues may arise if the home country taxes on a different 

basis to the UK and apportions the income to be taxed in the home 

country; 

e) Where the employee is on the host payroll for social security purposes, 

but the bonus information is not made available as there is no home 

country taxing point (due to a valid deferral); and 

f) Exchange rate differences in the amount of the bonus when declared and 

when received in the UK. 

3.7 To overcome these issues, a practice dating back to the 1980s was 

established, whereby the expatriate employer could choose to have bonuses 



taxed on a received basis without having any attribution of the bonus to UK 

duties or otherwise. The amount was treated as earnings for the tax year as 

a whole, and then apportioned between UK and non-UK duties for the tax 

year based upon the workdays in that tax year. 

3.8 It is palpably wrong and open to bizarrely unfair results on a case-by-case 

basis, but employers, advisers and HMRC accepted that, on a year-by-year 

basis, it would even out to be fair for the expatriate population for an 

employer. Thus, the “concession” was applied so long as it was applied 

consistently to every employee who was tax-equalised. 

Problems 

3.9 There are relatively few problems with this for the “normally tax-equalised” 

expatriates employed by a large employer with a large population of 

expatriates. Because the UK tax is borne by the employer not the employee, 

the employee does not care on what basis of taxation he is assessed so long 

as the employer pays. 

3.10 However, the “concession” is not formally linked to modified PAYE or to taxequalised 

expatriates and, because it is unpublished, there are no rules as 

such. Therefore, a normally tax-equalised employee may decide that he is 

not prepared to accept this basis, which means that the rest of the expatriates 

may be unable to apply it. 

3.11 The problem is exacerbated when there is a rift between the employer and 

employee, and the employee files his own tax return on a basis that is not in 

accordance with the practice of the concession. For example, if Mr X arrives 

in the UK for a 2-year assignment and has a 3-year LTIP payment the day 

after arrival of £3m, then, under the “concession”, it would be taxable. It 

seems a strange concession to have tax paid when it would otherwise not be 

paid. Mr X therefore hires his own adviser and files on the strict statutory 

basis. 

3.12 A few employees find they are unable to accept anything other than the strict 

basis of taxation. Lawyers are often unable to accept having their tax return 

prepared on any basis outside the law. In addition, where the bonus may be 

doubly taxed, there may be issues relating to calculating the amount of 

foreign tax credit that can be allowed as a reduction of the UK tax liability. 

Issue 6 expands on this. 

Proposal 

3.13 The practice should be stopped for all new arrivals in the UK from the start of 

the next appropriate tax year, and be allowed to wither away over time for 

existing expatriates who have already filed on this basis. 

3.14 All bonuses should be apportioned in accordance with SP 5/84 unless HMRC 

or the taxpayer can demonstrate that a fairer attribution is available. 

3.15 On departure from the UK, the employer and employee should be aware that 

any bonus received after departure from the UK should be subject to UK tax if 

it is a bonus relating to work done in the UK. It will also be subject to PAYE 

where the employee has worked for a person whilst in the UK, following 



ITEPA section 689. 

3.16 A logical conclusion would appear to be that, in the absence of clear 

guidelines to the contrary, the bonus should be for a period during which 

duties are performed in the UK if the cost of that bonus is allocated to the UK 

entity which is able to claim an income/corporate tax deduction for the 

payment. The OECD are known to favour the connection between a 

corporate tax deduction and a personal income tax charge for the earnings, 

and this was borne out in the debate over Article 15 of the OECD model 

treaty. 



4 Issue 4: Domicile: general 

4.1 The obvious issue is the lack of a statutory tax definition for the expression 

“domiciled in the UK” and, of course, the opposite “not domiciled in the UK”. 

4.2 This status has considerable relevance to the amount of tax that an expatriate 

has to pay in the UK. The status is nearly always needed to be determined in 

order to file a tax return, and is often critical, as it affects the taxation of many 

sources of income and capital taxes. For example, it affects employment 

income, investment income from non-UK sources, capital gains from non-UK 

situs-assets and Inheritance Tax (until the deemed domicile rule of 17 years 

in the last 20 kicks in). A detailed list follows: 

a) Income tax charge on certain share scheme benefits (does section 421E 

apply to ITEPA section 21) 

b) Foreign employment contracts (ITEPA section 21) 

c) Self employed partners in partnerships with no PE in the UK (ITTOIA 

section 857) 

d) Travel Expenses of non-UK domiciled employee (ITEPA section 373) 

e) Travel expenses of spouse and children (ITEPA section 374) 

f) Pension Scheme deductions eligible for relief under the grandfathering 

provisions (FA2004 Schedule 36 paragraph 51) 

g) Dividend Income from non-UK companies and OEICs, etc 

h) Rental Income from non-UK property (ITTOIA 2005 Part 3 Chapter 11) 

i) Interest from non-UK banks, non-UK corporations and entities 

j) Purchased life annuity payments 

k) Personal Portfolio bonds 

l) Pensions from foreign pension plans 

m) Capital gains on non-UK situs assets 

n) Capital gains by trusts created by non-domiciled settlors 

o) Capital gains on capital payments received from non-resident trusts with 

capital gains 

p) Creation of non-UK resident trust by UK domiciled settlor (TCGA 

Schedule 5) NB note the difference where there is property added by a 

non-UK domiciled but resident settlor to a non-resident trust (TCGA 1992 

Schedule 5 paragraph 2) 

q) Inheritance tax on non-UK situs assets 

r) Transfer of assets overseas to avoid UK tax 

s) Royalties and Copyright 

t) Deep discounted securities 

u) Foreign social security benefits (if taxable in UK) (ITEPA section 679) 

v) Transfer of assets abroad to prevent income tax (ICTA1988 sections 739 

and 740) 


4.3 None, in as much as domicile is not defined in tax statute. 



4.4 There are a few tax cases on the meaning of domicile, but the main case law 

in determining domicile arises from the issues of divorce and wills. The most 

recent case of Agulian & Anr v Cyganik ([2006] EWCA Civ 129), heard in the 

Court of Appeal, has an excellent analysis of what domicile means, albeit in 

the context of the application of domicile to a will. In the absence of any other 

law, it is logical to assume that tax law would hinge upon the domicile law as 

applied in non-tax cases. 

4.5 Tax cases where domicile has been an issue include: 

• Earl Of Iveagh v Revenue Commissioners ((SC(I)1930, ITC31) 

• CIR v Cohen (21 TC 301) 

• Re Clore (decd) (No2), Official Solicitor v Clore and Others (1984 

STC 609) 

• Fielden v CIR (42 TC 501) 

• CIR v Duchess of Portland (54 TC 648) 

• CIR v Bullock (51 TC 522). 

4.6 There are many other cases, but the interesting thing to note is that, because 

there appears to be no defined statutory rule of domicile, each case is 

decided on its own merits and, as the facts vary and the tax at stake can be 

significant, many cases could end up in Court to determine domicile for tax 

purposes. 

4.7 It would be logical to assume that the taxpayer could apply to HMRC for a 

domicile ruling in every case. However, for the majority of foreign national 

expatriates who come to the UK to work on a temporary basis, it would be 

stretching the imagination to think anyone would find such a person domiciled 

in the UK as has recently been exemplified in the Cyganik case (Agulian & 

Anr v Cyganik( [2006] EWCA Civ 129). 

4.8 The exception to this is the case of any expatriate who has a UK domicile of 

origin, but who has established a domicile of choice in another country and 

returns to work in the UK for an assignment. 

4.9 If domicile requires physical residence in another jurisdiction, and the 

employee returns to the UK for a two- to five-year assignment, the ruling on 

domicile could be that the individual had abandoned his domicile of choice. 

4.10 It is noted that there was an intention of the Chancellor to conduct a review of 

residence and domicile but, at the time of writing, the consultation period has 

been ongoing for three years and is still open. The Chancellor stated in his 

2003 Budget, and repeated on the Treasury website, that the report issued in 

March 2003 would: 

“… provide a framework for further analysis and discussion and ensure that 

any specific options for reform of the current rules are based on the widest 

possible understanding of their effect.” 

4.11 It is clear the three-year delay in any further meaningful statement shows 

there is no sense of urgency in making change. 



Proposal 

4.12 Whilst this issue affects few expatriates, there should be a guideline for 

domicile from HMRC in the absence of a review. A numeric guideline makes 

most sense, and having it applied equally to all people regardless of their 

domicile of origin makes sense. 

4.13 It would be sensible to review the consultation that has already taken place 

and consider introducing a temporary rule, as a Statement of Practice, in the 

absence of any statutory changes. 



5 Issue 5: Domicile: State or federal 

5.1 This issue is whether domicile is a relationship that is applicable to a country 

or federal entity (eg the USA, Switzerland, UK) or to a lesser legal jurisdiction 

(eg New York State, Zug Canton, Scotland). It has an impact for Britons with 

domicile of origin in the UK who have settled abroad, and are now expatriates 

who come to the UK and will move to a new location (not back home) after 

the assignment has completed. It will also apply to many other countries with 

a level of domiciliary jurisdiction below the country level. Canada, Spain, 

Australia and China are countries that immediately spring to mind as ones 

with sub-country legislatures. Yugoslavia, Russia and Czechoslovakia are 

classic historical examples. 

5.2 The US sends many expatriates to the UK, and the issue of an expatriate who 

moves permanently from one US state to the UK and then on to another state 

or country raises questions. 


5.3 As Issue 4, there is no statutory legislation, and the tax cases and other 

cases remain the same. However, it is interesting to note that, until recently, 

people were regarded as domiciled in the UK and, of course, all of tax law 

refers to people domiciled in the UK. 


5.4 Until 2004, this issue was given very little consideration as it was of limited 

practical impact and HMRC never appeared to take the point. However, the 

incidence of domicile affects so many areas of taxation, as seen above in 

Issue 4, that it can be important in those cases where it has an impact. 

5.5 Practice varies across the profession, and within single firms of accountants 

there will be conflicting views, so it is impossible to say what the current 

practice is. 

5.6 There is a reference to this situation by HMRC on their website at the 

technical manual references IHTM13021 and IHTM1302. 

5.7 HMRC now argue (they never did “overtly” in the last century) that you are 

domiciled to a state/canton/province, as opposed to the overriding country, 

where there are separate laws covering the state/canton/province. This 

means that, for those with a UK domicile of origin who establish a domicile of 

choice in another location, there is a risk that an assignment to the UK for 

employment will trigger a return to the UK domicile. This would especially be 

so for expatriates who have “back to back assignments”, ie those coming to 

the UK who then move to a new “expatriate” location and do not return home. 



5.8 The classic example of where this could have a major impact is a mythical 

Briton, Mr A, who leaves the UK when three years old and settles in Vermont, 

USA (with his parents). He becomes a US citizen and renounces his UK 

citizenship. He moves to a New York City boarding school at age eleven, then 

to New York university and rents a flat at age 18, and buys a house at age 25 

with his wife. He takes a job with ABC New York when aged 50 and gets a 

divorce at age 55 when he is sent to the UK for a 5-year secondment. Whilst 

here in the UK, he sells his New York home and puts the money in the bank 

account in Jersey, and his goods are in storage in Texas as he is buying a 

new home in either Texas or Florida to retire to after the secondment is over. 

He makes a will with his parents’ lawyers in Vermont before coming to the 

UK. He has children in California and an ex-wife in Iowa. At age 58 he is run 

over by a Clapham Omnibus. The house in Texas/Florida is not yet 

purchased. Where is he domiciled 

5.9 Under Vermont law, he will be able to have a valid will as he has no other will 

at the time he writes the will, and he is thus domiciled in Vermont for 

testamentary purposes. However, this does not make him domiciled in 

Vermont as a domicile of choice under UK tax law. 

5.10 According to the HMRC view of the law, his domicile of choice would have 

been New York State (probably when he was 25) but, on arrival in the UK, as 

his domicile in New York State has ceased and he has no other domicile 

within the US (under UK law), he has no domicile of choice. As a result, his 

domicile of origin in the UK is restored. 

5.11 Can this be right Logically no, but that has no place in tax law. Strictly yes, 

if the state is the basis of domicile for tax and not the country. 

5.12 Interestingly, there is a Double Taxation Agreement between the US and the 

UK, for UK Inheritance tax and US equivalent taxes, which is an agreement 

between the US federal government and the UK Government. It refers within 

the agreement to being domiciled in the US and the UK, and even applies tie 

breaker provisions to determine which country takes precedence in the event 

of someone’s being domiciled in each country under the domestic laws of 

each country. If you cannot be domiciled in “the USA” according to the UK tax 

authorities, how can there be a Double Taxation Agreement providing for 

such a situation entered into by the UK Government through its then agent, 

the Inland Revenue 

Proposal 

5.13 The common sense proposal would be to have the UK HMRC recognise that 

there is only one set of laws as regards taxation, and that is the country laws 

which relate to taxation, ie UK law, US law, etc. There is no English, Scottish 

or Northern Irish tax system at the moment, although there are provisions for 

a Scottish income tax. Therefore, in the example above, Mr A should have a 

domicile of choice in the US, as his will is drawn up in Vermont, on the basis 

that he is, has been and wants in the future to be a US citizen living 

permanently in the US except for temporary absences. 



6 Issue 6: Economic Employer Test - Treaty claims under Article 15 

6.1 The issue here is whether the so-called “economic employer test”, announced 

by the UK Government as its interpretation of the OECD model treaty rules, 

can apply to treaties agreed “before” the latest changes were announced. 


6.2 The sole piece of legislation that exists for income tax is ICTA 1988 section 

788. It basically says that Her Majesty may by Order in Council declare that 

arrangements made in a Double Taxation Agreement with another country 

shall have effect. The arrangements have to meet the conditions set out in 

section 788(3) which provide, so far as they affect expatriate employees: 

a) for relief from income tax; 

b) for charging the income from UK sources on persons not resident in the 

UK; 

c) for determining the income attributed; and 

d) for conferring a tax credit under ITTOIA 2005 section397(1). 


6.3 Practice varies depending on the accounting firm, and there is no agreed 

practice within HMRC as it has been possible to do a compromise deal on the 

issue. There are two main areas of difficulty surrounding when a treaty claim 

under the relevant bilateral equivalent of Article 15 of the OECD model will be 

allowed by HMRC. 

6.4 The main area frequently debated is whether there is an Economic employer 

in the UK such that the provisions of Article 15(2) cannot apply. 

6.5 Article 15 (2) broadly gives exemption from tax in the UK for income earned 

by a person who is for the purposes of the treaty a non resident of the UK and 

a resident of the treaty partner, provided they meet three conditions set out in 

Article 15(2). These are: 

a) that the employee is in the UK for less than 183 days in whatever 12- 

month period the treaty specifies (it varies from treaty to treaty); 

b) that the employee is paid by or on behalf of an employer that is outside 

the UK; and 

c) that the earnings are not recharged or borne in the UK to a permanent 

establishment of the employer. 

I have loosely translated the words, but they reflect most treaties. 

6.6 To say there has been much debate on the meaning of the word “employer” 

in Article 15(2) condition 2 would be a gross understatement. The OECD is 

still issuing refinements on the exact application of the Model Treaty and the 

extent of the application of Article 15. 



6.7 Herein lies the problem. The tax law in the UK is set by Parliament in an Act 

of Parliament. That law cannot be changed by the OECD. Only Her Majesty 

may do that, by revoking the Order or amending its terms. It is accepted that 

the ECJ may interpret UK law when there are conflicts between UK law and 

European law that the UK has signed up to implement (eg the Treaty of 

Rome), but this does not affect the interpretation of Article 15. 

6.8 For many years, therefore, professional advisers interpreted Article 15 to 

mean that the word “employer” had to have the legal definition of the word 

under UK law, as there is no definition of the word “employer” within the 

treaty. 

6.9 Applying that concept, anyone seconded to the UK for a period which 

amounted to less than 183 days in the relevant period was entitled to claim 

relief from double taxation by claiming exemption from UK tax. 

6.10 In June 1995, HMRC announced in Tax Bulletin 17 the introduction of a 60- 

day rule for Article 15. There was no backing change in legislation. In July 

1996, Dawn Primarolo (Financial Secretary to the Treasury) announced in 

Parliament that the treaty was to be interpreted as though the word 

“employer” was meant in the economic sense, and held that those in the UK 

for less than 60 days but payrolled from their home location would not be 

employed in the UK for the purposes of the treaty. The position between 61 

days and 183 days was left unclear, although HMRC interpreted it to mean 

that, after 60 days, there would be a presumption of a UK employer. Tax 

Bulletin 17 contained the following: 

“The United Kingdom is a member country of the OECD and the terms of 

modern United Kingdom Double Taxation Agreements, including the 

condition concerning payment of remuneration, are based on the OECD 

Model Convention. The Revenue seeks, as far as possible, to apply 

Double Taxation Agreements consistently with the guidance in the 

Commentary on the Model Convention. Consequently, the Revenue now 

intends to take an approach consistent with the guidance in the 

Commentary on the Model Convention in cases where remuneration is 

paid by a non-resident but the cost of that remuneration is borne by an 

"economic employer" in the United Kingdom. Inspectors dealing with 

claims to exemption from employees who commenced a work assignment 

in the UK after 1 July 1995 and with all claims for 1996-97 onwards, will 

take into account the terms of the Commentary on the OECD Model 

Convention. They will not accept claims where the cost of an employee's 

remuneration is borne by a United Kingdom company which acts as the 

"economic employer".” 

6.11 HMRC followed it up in Tax Bulletin 25 with the following: 

“In July this year, in response to a question during a Standing Committee 

debate on the proposed UK/Argentina Double Taxation Agreement, the 

Financial Secretary to the Treasury provided useful clarification of the 

circumstances in which a UK company might be regarded as an employer 

in the absence of a formal contract of employment between the employee 

and the UK company. The Minister indicated that the Inland Revenue 

would not consider that a short term business visitor was sufficiently 

integrated into the business of a UK company for it to be regarded as the 

employer where the employee concerned is in the UK for less than 60 



days in a tax year and that period does not form part of a more substantial 

period when the taxpayer is present in the UK.” 

6.12 As HMRC always make clear, Tax Bulletins are just their view of the law. It is 

not necessary for anyone to accept this view. However, anyone taking a 

contrary view would have to disclose a departure from this view (or risk a 

discovery assessment for the next five years and ten months) and also a 

challenge through the Courts. 

6.13 It is astonishing that ten years later we have no general acceptance from the 

tax profession of HMRC’s view. It is certainly my view that HMRC are wrong. 

Why 

a) Section 788 is the law. It states that, if Her Majesty makes an Order in 

Council, then the arrangements in that Order shall have effect. 

b) Double Taxation Agreements are Orders in Council. Once the Order is 

made, then the arrangements in that Order are law. 

c) The Double Taxation Agreements do not carry a definition of “employer” 

within Article 15, so it is up to the Courts to determine what the meaning 

of the word is under UK law, which would be tax law if there were any tax 

law precedent, or under general law if there were no precedent. (It would 

not be unkind to say the Courts are undecided on the vexed question of 

who is the employer - see Issue 2 above.) We are equally unclear as to 

whether there is an employment or self-employment in many cases. 

d) There is no general law that provides a definition of the word “employer”. 

The law is not created by a statement by the FST in a parliamentary 

debate, although this can be regarded as an expression of wishes. 

e) In the absence of any change to the law, the law applying to the DTA 

when it was made must prevail until it is changed. 

6.14 Given such imprecision, it is surprising that HMRC have such a clear view of 

the meaning of the term “employer”, and have done for so many years, and 

unsurprising that large employers with many expatriates are reluctant to 

accept the nominal 60-day test. 

Proposal 

6.15 There is such a wide variety of views that it is difficult to see any approach 

that would make a hit in all quarters. However, this is an area where there 

would be some merit in having a workshop approach, and inviting affected 

employers to air views to see whether some acceptable middle ground could 

evolve. 



7 Issue 7: Foreign tax credit 

7.1 The issue here is how you calculate a foreign tax credit given that there is no 

defined or accepted method for calculating the foreign tax credit and, as a 

result, there are numerous ways of calculating what the foreign taxes eligible 

for credit should be. 


7.2 ICTA 1988 section 788 applies for any individual who wishes to reduce his 

UK tax on doubly taxed income. The legislation enables Double Taxation 

Agreements to be effective, provided they have been introduced by Order in 

Council or in effect, a Statutory Instrument. The law is therefore open for the 

Government to write as it sees fit, provided it is enshrined in a Statutory 

Instrument. Relief can be given either by exempting income from UK tax or 

by giving credit for tax paid elsewhere. 

7.3 The Statutory Instruments invariably introduce the wording of the Double 

Taxation Agreement, so the Double Taxation Agreement is the law. 

7.4 However, the legislation recognises that there is not a DTA with every 

country, not least because new countries are being formed. Therefore ICTA 

1988 section 790 provides for unilateral relief to be given by the UK. 

Unilateral relief is only given by way of tax credit relief. 

7.5 It is always possible for unilateral relief to be applied to a country where there 

is a Double Taxation Agreement, if that Double Taxation Agreement does not 

provide for credit relief and it would be beneficial to claim relief in that way. 


7.6 If there was ever a topic that I have struggled more with, I have forgotten it. 

The way in which a tax credit is calculated causes enormous debate and 

numerous solutions, and not just within the same firm. I have seen my own 

solution change with the years. 

Double taxation arises in a number of ways: 

a) When the expatriate is dually resident and so paying tax in both countries 

of residence; 

b) When the expatriate is resident in one country but working in another 

country, and the country of residence taxes on a worldwide basis (eg the 

UK), and the country where the work is performed taxes regardless of 

residence, even for one day’s work (eg the UK); 

c) When the employment contract is between an employer and employee 

based in one country, and the employment is exercised in another country 

(eg Brazil taxes if the employer is Brazilian) and the jurisdiction authorises 

a withholding tax. If home country taxation is effectively a “payroll tax”, it 

gives rise to the issue of whether a tax credit is available as the tax is paid 

by the employer not the employee. This affects Singapore, Brazil and 

taxes like the Fringe Benefits Tax in Australia. 



d) When the employee is a US citizen and is taxed on the basis of 

citizenship and also works in the UK. The US is reserved for special 

comment as it taxes its citizens on a worldwide basis regardless of source 

or residence. The interaction between the US and the UK is the subject of 

a research topic on its own, and is not fully covered here. More details can 

be found in the excellent Tax Bulletin on this issue: see 

http://www.hmrc.gov.uk/bulletins/tbse6.pdf 

7.7 The principle of tax credit relief is simple and obvious. When you pay tax in 

the UK and another country on the same income, one country should allow a 

credit for tax paid in the other country. However, there are two big issues 

here. Who gives credit to whom, and how do you calculate the tax that is 

available for credit 

Who gives credit 

7.8 After years of debate, it is now almost universally agreed that the country of 

residence, if it taxes employment performed in another country, should give 

credit for tax paid in the workplace country in respect of work performed in 

that country. 

7.9 Whilst there is some argument about how to determine the earnings to 

attribute to working for any particular day, or whether you are working solely 

for the benefit of the UK employment when you are in the UK, the general rule 

is that, if you spend a working day working in the UK, then that is UK-sourced 

employment and subject to UK tax. The UK, as source country, does not give 

credit. 

7.10 When an employee is seconded to work in the UK and works in another 

country for a day and pays tax there for that day’s work, the tax on that day’s 

work (in the country of source) should be offset against UK tax due on the 

same income (as the country of residence). The tax credit is only available if 

the UK taxes that income as well as the country of source. 

7.11 For UK ordinarily resident taxpayers, the UK taxes on a worldwide basis, so 

credit would be due as taxes would be paid in the UK. If the taxpayer is not 

ordinarily resident, then UK tax would only be due if the income were remitted 

to the UK. 

How to calculate the credit 

7.12 Calculating the UK tax on a slice of income which is doubly taxed causes only 

two calculations to be considered. The first is called the top slice tax, and this 

calculates the tax at the highest marginal rate in the UK. The second is the 

average rate method, and is effectively a proportion of the total tax due on 

total income, applying that average rate of tax to the doubly taxed income. 

The current practice is to take the top slice, and for many expatriates that will 

be at the higher rate of 40%. By definition, average rate tax must be lower 

than the top rate of tax, as the UK tax rates on individuals are progressive. 



7.13 Calculating the foreign tax on the same, doubly taxed income creates the 

following issues: 

a) The UK tax year is almost always different to the foreign tax year so, 

unless the income is a payment on a specific date, then there will be two 

foreign tax years to take into account in order to calculate the tax rate 

applicable to the doubly taxed income. 

b) The other country may not tax it the same way, eg it could be income tax 

here and capital gains tax there. 

c) The countries may tax it at different times, so claiming a tax credit cannot 

always be done contemporaneously. 

d) There is the issue of using either the tax rate of the top slice of income or 

average tax rate in the foreign country on all income. 

e) When calculating the average tax rate in the other country, there is the 

issue as to whether you take foreign tax credits into account when 

calculating the numerator of the equation tax paid/taxable income. 

7.14 To fully appreciate the problems, we should examine the problems above in a 

little more detail. 

a) Different tax years 

7.15 The main problem here is that each tax year may not be affected in the same 

way. For example, if a US employee has a salary of £1m in 2005 coupled 

with a farm loss of £1m, he would pay no US tax; if he has a salary of £1m 

and a bonus of £10m taxed in calendar year 2006 but relating to 2005 and a 

salary of £1m and no bonus in 2007, then a UK tax charge on the bonus paid 

in March 2007 would be given a tax credit based upon three-quarters of 

2006/7 and a quarter of 2005/6, whereas a bonus paid in May 2007 would be 

based upon a credit of three-quarters of 2006 and a quarter of 2007. The tax 

paid is identical in home and host country, but the credit could be different. 

b) Income taxed differently 

7.16 This causes two sorts of problems. The first is where there are two different 

taxes applied to the same income. For example, some share scheme income 

is taxed as capital gains or as income, so it is possible for one country to tax 

the income and another to tax the same quantum as gain. Having capital 

gains tax involved throws up the problem that the spouses may make 

transfers to each other of assets which give no tax charge so a transfer from, 

say, H to W followed by a sale by W could give a tax charge on H as income 

and on W as gain. The follow-through rules of tax credit do allow for this, and 

the position is hinted at in Statement of Practice 6/88 paragraph 3 which 

outlines the principle thus: 

7.17 “The principal requirement for the granting of credit … is therefore that the 

overseas tax should be computed by reference to the same gain as the UK 

tax. There is no requirement that the respective tax liabilities should arise at 

the same time or that they should be charged on the same person.” 



7.18 Although the SP is solely to do with CGT, the principle of comparing tax 

against tax when computed by reference to the same quantum, be it income 

tax, capital gains tax or even payroll tax, is clear. However, it is not clear that 

relief will always be given on an equitable basis if there is tax in two or more 

jurisdictions based solely upon SP 6/88. 

7.19 A far more tricky issue for the expatriate is the fact that the tax rules drawing 

up the taxable amount of income will differ between countries. An example is 

the fact that the taxable income in the home country may be reduced for, say, 

alimony and pension scheme deductions, neither of which would attract tax 

relief in the UK. It would be logical to ignore such factors but, strictly 

speaking, they should be taken into account. 

c) Taxed at different times 

7.20 Because the tax has to be paid in order for there to be a credit against UK 

tax, there will always be a delay and extra administration for expatriates 

working in the UK. This is especially so when the tax payment dates differ 

between the UK and the other country. Income received in March 2006 will 

be paid as PAYE in the UK, and any balance due is paid with the tax return in 

January 2007. The US tax will be paid when the 2006 calendar year tax 

return is filed, and this could be as late as January 2008 depending on when 

the expatriate has arrived in the UK and filing extensions. It is worthy of note 

that US expatriates get an extension in filing their first year’s return until 13 

months after the end of the tax year, something for the Carter Report review 

team to consider. 

d) Top slice or average rate for the home country 

7.21 The rate of tax which is applied to the home country income can make a 

material difference to the level of tax relief granted. Where countries have 

higher marginal rates than the UK, the relief can be calculated easily by 

reducing the effective rate to 40%. But where the rates start low and finish 

above 40%, the calculation is not so easy. Rates change all the time around 

the world, so a fictitious set of rates shows the principle. 

UK 

First £5,000 0% 0% 

Next £2,500 10% 10% 

Next £2,500 20% 10% 

Next £10,000 20% 15% 

Next £10,000 20% 20% 

Next £25,000 40% 25% 

Next £50,000 40% 30% 

Balance 40% 35% 

Otherland 



Average tax versus top slice tax on UK 

Slice Tax Average Top 

£10,000 £750 7.5% 10% 

£20,000 £2,750 13.75% 20% 

£30,000 £4,750 15.83% 20% 

£40,000 £8,750 21.87% 40% 

£50,000 £12,750 25.5% 40% 

£100,000 £32,750 32.75% 40% 

Average tax versus top slice on Otherland 

Slice Tax Average Top 

£10,000 £500 5% 10% 

£20,000 £2,000 10% 15% 

£30,000 £4,000 13.33% 20% 

£40,000 £6,500 16.25% 25% 

£50,000 £9,000 18% 25% 

£100,000 £23,750 23.75% 30% 

7.22 What the tables above show is that the average rate of tax may be 

significantly lower than the top slice rate of tax. It means that, if you used the 

top slice rate in the UK but the average rate in the Otherland, the tax credit 

will always be limited to the Otherland average rate as it is much lower. 

e) When calculating the average rate in the foreign country, do you take 

account of foreign tax credits which may be deductible in calculating the 

effective rate of tax 

7.23 The issue here is that the US expatriate working in the UK usually has income 

sourced to the UK. If there is income sourced to the home country which is 

taxing on the basis of residence or citizenship, then it may allow any UK tax 

on UK-sourced income to be deducted against the home country tax liability 

arising on any foreign (to the US) income. Taking the average rate as being 

the taxes due as a percentage of the total taxable income, and the tax before 

FTC as 30% but after FTC 5%, then the average rate of tax could be less 

than 5%. The example below is grossly simplified. 

UK 

Otherland 

Taxable income (90% UK – 10% Other) 90,000 100,000 

UK/Other taxes 29,000 23,750 

Less FTC offset (21,000) 

Actual Taxes due to be paid 2,750 



The UK FTC could be: 

a) Average rate of 2,750/100,000 ie 2.75% 

b) Average rate of 23,570/100.000 ie 23.75% 

c) Top slice rate of 30% 

d) Top slice rate of restricted to taxes actually paid on doubly taxed income 

ie 2,750/10,000 ie 27.5%. 

7.24 One can easily imagine the additional complexities caused by considering all 

the factors together, but resolving them into an easily understood and applied 

methodology has been beyond the wit of most, including me. 

Proposal 

7.25 In view of the complexity involved, this is the perfect topic for a working party 

to be drawn up to produce a simple working solution that is acceptable to 

HMRC. 



8 Issue 8: Garden leave and holiday pay 

8.1 These are relatively modest issues, and the obvious question is whether 

these two items are taxable in the UK when paid after departure from the UK 

or upon a termination in the UK. 


8.2 The main charging section is ITEPA 2003 section 62. ITEPA sections 21 and 

22 apply the concept of “chargeable overseas earnings for non-UK 

domiciliaries”. Section 21 provides that the full amount of any general 

earnings for a tax year in which the employee is resident and ordinarily 

resident are taxable, unless they are exempted from being charged under 

section 21 (on an arising basis) and are instead charged under section 22 (on 

a receipts basis). Section 23 provides the calculation of what is taxed under 

section 22, leaving the rest to be taxed under section 21. Finally, section 24 

provides the anti-avoidance legislation against dual contracts. 

8.3 Most R/OR expatriates have a single contract and thus, where there are UK 

and non-UK duties in the same contract, the whole of the earnings is taxed in 

the UK. 

8.4 ITEPA section 25 applies to expatriates who are not ordinarily resident, and 

has the specific wording that the general earnings which are taxed in the UK 

on an arising basis are those which are “in respect of duties performed in the 

United Kingdom”. This expression is not defined in law, but there is a 

Statement of Practice which sets out the HMRC interpretation of this 

expression (SP 5/84). It is time for a fresh look at this, and undoubtedly this 

would be done as part of the HMRC review of residence and domicile. 


8.5 Ordinarily resident employees not domiciled in the UK. 

Garden leave 

8.6 Garden leave is broadly a payment to an employee to represent his earnings 

for the balance of his employment from when notice is given to the date of 

cessation of employment, notwithstanding the fact that he will actually 

perform no duties of the employment. The amount of the garden leave 

payment is determined by the level of current earnings and the time spent on 

garden leave. In effect, it is earnings for the garden leave period, but not 

earnings for duties performed in that period as there are none. It has nothing 

to do with the length of service, although in practice it is related to the 

seniority of the person. 

8.7 If the garden leave time period is spent in the UK, then the earnings are 

clearly UK-based, regardless of when the payment is made. 



8.8 If the employee returns home during the garden leave period and the 

payment is made at the end of the garden leave period, then the payment 

relating to the period after the departure from the UK will not be taxed in the 

UK as it will not be earnings from a UK employment. ESC A11 will treat the 

period after departure as being a period of non-residence, and thus the 

earnings will no longer be caught by section 21. However, the payment that 

is attributed to the period of garden leave spent in the UK would be taxable. 

8.9 To the extent that the payment of garden leave is paid to someone who is in 

the UK at the time of payment but not throughout the basis period relating to 

the source of that payment, then, as the earnings do not relate to duties 

performed outside the UK (required for exemption by section 23(2)(c)), the 

payment is wholly taxable. 

8.10 If the person returns home before garden leave commences and also before 

payment, and is thus not resident at the time of payment, we return to the 

question of whether the payment is from a UK contract or from an overseas 

contract. As we have just seen, the exemption of section 23(2)(c) is not 

available, so the payment is taxable, and so the reliance is again on ESC 

A11. As the payment for the period after departure is now for a split tax year 

when the individual is not resident and not ordinarily resident, the payment 

would be free of UK tax. 

Holiday pay 

8.11 Holiday pay entitlement should accrue evenly over the annual pay period so, 

in most cases, taxability will depend on the last 12 months, or less, up to 

termination, provided all annual holidays are being taken. If the employer 

allows holiday pay to roll forward to subsequent pay periods, a problem of 

identification exists. Suppose an expatriate arrives in the UK with a holiday 

entitlement of 47 days. He is terminated two years later when his holiday pay 

entitlement is 50 days. Arguably, the additional three days are the only days 

that have accrued to the expatriate whilst working in the UK, and so they are 

the taxable amount. However, there is no FIFO (First In First Out) rule. 

8.12 The main reason for this is the fact that holiday pay is only ever “paid” when 

the person is terminated. Usually it is pay for the period when holiday is 

taken. In practice, for normal expatriates, no account is taken of holiday pay 

accrued on arrival or departure. I do not know if HMRC would accept that, on 

average, most people will take their holiday entitlement, so that there is no tax 

to be gained by pursuing the individual expatriates. They would be entitled to 

do this under their powers of care and management. The fact remains there 

is no statutory basis or published concession for holiday pay. 

Current practice - Not Ordinarily Resident (NOR) but resident expatriates 

8.13 The position here is different, in that an NOR expatriate is usually taxed on 

his earnings in accordance with SP 5/84. On termination, the holiday pay and 

garden leave should be identified and separated from the termination 

payment as they will be taxed as ordinary earnings under ITEPA section 62 to 

the extent that they represent earnings for UK duties performed in the UK. 



Garden leave 

8.14 The paradox here is that garden leave is normally regarded as being 

earnings for performing no duties at all. Whilst the person is in employment, 

and is available for duties if required, in practice, most terminated employees 

on garden leave do tend the grass, be it on a golf course or in a garden. 

8.15 The interesting thing about ITEPA section 26, which defines what foreign 

earnings are for an NOR person, is that the earnings do not have to be for 

working outside the UK. Although the heading to section 26 says “Foreign 

earnings for year etc”, the section merely defines them as general earnings 

other than general earnings in respect of duties performed in the UK. It 

follows that, if the person is performing no duties whatsoever, they would be 

brought into the definition of section 26 as foreign earnings. 

8.16 The tax case of Dixon v Robson (48TC527) is not on all fours with garden 

leave, as that was the case where payment for rest days during employment 

was considered. In that case there was the continuing employment to 

connect the general earnings to. In the case of a termination of employment, 

the only “nexus” to attach the general earnings to is the termination of the 

employment and the period of garden leave. 

8.17 Whilst it is self-evident that an expatriate who returns to his home country 

during the garden leave period will not be taxed on the garden leave 

attributable to the post departure period following ESC A11, there is a good 

case to argue that, even if the period is spent in the UK, it should be not taxed 

on an arising basis. It will be evident that, under section 25, tax is due on the 

remittance basis, so that, provided the payment is kept outside the UK, it will 

not be taxed in the UK. 

Proposal 

8.18 As these are relatively mundane and small amounts, an agreed basis for 

taxation could be put into a Tax Bulletin and then placed in the appropriate 

HMRC manual. Obviously, the most appropriate tax manual would be the 

expatriate tax manual. 



9 Issue 9: Hypotax and other hypo-ductions 

9.1 The issue here is about how and where you deduct hypothetical tax (“hypotax”) 

and hypo-social security deductions from earnings subject to UK tax. 

This issue only affects expatriates who are tax-equalised in the UK. The 

issue is what the “net taxable earnings” which are required to be grossed up 

are. 


9.2 There is no statutory reference to grossing up for tax. There are two main tax 

cases, Hartland v Diggines (10 TC 247) and North British Railway v Scott 

(8TC332), which do no more than reflect common sense. They confirm that if, 

as an employer, you make a payment of earnings, you have a statutory duty 

to deduct PAYE (and NIC). Therefore, when you make a payment to an 

employee, it is deemed to be net of tax (and NIC), and you will be required to 

pay that tax (and NIC) to HMRC in accordance with the PAYE regulations. 

9.3 There is, however, a statutory reference to what earnings you will pay tax on. 

This is found in ITEPA sections 21(2) and 25(2), which confirm that tax is paid 

only on what is received in the tax year. 


9.4 The process and management of hypothetical tax deductions is complex and 

varied and, to a certain extent, depends upon each company’s policy. As 

such, it is beyond the scope of this paper. However, some basics are 

required to appreciate this issue. 

9.5 Whenever an expatriate is tax-equalised, the employer calculates what tax 

would have been paid had the employee stayed at home on home earnings 

and delivers that net of home tax to the employee. That tax is called the 

hypothetical tax – hypothetical because it is usually not the tax that is actually 

paid to either the home or host tax authorities. 

9.6 On assignment, the expatriate receives net of tax the normal home pay 

reduced by the hypothetical tax, plus additional allowances that relate to the 

expatriate and the location he has been moved to. These are usually paid net 

of home country tax and host country tax. The hypothetical tax is not actually 

collected, as such; it is merely an adjustment to the theoretical “stay-at-home” 

gross pay to arrive at the net pay that the expatriate will actually receive. 

9.7 In addition, employers provide a wide range of expatriate allowances and 

finally pay whatever taxes and social security are needed to be paid for the 

expatriate in the host country, and usually in the home country as well. There 

are many types of expatriate allowances, and their names vary from company 

to company, but a few examples will give a good grasp of what can be paid. 

Examples include hardship allowance, foreign service premium, higher cost of 

living allowance, foreign housing, education allowance, assignment 

completion bonus, etc. 



9.8 If the expatriate receives bonuses and/or equity-based compensation, that too 

may be subject to hypothetical tax, but less commonly so. If there is a 

hypothetical tax and social security adjustment, it may be an adjustment to 

the specific equity-based compensation or an adjustment to general earnings. 

There is simply no agreed best practice, which makes each client’s case one 

to be decided on the facts. 

9.9 The concept of hypothetical social security is exactly the same as 

hypothetical tax, but not all companies that apply hypothetical taxes will apply 

hypothetical social security, as the expatriate often remains on home social 

security rather than paying UK social security. 

9.10 When hypothetical tax is based upon all aspects of home compensation, ie 

including equity-based income, eg stock options exercises, restricted stock 

awards and Long Term Incentive Plans (LTIPs), some unusual results occur. 

9.11 When calculating what is taxable in the UK for an expatriate, ie what is to be 

grossed up, the hypothetical tax components need to be looked at to 

determine whether they do reduce the income which is to be grossed up for 

UK tax purposes. 

9.12 An absurd example shows how this could be problematic in practice. These 

do happen in reality and, in fact, there are occasions when the income is 

negative. 

Gross pay for year $260,000 

Less hypothetical taxes 

Hypo-tax on base pay $75,000 

Hypo tax on stock option exercise $180,000 

$255,000 

Net pay for year $5,000 

Convert US$ to £ at 1.85 to the £ £2,702 

UK tax is effectively nil as covered by personal allowance. 

9.13 This is, of course, a vastly simplified example as there would be other 

benefits to consider, but the principle is clear. The UK tax is nil because of 

the hypothetical taxes. Can this be true There are two reasons why this may 

be true. 

9.14 First, the UK taxes on a receipts basis as required by ITEPA sections 21 and 

25. If you do not receive emoluments, you do not pay tax. Have you received 

the earnings which have been wiped out by the hypothetical tax deduction 

9.15 ITEPA section 18 provides three rules to determine when an emolument has 

been “received”. 

9.16 Rule 1 is: “The time when payment is made of or on account of the earnings”. 

Clearly no payment has been made, so this rule is satisfied. 



9.17 Rule 2 is: “The time when a person becomes entitled to payment of or on 

account of the earnings”. The question is whether an expatriate who has 

signed up for an assignment and has agreed to the tax equalisation policy 

has agreed to become not entitled to payment of the earnings to the extent 

that they represent hypothetical deductions. Whilst there is room for doubt as 

to whether he has ceased to be entitled to the earnings, it seems entirely 

tenable to argue that, when you have agreed to have your net earnings 

reduced to take account of hypothetical tax, you have agreed that you will not 

be entitled “to receive” those earnings so long as the rules relating to tax 

equalisation as set out in the employment contract or the company policy are 

concerned. 

9.18 I contend that Rule 2 is also capable of being complied with. 

9.19 Rule 3 relates to directors. Virtually all tax-equalised expatriates are not 

directors of companies. They cannot be a director of a UK company and be 

paid net of tax, as that is contrary to section 310 of the Companies Act. They 

would be unlikely to be a director of another company if they are expatriated 

to the UK. However, if they were, then Rule 3 could bite, as Rule 3 provides 

for the earnings to be treated as received on the earliest of the three events 

listed there. Directors are worthy of further examination, but are beyond the 

scope of this paper. 

9.20 So far, we have looked at the adjustment of the earnings by hypothetical tax 

and concluded that it appears to be a valid reduction of the net earnings to be 

grossed up. We now have to look at what actual taxes are being paid in 

consequence of the hypothetical deduction from the earnings. 

9.21 For normal compensation, it is self-evident. However, in the example above, 

there is also the taxation of a stock option exercise. A stock option exercise 

of itself is not necessarily subject to UK tax, especially if it were granted prior 

to arrival. Likewise, an LTIP award that relates solely to service prior to 

arrival in the UK may also have no UK tax attaching to it. However, if the 

income has been brought into the hypothetical tax calculation, then it will have 

been done so on the basis that the home taxation will be borne by the 

employer in exchange for the employee’s paying only the hypothetical taxes. 

As such, the reason the employer pays the home tax on the LTIP is because 

the employee is on assignment in the UK. It means the home country 

taxation should be earnings from the UK employment, and therefore taxed as 

such, “when paid”. 

9.22 There is an argument that, if the underlying stock option is free of tax in the 

UK, then any taxation in the home country can be ignored. This misses the 

point as to why the tax is being paid by the employer. The non-UK taxable 

stock option exercise is a smokescreen. It does not matter what the taxes 

are. If the reason the taxes are being paid is by virtue of the employment 

agreement between the employer and employee, any payment made by the 

employer will be sourced to that employment and will be earnings from that 

employment. 

9.23 It is therefore correct to deduct hypothetical taxes and social security from the 

net earnings subject to gross up where the facts support this. However, it is 

also true that, where there are home country taxes due on items paid by the 

employer and the payment is made by virtue of the UK employment, that 



payment should itself be a payment that is earnings from the UK employment. 

9.24 The practical problem is determining what taxes have actually been paid by 

the employer for the employee in the home country. The employer should be 

able to analyse all payments made to the tax authorities on behalf of the 

employee and determine why it is paying them. There will be two reasons for 

paying the taxes. 

9.25 First, it is obliged to do so under the employment arrangements. If this is so, 

the payment of the taxes will be earnings, as it represents normal 

compensation for employment. 

9.26 Second, it may do so for cash flow reasons, ie it may pay the home country 

taxes initially but expect the taxes to be recouped when the tax year is 

resolved. This process is usually referred to as a hypothetical tax 

reconciliation when the employer accounts to the employee for all the taxes 

paid/refunded and for the hypothetical taxes adjusted when making initial 

payments to the employee. The employer will expect the employee to repay 

any taxes overpaid it on behalf of the employee. In this case, the payments 

are not earnings and should be treated as loans. 

9.27 The problem is that the payments are usually so mixed as to make the 

hypothetical tax reconciliation statement difficult to analyse. 

Proposal 

9.28 Because there are so many possibilities, dependent upon the company 

policy, it makes sense for there to be a Tax Bulletin Article to discuss the way 

in which HMRC expect to see hypothetical tax deductions treated generically, 

coupled with their expectations as to how the underlying taxation payments 

made by the employer should be taxed in the UK. 

9.29 This discussion needs to be with employers and with tax professionals so that 

there is complete understanding of the issue before the Tax Bulletin Article is 

issued. 

The whole of the above discussion has been based upon tax. There is no difference 

in logic or principle to the deduction of hypothetical social security, which should be 

treated the same way. 



10 Issue 10: Incidental duties in the UK 

10.1 The issue here is that there is no statutory definition of the expression 

“incidental duties in the UK”, making it difficult to know when they are taxed. 

This means spending one day in the UK could mean UK taxation (subject to 

the possible treaty claim) and thus the operation of PAYE and NIC. This 

definition also crops up in so-called “dual contracts”. 


10.2 ITEPA section 39(1) describes an incidental duty only for the case where the 

employment is “in substance one whose duties fall to be performed outside 

the UK”. 

10.3 In section 39(2), it deems duties of the employment performed in the UK to be 

performed outside the UK if they are “merely incidental” to the performance of 

the duties outside the UK. 

10.4 What does “incidental” mean 

Case law 

10.5 The only case law we have is Robson v Dixon (48TC527), and this case 

concerned an airline pilot who had 38 takeoffs and landings in the UK over a 

long period. The Courts judged that each takeoff and landing was of equal 

merit, and therefore none could be incidental. (HMRC have since granted an 

ESC (A10) for a single takeoff and landing, presumably to cover emergency 

landings). 

10.6 The case did introduce the expressions of coordinate duties and subordinate 

duties. In broad terms, if you are doing in the UK exactly what you would do 

outside the UK the duties are coordinate, ie of equal value and thus not 

incidental. 

10.7 The problem with each person’s job is that it is almost impossible to 

determine what is incidental. Every sales lead may be important. Every staff 

counselling session could be critical. Determining the position for each 

employment is effectively a question of fact and degree, ie it takes a Court to 

decide whether the duties are incidental. 

10.8 Booklet IR20 paragraph 5.8 confuses the position by saying that training is 

not regarded as being coordinate, but can be incidental if the time spent is 

less than 91 days a year. As employers regard training as a vital function, this 

seems an extraordinary statement to make. 


10.9 Since the introduction of the EU and the freedom of movement of people, 

there are vast numbers of people who arrive in the UK for work purposes. 

They may work here for a day or longer but remain on home country 

employment terms, payroll, etc. They simply come to the UK to work. 

10.10 If the visit is just for a day and it is not an incidental duty, then the employer in 

the UK is required to deduct PAYE and pay that over to HMRC. Who is the 

employer ITEPA section 689 makes it clear that the person that the 



employee is working for is the employer for PAYE purposes. 

10.11 For one day, it is likely that few “notional employers” in the UK would be 

aware of the requirement to operate PAYE. 

Proposal 

10.12 A logical interpretation would be to state that, if the substance of the job was 

not based in the UK, then the occasional duty performed in the UK will be 

ignored up to a de minimis limit, say 20 workdays in each tax year. By making 

the determination mathematical rather qualitative, then the debate over 

whether a day in the UK counts or not is removed. In addition, each part-day 

in the UK can be counted as one day, so there is no need to bother about 

timings. 

10.13 If necessary, there could be a special rule for directors, whose earnings could 

be substantial. 

10.14 The issue of tracking such people on their visits to the UK is still there but, if 

the taxation is now simple, then employers would be able to implement 

tracking systems for employees without having to consider whether each 

individual day consisted wholly or partly of incidental duties. 



11 Issue 11: Judicial approach to IR20 

11.1 The issue here is the lack of statutory definition combined with the fact that 

HMRC guidance, which is to be found in IR20, is not binding in law, ie the 

Courts are not required to apply IR20. 

11.2 None 



11.3 The fact that “experts” still write long and detailed books on this topic shows 

that the issue of determining residence (along with ordinary residence and 

domicile) is far too complex for the expatriate taxpayer to determine in many 

situations. Whilst the majority can make a determination relatively easily, 

there are still very many taxpayers who cannot determine their residence 

status, let alone their domicile or ordinary residence status, without guidance 

from a tax expert. 

11.4 The only guidance available from HMRC is the booklet IR20. The wording in 

the Preface to IR20 is most illuminating. It states that, “the notes in IR20 

reflect the law as it stood in 1999”. However, it follows up with, “They are not 

binding in law and do not affect rights of appeal about your own tax.” 

11.5 If you have difficulty in understanding the details within IR20, help is at hand, 

as the Preface states that, “If you have any difficulty in applying the rules in 

your own case, you should consult an Inland Revenue Tax Office.” 

11.6 The problems with this are many and obvious: 

• IR20 is out of date, and does not provide guidance in all cases, in 

particular - 

• It does not provide a guide for the taxpayer to overcome the lack of 

statutory definition of the terms residence, ordinary residence and 

domicile. 

• It also does not address the issues listed in this paper. 

• Its legal status is shown in the preface to be invalid, so whatever guidance 

it does give is not binding. 

• The staff at the local offices often cannot help as they do not have the 

relevant experience or expertise. 

11.7 The case of R v Inspector of Taxes (ex parte Fulford-Dobson) (60TC168) 

made it clear that the Courts would pay heed to the wording on the cover of 

the booklet IR1, which made it clear that the Inland Revenue had the right not 

to apply an ESC where the circumstances did not meet the ESC exactly. 

However, the judges did not feel constrained to apply the wording of the 

booklet as it was not the law. 

11.8 The corollary established for expatriates is that the law is as it is written and 

the taxpayer cannot rely upon non-statutory provisions, such as booklet IR20. 



11.9 Given that the wording in the preface also has the comment that, “whether the 

guidance is relevant in any case will depend on the facts,” is effectively saying 

that IR20 will not be binding in any case, unless the facts fit the guidance, in 

the view of the Inspector of Taxes. In effect, the Inspector’s view will usually 

be binding, as the only recourse is to appeal to the Courts. 

11.10 Going through the Courts to understand what the legislation is driving at will 

only be possible where the tax at stake is sufficiently large to make it 

worthwhile either for the single taxpayer, or if the issue is sufficiently common 

so that that taxpayers’ agents club together to bring the case to Court, for the 

good of taxpayers as a whole. 

Proposal 

11.11 The call for a rewrite of IR20 has been coming from many quarters for a long 

while. The booklet is relatively old, and has dated. More importantly, it has 

never been accepted as being the provider of the bulk of the answers that 

expatriate advisers look for, other than some basics on residence and 

ordinary residence. 

11.12 Although expatriates are a small population compared to the 37 million 

taxpayers estimated for the UK, they are an important part of that population, 

as increasing numbers of taxpayers are not domiciled in the UK, and 

expatriates do pay significantly more tax, on average, than the 37 million nonexpatriates. 

11.13 The logical conclusion would be for HMRC to rewrite the booklet IR20, having 

first consulted widely with the professional bodies that represent expatriate 

taxpayers. The new IR20 needs to be publicised with a guidance note that 

has numerous examples that clarify all current unresolved issues within 

expatriate tax. Such a note should be designed to ensure a taxpayer can 

complete his SA return based upon this guidance, which should therefore: 

a) represent the current accepted view of the law as it is applied to 

expatriates; 

b) be followed by “all” HMRC offices; and 

c) be accepted by HMRC as binding if a taxpayer has made full disclosure of 

all the relevant facts in his return and has followed the guidance note. 

11.14 For the last two years, HMRC have said they are unable and/or unwilling to 

make any changes, whilst HM Treasury is reviewing the issue of residence 

and domicile. This ignores the issues facing expatriates, which is that they 

cannot complete their tax return accurately unless they have better guidance 

on these terms. That should be sufficient reason for HMRC to act and revise 

IR20. 

ADDENDUM 

11.15 Since this report was finalised, the Special Commissioners’ case relating to 

residence (SpC 0568) has confirmed that the Courts will ignore IR20 as it has 

no place in the law. In the interests of certainty, both HMRC and taxpayers 

could do with some statutory intervention in this area. 



12 Issue 12: Mobile workers regime; 

12.1 The issue here is allied to the issue of residence (and the application of IR20) 

to workers temporarily assigned to or from the UK. It was triggered initially by 

UK nationals who are lorry drivers, who have their family home (and family) in 

the UK but work wholly outside the UK. Such people can be technically not 

resident in the UK. The Inland Revenue (as they were) refused to accept 

most claims, saying they would follow up with a detailed explanation of why 

the claims would fail. They have never followed up with any clarification of 

when a mobile worker will be regarded as resident in the UK. 

12.2 This affects not just British lorry drivers but also all workers who work in the 

UK and outside the UK where the majority of their working time is outside the 

UK but they live in the UK. 


12.3 ICTA 1988 sections 334, 335 and 336 are the only references to residence. 

12.4 Section 334 deals with a Commonwealth or Irish citizen who leaves the UK 

“for the purpose only of occasional residence abroad”. There is no definition 

of the term “occasional residence abroad”. 

12.5 Section 335 deals with people who work “full time” outside the UK and have 

“No duties” performed in the UK. If you meet this condition, then you can 

have your residence determined without regard to the fact you have an abode 

in the UK. 

12.6 Meeting the condition of “no duties in the UK” would be impossible if there 

was any function of the employment whatsoever, so subsection 2 carries the 

familiar “incidental duties” exclusion. This ignores purely incidental duties in 

the UK, thus allowing an expatriate to meet the 100% duties performed 

overseas requirement. One imagines that receiving orders for the week’s 

work ahead in the UK, followed by travel from the UK overseas to perform 

those duties, would meet this condition. 

12.7 Section 336 deals with those people who are resident outside the UK (without 

necessarily being resident in any particular country) and who visit the UK for 

“some temporary purpose”. 

12.8 Case law has been augmented by a Special Commissioners’ case of 

Shepherd and HMRC (SPC OO484) in June 2005. This contains an excellent 

summary of the law relating to residence. However, the case was fairly 

extreme and, whilst it proves that Mr Shepherd did not break residence and 

so provides a clear ruling for those on all fours, anyone with a different fact 

pattern could still regard themselves as meeting the conditions for being not 

resident in the UK. 


12.9 It will be evident from the Shepherd case that advisers do use the rules in 

IR20 literally to determine residence, and will therefore structure presence 

and absence in such a way that the residence tests of IR20 are not met. 



12.10 In the absence of a statutory test for residence, and with the only guidance to 

be found in IR20, most advisers would have accepted that Mr Shepherd 

marginally failed his claim for non-residence, and that a closer adherence to 

the wording of section 334 will bring about non-residence for others. 

12.11 International lorry drivers and many others, eg holiday representatives, 

specifically adopted a work pattern to ensure they broke UK residence under 

the rule of counting days in the UK within IR20. Can they succeed 

12.12 As the law on residence changed in 1994-95 when the available 

accommodation rule was abolished, these workers were able to spend less 

than 90 days a year in the UK and thus be not resident in the UK by applying 

the words of paragraph 2.2 of IR20. The rule in paragraph 1.2 of the same 

booklet says you “normally” ignore days of arrival and departure, which 

means a carefully planned work pattern can avoid the residence trap. 

12.13 For example, if you work outside the UK for 45 weeks a year, leaving the UK 

Monday morning and arriving back Friday night, and spend seven weeks a 

year holidaying outside the UK, you will not meet the 90-day residence test as 

your presence here, at 90 days a year (45 weeks at 2 days a week), is just 

less than the 91 days a year average discussed in paragraph 2.2 of IR20. 

12.14 The HMRC response to such (in their view) deliberate tax avoidance 

manoeuvres was to draw up a list of features that they expected taxpayers to 

consider and interpret in order to determine whether taxpayers meet the 

conditions. In Tax Bulletin 52 they said: 

“Paragraph 2.2 explains a long-standing Revenue practice in the case of 

individuals who go abroad for full time employment. They are treated as 

not resident and not ordinarily resident from the day after their departure 

if: 

• they have left the UK to work full time abroad under a contract of 

employment, and 

• their absence from the UK and the employment abroad both last for at 

least a whole tax year, and 

• during their absence any visits they make to the UK total less than 183 

days in any tax year; and average less than 91 days a tax year over 

the period of absence up to a maximum of four years. 

“All these conditions must be met for this practice to apply. It is not sufficient 

merely for the day counting tests to be met.” 

12.15 Whilst Mr Shepherd (above) did not meet the conditions as he did carry out 

duties in the UK (the takeoffs and landings being held to be so in Dixon v 

Robson) the lorry drivers who work wholly in Europe and the holiday 

representatives who only work outside the UK can still meet the requirements 

above and distinguish themselves from Mr Shepherd. 

12.16 Off-the-record discussions were held with HMRC about the list of criteria they 

had drawn up and when they intended to publish them, but these have been 

deferred until there has been a general announcement about residence and 

domicile. 



Proposal 

12.17 It appears that the current review on residence and domicile has become 

frozen, as at the time of writing, as HMRC are still open to further 

contributions as part of their consultation process two years after the 

consultation period opened. It is therefore unlikely that there will be any 

revision to IR20, or the current rules or impasse. 

12.18 HMRC should at least confirm that Tax Bulletin 52 can be relied upon and 

that, if someone does work full time overseas, and is absent for a complete 

tax year, and they meet the counting test, they will be not resident. 

12.19 Further guidance needs to be provided on the meaning of full time and 

incidental duties, by way of examples, so that a taxpayer can determine 

whether his occasional duties in the UK are also incidental duties in the UK. 

ADDENDUM 

Since completing this chapter, the case of Mr Gaines-Cooper (see above) 

was held to suggest that a taxpayer could not rely on IR20, and in particular 

the counting of days to ignore days of arrival and departure. Whilst this is just 

a Commissioners’ case, meaning it could go the next three Courts before we 

have a final decision, it does show the difficulty of determining issues for 

expatriates. The counting of days ignoring arrival and departure has been a 

practice for many years. This case merely reaffirms the need for certainty 

from the legislators. 



Issue 13: Modified PAYE 

13.1 The issue here is the operation of PAYE and NIC for expatriates 

13.2 The operation in the UK of PAYE and, where applicable, NIC presents 

difficulties for employers, for a variety of reasons. Tax Bulletin 81 brings in 

revised rules for “Modified PAYE” from 6 April 2006 or 2007 (see: 

http://www.hmrc.gov.uk/bulletins/tb81). This is effectively a relaxed set of 

rules for employers of expatriates working in the UK provided the employee is 

fully equalised on his general earnings. The eligible employees are stated to 

be as follows. 

13.3 The revised procedures make it clear that the arrangement does not apply to 

employees who are resident, ordinarily resident and domiciled in the UK. 

Neither does the arrangement apply to employees who are equalised on only 

part of their earnings. For an employee to be included, the employer must 

equalise liability to UK Income Tax on all general earnings subject to the rules 

in ITEPA 2003 Chapter 5 Part 2 applying to employees resident, ordinarily 

resident or domiciled outside the UK. Broadly, this includes all cash earnings 

from the employment and all non-cash benefits treated as earnings. There is 

no requirement for the employer to equalise liability on specific employment 

income, ie amounts that count as employment income such as termination 

payments and gains on the exercise of share options. Employers must apply 

PAYE in accordance with the relevant statutory provisions and regulations to 

any non-equalised employment income of an employee covered by the 

arrangement. 


13.4 HMRC are permitted by Regulation 141 Income Tax (PAYE) Regulations 

2003 to declare any case subject to special arrangements where HMRC are 

of the opinion that the deduction of tax by reference to the tax tables is 

impracticable. 

13.5 It is accepted that because expatriates: 

a) are employed by an employer in a different jurisdiction; 

b) are usually on a foreign payroll; 

c) are often subject to withholding taxes in that jurisdiction; 

d) have their records kept in the annual cycle set by the foreign jurisdiction; 

e) have employer information systems designed to be compliant with that 

foreign jurisdiction; 

f) are paid in a foreign currency whose value fluctuates daily; and 

g) may be compensated in ways that do not require the information to be 

collected in the home location, eg tax favoured share schemes or foreign 

equivalent to dispensations, 

then the strict operation of PAYE is virtually impossible. Therefore, HMRC 

are permitted to make a special arrangement. There are no legislative 

restrictions on this other than the general requirement for HMRC to use their 

care and management to collect taxes. This care and management function is 

now found in Commissioners for Revenue and Customs Act 2005 section 

51(3). 



13.6 The fact that some employees are “in” and some are “out” of “modified PAYE” 

creates problems for employers and employees alike. 

13.7 There are expatriates who were originally from the UK who come back to 

work here for a period. If they become ordinarily resident and have not shed 

their domicile (a notoriously difficult thing to achieve), then they must go onto 

the domestic payroll. 

13.8 If any part of their earnings is not tax equalised, then they must go onto the 

domestic payroll. 

13.9 Finally, even if you are eligible for inclusion on a modified PAYE scheme for 

your general income, you are required to be subject to the normal PAYE rules 

on any equity-based employment income, which begs the question as to how 

you can have a person on two payrolls simultaneously with one employer. 

13.10 Many employers will have a “Modified PAYE” scheme for eligible employees, 

and are required to have a separate scheme for ineligible employees. 

13.11 The problem for employees is that modified PAYE enables the employer to 

provide the P11D by 31 January. If you are outside modified PAYE, the 

employer is almost bound to fail to complete the P11D correctly, as there 

simply will have been insufficient time. 

Proposal 

13.12 Whilst there is no doubting that HMRC have already made great strides in 

relaxing the rules for PAYE for expatriates, there is no doubt they could go 

further and include all expatriates on a Modified PAYE scheme. Provided the 

employer has agreed to indemnify HMRC against any loss of tax, HMRC 

would appear to be complying with the legislation, maximising their tax 

collection and providing a good service to both expatriate employers and 

employees. 

13.13 I am aware of the concerns that such a carte blanche for expatriates may be 

too great a step to take. The reasons are usually that the system may be 

open to abuse, and that it may be too beneficial to expatriates. 

13.14 All systems are open to abuse. I am not aware of a 100% compliance record 

for domestic PAYE systems (in fact the opposite is much more likely). 

However, the indemnity given to HMRC by the UK employer provides a 

significant counter to any abuse. 

13.15 Likewise, the fact that Modified PAYE is so relaxed as compared to the 

existing PAYE rules probably says more about the PAYE rules themselves. If 

Modified PAYE were to be applied by all employers to all employees, and it 

provided better compliance and more tax, then it should be seriously 

considered for all employees. 



14 Issue 14: Neglect and penalties 

14.1 The issue here is whether an expatriate can be guilty of negligence when it is 

often impossible to determine one’s residence, ordinary residence and 

domicile status when completing a self assessment tax return. Will an 

incorrect assessment of these statuses be negligence, leading to penalties 

and interest surcharges for any tax underpaid as a consequence to misanalysing 

the status leading to incorrect entries on the tax return 


14.2 As stated elsewhere, there are no statutory definitions of the three terms 

residence, ordinary residence and domicile. 

14.3 However, under self assessment, each taxpayer is presumed to have 

sufficient knowledge to be able to put on the return sufficient details to enable 

the person to file a correct return and make the correct payments. Failure to 

do this will lead to penalties under TMA 1970 section 95, as there has been a 

failure to make a correct return. The question is whether there has been 

fraud or negligence within the meaning of TMA 1970 section 95(1) such that 

he is liable to a penalty. 

14.4 Negligence is not defined in TMA 1970 section 95, but the term “neglect” was 

previously defined by TMA 1970 section 37. However, this expression was 

repealed in 1989 by FA89 section 149(2) and replaced with the expression 

“negligent conduct”. To all intents, they are the same, and I use the familiar 

terms “negligence” and “negligent” as meaning the same today under current 

law. 

Case law 

14.5 The only case involving negligence of the taxpayer is Hancock v CIR (Sp 

Com 1999). In that case the facts were so extreme that it was clear that the 

taxpayer was clearly negligent, as he was an accountant with avenues open 

to him to resolve his issues. Little guidance can be drawn from the case for 

expatriates or their advisers. 

HMRC guidance 

14.6 HMRC have said in their website manual: 

“Neglect does not involve any deliberate intention to deceive or to pay 

less tax or NICs. Inland Revenue staff should proceed on the basis that a 

good working definition of neglect is simply “a lack of reasonable care”. 

14.7 Amazingly, they suggest that a reasonable employer, taking reasonable care, 

will not have made an error in his return negligently. The writer has certain 

knowledge that this is not complied with. 

14.8 The manual also states that: “It may happen, as for example with a complex 

legal avoidance scheme, that the employer (probably through his agents) has 

a reasonably arguable case for what he returned. A reasonable employer 

might be advised by leading professionals that, in the given circumstances, 

no liability to tax or NICs would arise. He might follow that advice to the letter 

and arrange his affairs on that basis. The Revenue might believe that a 



liability does arise. It might require litigation resulting in a 3-to-2 majority in 

the House of Lords to establish that the scheme did not work, then the return 

will be incorrect. But there would be no question of its having been submitted 

negligently incorrect.” 

14.9 The tenor of the manual is that a taxpayer advised by a leading tax 

professional should not be negligent if the return is incorrect and the error 

based upon the advice from leading professionals. That means there should 

be no penalty for the error. 

14.10 Readers will not be surprised to know that a CTA is not regarded as a 

“leading professional”. The statement seems to be restricted to counsel. The 

ICAEW or the CIOT has taken leading counsel’s opinion that the taking of 

advice by a taxpayer from a CTA would lead the taxpayer to claim he had not 

been negligent. This, of course, does not exonerate the CTA, who should 

either know the correct position or make a disclosure where the position is in 

doubt. 

14.11 I cite the case of Langham v Veltema in 2004 (the facts of this case were 

reviewed in Tax Journal (19 April 2004, page 11). In brief, it involved the 

valuation of a property owned by a company and given to one of its directors. 

This is a transfer of an asset at market value to the director, and is taxable 

under what used to be called “Schedule E” as a benefit-in-kind. The term 

Schedule E ceased to exist after the introduction of ITEPA 2003, but the 

concepts live on. It is clear that, notwithstanding the fact that the return has 

been prepared by a taxpayer following advice from a competent professional, 

the return should give details of any area where there could be a difference of 

opinion. Without adequate disclosure of all the relevant facts, a reasonable 

Inspector could not make his mind up on the return, and that would leave him 

open to making a “discovery”. However, despite your residence and domicile 

status being relevant to the return, if you try to clarify your status, you are 

informed that you should self assess. 

14.12 The difference between a discovery and simply not taking up the issue on a 

return with adequate disclosure is that a discovery assessment can be made 

after the enquiry window in TMA1970 section 9A has closed. 

Proposal 

14.13 On the basis of the above, it should be the position of HMRC that any 

taxpayer who is advised by a CTA or other tax professional (hereafter 

referred to as a CTA) should not be guilty of neglect if they have taken the 

advice of the basis of filing the return, provided, of course, that the taxpayer 

has given the CTA all the relevant facts and appropriate disclosure has been 

made. 

14.14 A concept agreed in the Keith Committee Report in the mid-80s was that the 

submission of a tax return was like playing cards. If you played your hand 

with all the cards on the table face up, then you could not be guilty of neglect. 

This should be resumed as the benchmark for negligence. 

14.15 However, to protect the position of the taxpayer and HMRC, the CTA should 

be the person who is penalised if there is any error if there is negligence, 

provided the taxpayer has acted in good faith and provided all the facts 



required by the CTA. 

14.16 Negligence should be defined by a series of examples of what is acceptable 

and what is not. Given my proposal to have the CTA penalised, then HMRC 

should consult with the professions as to what all parties would regard as 

negligence and what not, and codify this through the public domain of a FAQs 

section on their website. 

14.17 To make it absolutely clear beyond all doubt, HMRC should issue an Extra 

Statutory Concession stating that, when a taxpayer (expatriate or otherwise) 

files a return based upon guidance obtained from the HMRC website, then 

they will have their position confirmed as being filed “not negligently” in the 

event that the Courts decide to overrule the relevant position. 

ADDENDUM 

HMRC issued a consultative document on 19 December 2006 relating to their 

powers to raise penalties. This can be found on HMRC’s website. The approach 

proposed by HMRC seems to take the line proposed above. 



15 Issue 15: Ordinary residence 

15.1 The issue here is the lack of a statutory definition of Ordinary Residence 

particularly as the ordinary residence status is so wide ranging. The IR20 

interpretation of ordinary residence is obviously based upon case law, but is 

not wholly backed up by case law in every case, leaving some elements of 

the advice in IR20 on ordinary residence effectively unsubstantiated. 

15.2 Issues that cause concern are based around the disposal of property and 

proving “intention”. 

15.3 OR status regularly affects taxation of overseas workdays and stock options, 

but there are many areas where the status is relevant: 

a) Employment income - generally see ITEPA Part 2 sections 14,15,21,22, 

25 and26 

b) Termination payments within ITEPA Chapter 3 Part (foreign service) 

c) Securities income exemption in ITEPA section 421E 

d) Securities options exemptions in ITEPA section 474 

e) PAYE on employment income ITEPA section 690 

f) Remittance basis for “relevant foreign income ITTOIA sections 830 and 

831 

g) Application to be paid gross interest 

h) Temporary non residents TCGA 1992section 10a 

i) Foreign assets of a non-UK domiciliary TCGA 1992 section 12 

j) Attribution of gains of non-resident company TCGA 1992 section 13. 


15.4 The terms “ordinary residence” or “ordinarily resident” (as opposed to “not 

ordinarily resident”) are not defined in the legislation and reliance must be had 

on case law. The definitions are surprisingly absent because the amount of 

tax a person pays when not ordinarily resident in the UK may be significantly 

different from an ordinarily resident person. 

Case law 

15.5 Case law is widely available, as the expression “ordinary residence” is used 

for tax and social security, and also for the purposes of determining whether a 

student is eligible to claim education grants. This third usage has provided 

the most recent analysis of the expression “ordinary residence”, and some 

useful deductions can be drawn. 

15.6 Tax cases: 

Reid v CIR 10 TC 673 

Levene v CIR 13 TC 486 

Peel v CIR 13 TC 443 

Elmhurst v CIR 21 TC 381 

Reed v Clark 58 TC 528 



15.7 Other cases: 

Regina vBarnet London Borough Council (ex parte Nilish Shah) (1 All 

England Law Reports 226) 

Mark v Mark. 

15.8 The case of Regina v Barnet London Borough Council ex parte Shah (and 

others) contains a good summary of the previous cases, as does Reed v 

Clark. I would simply refer to some of the comments in the former case. Lord 

Denning differentiated between those who had been here for three years, and 

had not intended to stay in the UK permanently (and were thus denied their 

grants), and those who had come to the UK intending to remain indefinitely or 

for a settled time, who were thus ordinarily resident (and thus eligible for a 

grant). In so deciding, he made the comment that those who remained in the 

UK with a work permit allowing them to live and work here, and who were 

thus otherwise not allowed to stay indefinitely in the UK, should not be 

regarded as ordinarily resident. The current work permit is issued initially for 

a maximum of four years. 

HMRC guidance 

15.9 As the HMRC manual states at IM 35: 

“As regards the term `ordinary resident' (in the interpretation of which the 

Acts give no guidance at all), an individual is ordinarily resident in the 

United Kingdom if he is resident here year after year.” 

General discussion and current practice 

15.10 The obvious question is how many years are needed for a person to be here 

year after year The answer in IR20 is four, but there is no statutory or case 

law basis for this. 

15.11 What can be deduced from these cases and from the IR20 booklet is that you 

will be ordinarily resident if: 

a) you come to the UK to live permanently in the UK, ie for the rest of your 

life; 

b) you come to the UK and intend to live here for at least three years; 

c) you come to the UK without intending to live in the UK for three years, but 

eventually stay for longer than three years. You will be ordinarily resident 

from the start of the 5 th tax year; 

d) you previously lived in the UK and continue to visit the UK for more than 

90 days a year on average; 

e) you live somewhere other than the UK and visit the UK for more than 90 

days a year on average, and have done so for four years; 

f) you live somewhere other than the UK and “intend to visit” the UK for 

more than 90 days a year; 

g) you were previously ordinarily resident in the UK and left the UK for a 

complete tax year, but were not resident anywhere else in the world. 



15.12 What is rather mystifying, to the writer at least, is that the tests for ordinary 

residence mean that you could be ordinarily resident in the UK when you are 

not resident in the UK. This much quoted comment comes from Rogers v 

CIR (1 TC 255) where a mariner left the UK and was at sea or in a non-UK 

port, temporarily, for the whole tax year. How this ties in with the notion that 

to be ordinarily resident in the UK you have to be resident year after year is 

not clear from the case. Subsequent cases have confirmed that, in most 

cases, you will need to be resident before you can be ordinarily resident. 

15.13 The sorts of issues that arise in practice are: 

a) What is a day when looking at the 90-day test 

b) What is “intention” 

c) What is required for there to be a change of intention 

d) How do you produce evidence to support your intentions or changes of 

intentions 

What is a day 

15.14 A day is not defined in the statute, as there is no statutory definition of 

residence so no definition of a day. It has, therefore, been determined by 

HMRC as being a period of 24 hours commencing at midnight. If you are 

here at the start and end of the day, you are present for the day and it counts. 

If you arrive after midnight or leave before midnight, the day does not count. 

There is obviously a musical element within the HMRC policy team as they 

have followed the lyrics from Maria Grever and Stanley Adams: “What a 

difference a day makes, twenty-four little hours”. The test was also examined 

in the film Airport when a passenger had to leave the UK by midnight to avoid 

tax residency. 

15.15 This definition of a day is only used for the purposes of the 90-day test for 

ordinary residence and the 183-day test for residence. The test of a day is 

different for the treaty test of 183 days. 

What is intention 

15.16 This is hard to define in practice, even if simple in theory. The issue in 

practice about intending to be here for three years has caused issues with the 

supporting evidence required to convince HMRC that an expatriate is not 

intending to be here for three years. The main point to emphasise is that it is 

the intention of the taxpayer that matters. The problem is that there will be 

conflicting factors that the HMRC will consider to be evidence. For example: 

a) a work permit application for more than three years because it has been 

signed by the taxpayer; 

b) the basis of accommodation in the UK, eg a lease for four years with no 

break clause is likely to show an intention to be here for more than three 

years; 

c) buying a house is regarded as an intention to be here for more than three 

years. 



d) making a declaration on the form P86 on arrival that a taxpayer is staying 

for more than three years; 

e) signing an employment contract in the UK for more than three years; and 

f) letting out your home country accommodation for more than three years 

before coming to a single assignment to the UK. 

15.17 There are a number of things that can be used by HMRC to show that a 

person has an intention, but the definition of the word makes it impossible for 

anyone other than the taxpayer to know what his intention really is. The key 

point is that it is the intention of the taxpayer, not the employer. Often they 

will have differing intentions. 

15.18 Practice over the years has been to rely upon the form P86 and, where a 

taxpayer has indicated 2-3 years, it is difficult to see how this can be 

overruled unless there is clear evidence to support a longer stay was 

envisaged at the outset. 

15.19 The words of Lord Templeman in R v Barnet are quite interesting: he 

summed up how long was needed for a person to become ordinarily resident 

for the purposes of obtaining a grant. He said, “ I find it impossible to estimate 

a sufficient length of time to sojourn to show the qualities of ordinariness.” In 

effect, he said that someone who lives here year after year, but has no right 

to live here permanently or for an indefinite period of time, would not become 

ordinarily resident, even after three years. 

What is required for there to be a change of intention 

15.20 This has been the most confusing point about ordinary residence in my 

experience. 

15.21 Until 2005, HMRC said that, if you bought a house and “disposed of it” within 

three years, then the house would be ignored in determining your residence if 

you also left the UK. In other words, if you stayed for less than three years, 

you would be not ordinarily resident from the start, even though you would 

initially be ruled ordinarily resident. This is because the purchase of the 

house is supposed to show an intention to stay longer–term, and thus be 

evidence of an ordinarily resident status, whereas a sale of the house and a 

departure within three years is a fact that can overrule the original ruling. 

15.22 However, if you merely changed your intention, HMRC used to say you were 

ordinarily resident simply because you originally said you were staying for 

more than three years. 

15.23 In 2005, and in response to a question raised at the Expatriate Tax Forum by 

a member of the CIOT, HMRC confirmed that they would allow a change of 

intention to be retrospective. 

15.24 This is still marginally confusing, as the status of ordinary residence must be 

the status for the year. I can only assume that, if at 6 April you have an 

intention to be in the UK year after year, but by the following 5 April you do 

not have such an intention and you intend to leave the UK, you will be not 

ordinarily resident for the tax year, provided you have not made yourself OR 

by some other means. 



15.25 This is an area where there is frequent questioning by HMRC on enquiry, and 

there is still no consensus of exactly what is required to satisfy HMRC that 

there has been no change of intention. 

How do you produce evidence to support your intentions 

15.26 Like many tax areas, it is often necessary to show something in writing to 

HMRC to support your position. It seems that the word of a taxpayer is not 

acceptable to HMRC unless it is recorded contemporaneously or is given as 

evidence in Court under oath. 

15.27 I would argue that the surest way would be to place a white space note in the 

tax return saying how long you intend to be in the UK, having given an 

estimate on the form P86 on arrival in the UK. 

15.28 In this respect, the booklet IR20 is, in my view, misleading. It contends that, 

when you have changed your original intention and you have now the 

intention to be in the UK for more than three years from the original date of 

arrival in the UK, then you must ordinarily resident from the start of the tax 

year in which the intention changes. Can this be right in every case Of 

course not. Take this example. 

15.29 Mr B has arrived to set up a new air traffic control system in the UK with a 

team of software writers. 

a) On arrival, he knows it should be done within three years. That is what 

the contract says and the P86 says. He is clearly not ordinarily resident. 

b) After six months, he is four weeks behind schedule. That means he 

knows he will be here for three years and four weeks. He is now ordinarily 

resident. 

c) After one year, he is back on track. He is not ordinarily resident. 

d) He is ill for three weeks and the project is four weeks behind again after 

18 months. He is once again ordinarily resident. 

e) After 24 months, they make a breakthrough and can save a month’s time. 

He is not ordinarily resident again. 

f) After 30 months, a new regulation comes out to provide for the software 

team to be in place for three months whilst the two systems work together. 

He is ordinarily resident 

g) The team leaves after 39 months. 

15.30 At no time have they ever expected to live here year after year so, arguably, 

they are not ordinarily resident throughout. However, according to HMRC 

rules in 2004, they would have been ordinarily resident throughout, and the 

new rules would still be unclear. 

15.31 The best way to record your intention is therefore to state your intention on 

the face of the tax return each year. 

Proposal 

15.32 The logical way forward would be for there to be a definition of the expression 

“ordinary residence” for all tax purposes. The test should be quantitative, and 



capable of being applied by all taxpayers and with simplicity. 

15.33 A numerical-based test would be an easy solution to be applied to a resident. 

For example, if you come to the UK and you are resident in tax years 1,2,3 

and 4, then you will be automatically resident and ordinarily resident in year 5. 

15.34 Alternatively, if you come to the UK, you will be not ordinarily resident in years 

1,2 and 3 automatically and regardless of your intention. If you are resident in 

year 4, you will also be ordinarily resident if you have been present in the UK 

for, say, 550 days in years 1 to 3, a day being counted if you were here 

throughout the day. There are many permutations possible, so maybe a 

working party can determine the right balance. 

15.35 It would be helpful to have a “days count” mechanism so that someone can 

log onto the HMRC website and put in their days of presence and get a 

residence and ordinary residence ruling immediately from the site in advance 

of filing their return. 

15.36 Likewise, a day can be defined as each day that a person is in the UK at midday, 

or a day can be defined as being here at 00:01 and 23:59. All that is 

required is certainty. 

ADDENDUM 

The recent case of Robert Gaines-Cooper v Commissioners for HMRC has 

determined that, in a case where there may be perceived to be abuse (my words not 

theirs), IR20 cannot be relied upon and, in fact, has no standing with the Courts. 

They decided in that case that presence at midnight would count as a day in the UK. 

Whilst this confirms that IR20 has no sway in the Courts, it did not bring us much 

closer to defining when residence, ordinary residence and domicile apply to an 

individual, other than of course to Mr Gaines-Cooper. The need for a statutory 

definition remains. 



Issue 16: Relocation Expenses: 

16.1 The issue here is whether the reimbursement of relocation expenses, or the 

provision of relocation benefits, to and from the UK should be treated as a UK 

earnings, foreign earnings or split between the two. 

16.2 The provision of relocation assistance by the employer to the expatriate to 

work in the UK is a normal provision of most expatriates’ packages. It is 

important to note, however, that there are two types of expatriate with 

relocation packages. The normal type would be a simple move of the 

employee from the home country to the UK and back home again. The other 

type will move from a location (the home country or another location) to the 

UK and then on to another location. In railway ticket parlance, there is either 

a return journey or two singles. 


16.3 The provision of a benefit of relocation would be taxable as a benefit by virtue 

of ITEPA sections 63 and 201, whereas the reimbursement of the expenses 

of relocation would be taxable by virtue of ITEPA sections 62 and 70. 

16.4 It has long been established that the relocation expense cannot be regarded 

as being wholly, exclusively and necessarily in the performance of duties, so 

it is generally accepted that the expenses/benefits are taxable for domestic 

employees. 

16.5 There is an exemption for qualifying removal benefits under ITEPA Chapter 7. 

Discussion and current practice 

16.6 The wording of ITEPA section 271 is perplexing. The section is designed to 

provide an exemption of the relocation expenses. Section 271(1) starts the 

ball rolling by exempting all relocation expenses. However, section 271(2) 

then provides that, for certain employees, sub-section (1) does not apply. If 

the general earnings are within either ITEPA section 22 (non-domiciled in UK, 

OR and an overseas contract) or section 26 (not ordinarily resident; overseas 

workdays and earnings not remitted to the UK). 

16.7 The only logical way to read this section is to say that, if the total expenses 

have been apportioned between ITEPA sections 25 and 26, then the part 

allocated to the UK workdays would not be exempt from UK tax (unless within 

the limit below). However, the expenses would fall to be considered within 

the general ambit of ITEPA sections 25 and 26 so that, in practice, the foreign 

element would be tax exempt unless all of the earnings were remitted to the 

UK. 

16.8 There is, however, a pitiful limitation on the exemption of relocation expenses 

of £8,000, which is mentioned in ITEPA section 271(3). In a domestic 

relocation, with stamp duty and house prices at their current levels, the 

majority of employer-assisted moves will be well in excess of the £8,000 level. 

International relocation expenses are not usually faced with stamp duty costs, 

but relocation expenses are invariably in excess of £8,000 even without 

stamp duty. 



16.9 In order for the £8,000 exemption to be available, a number of conditions 

have to be satisfied. The main condition is that there is “a change of 

residence”. This is interpreted by HMRC as meaning that there has to be a 

person becoming resident in the UK for tax purposes (EIM 03104). This is 

not normally an issue, but when a person comes to the UK for less than two 

years, and is also in the UK for less than 183 days, that person will be not 

resident for the year of arrival. It is plainly wrong that this person will not 

qualify for exemption when another person with the same assignment terms, 

who arrives in the UK and is here for more than 183 days, is. 

16.10 It is thus obvious that the section has to be read with the change of residence 

meaning that the individual no longer “resides at his old location and does 

reside in his new location”. In other words, residence is defined as the bricks 

and mortar in which he lives, rather than the status of residence for tax 

purposes. In practice, HMRC usually accept this. 

16.11 For each expatriate coming to the UK there are, self evidently, the expenses 

of travelling to the UK and again on leaving the UK. What is taxable in the 

UK 

16.12 Personal travel expenses for non-UK domiciled expatriates coming to the UK 

will be exempted under ITEPA sections 373 to 375. It is only the expenses 

not excluded under travel expenses that need to be considered as relocation 

expenses. If the accompanying children were aged 17 and 19, for example, 

one would be covered by section 374 and the other by section 271. Probably. 

16.13 The expenses of relocating to the UK will normally be paid, because the 

employer wants the employee to go and work in the UK. It is therefore logical 

and generally accepted that the expenses of relocating “to” the UK arise 

because of the UK employment. 

16.14 The next issue is to decide whether the relocation expenses are wholly 

charged to UK tax, or whether they are charged to UK tax in the proportion of 

UK workdays to total workdays as prescribed by ITEPA sections 25 and 26. 

16.15 The absence of any statutory pro-ration of the general earnings between UK 

and non-UK workdays in the year in question means that the taxpayer has to 

rely upon Statement of Practice SP5/84 to determine whether the chargeable 

relocation expenses can be split and, if so, in what fashion. 

16.16 The expenses are going to be taxable earnings within the meaning of ITEPA 

section 10 for the year in which the expenses are reimbursed or the year in 

which the benefit is provided. Usually, that would be the year of arrival, but it 

could be the year following arrival, depending upon what the expenses relate 

to. 

16.17 Ordinarily resident employees will be wholly taxable on the relocation 

expenses, but those who are not OR will have their earnings divided in 

accordance with ITEPA sections 25 and 26. HMRC SP 5/84 is worded so that 

general earnings are prorated according to workdays in the UK and overseas. 

The particular section of SP5/84 reads as follows: 

“5. The practice changed with effect from 6 April 1983 when HM Revenue 

and Customs introduced a simplified procedure for employees who: 



- are resident but not ordinarily resident in the United Kingdom 

- perform duties of a single employment both in and outside the United 

Kingdom, so that they are potentially chargeable under both Section 

25 and 26 ITEPA in respect of general earnings from that 

employment; and 

- receive part of their general earnings in the United Kingdom and part 

abroad. 

“In such cases, provided the general earnings chargeable under Section 

25 are arrived at in a reasonable manner (ie in the absence of special 

facts, the proportion of the general earnings, including benefits in kind, 

relating to UK duties is arrived at on a time basis by reference to working 

days), HM Revenue and Customs are prepared to accept that a charge 

under Section 26 will arise only where the aggregate of general earnings 

remitted to the United Kingdom exceeds the amount chargeable under 

Section 25 for that year; and to restrict the charge under Section 26 to 

the excess of the aggregate over the charge under Section 25.” 

16.18 It therefore is evident that the relocation expenses should be prorated 

between UK and non-UK workdays of the tax year in which the expenses are 

paid or benefits are provided (see section 19 for a detailed discussion on SP 

5/84). 

16.19 At the end of the employment in the UK, the expatriate is normally faced with 

three options: 

a) return home to work; 

b) move to another location to work; or 

c) termination because there is no work in any location for the employee to 

do. 

Return home to work 

16.20 In this case, the reason for the relocation expenses to be reimbursed at the 

end of the assignment is because the employee is to work again in the home 

location. For exactly the same reasons that the relocation expenses to the 

UK are taxed, the expenses of relocating back home to work will not be UK 

emoluments. In effect, the emoluments arise from an employment that is 

wholly outside the UK, ie the next employment back in the home country. 

16.21 There is an alternative view, which is that, when the expatriate has come to 

the UK under the terms of his home country employment contract or under 

the terms of his employer’s policy, the relocation expenses are effectively 

being reimbursed, each way, by virtue of the employment in the UK. 

16.22 There has been a practice, which was agreed in the debate upon the 

withdrawal of ESC A5 and ESCA67 in 1993, whereby the expenses of 

relocation to the UK are taxed and the expenses of relocation from the UK are 

not taxed, but there is neither a statutory basis for this, nor any known 

Revenue written agreement to this. 



16.23 Notwithstanding this HMRC appear not to take the point. 

16.24 If the expatriate were to return to the home country and never set foot again 

in the UK, the position above would be clear. However, if the employee 

returns to the UK for any reason as part of the overseas employment, then 

there will be general earnings which are taxable by virtue of ITEPA section 27 

and, as a result, a proper proportion of the relocation expenses away from the 

UK should be charged to tax in the UK. It would be perverse to argue that the 

expenses relating to relocation to the UK “were” prorated for those who were 

not ordinarily resident in the UK whilst on assignment and “were not” prorated 

for a year when a proportion of the other general earnings is taxable. 

16.25 It may be possible to argue that the UK workdays are merely incidental to the 

overseas workdays if the work in the UK is in relation to the next work 

assignment, but, if the reality is that the UK workdays are coordinate with the 

workdays of the assignment after the taxpayer has ceased to be resident in 

the UK, then a proportion of the relocation expenses should be taxed. 

16.26 It is assumed that the workdays in question to be prorated under Statement of 

Practice 5/84 would be the workdays after the taxpayer had left the UK, ie 

taxing the earnings of the subsequent employment in accordance with ESC 

A11. 

Move to another location to work 

16.27 In the second case, the move to another location would be treated the same 

way as above, except that there could be no argument that the expenses of 

the employee could be taxed in the UK as relating only to the UK employment 

as there is a sequence of employments rather than two employments, to 

which all of the relocation expenses could be connected to the move to the 

UK and back from the UK. 

Termination 

16.28 In the third case, the expenses will be subject to tax as general earnings if 

there is any provision in the employment contract for the expenses to be 

reimbursed following the cases of Dale v De Soissons ( 32 TC 118) and 

Henry v Foster ( 16 TC 605). The expenses would, of course, be “connected 

with” the termination of the employment, and thus taxed by ITEPA Part 5 

Chapter 3, but section 401(3) provides that, where there is another charge to 

tax, it takes priority over section 401. Case law makes clear that, where the 

termination payment or benefits are procured by virtue of the employment 

contract, then the payments and benefits are taxed as general earnings. As 

the employee is almost always provided with relocation expenses to and from 

the UK as part of the contract of employment terms and conditions (usually 

the expatriate policy of the company), then the termination of the contract 

does not override the already taxable earnings. 

Proposal 

16.29 It is evident from the above that the provision of employer assistance in 

relocation of expatriates is going to create complexities not arising with 

domestic relocations because of the cross border effect. 



16.30 Common sense would suggest the following: 

a) a review of the limit of £8,000, as this limit is now out of date; 

b) that relocation expenses to the UK would be taxed in every case; 

c) that the taxable proportion of relocation expenses for those who are not 

ordinarily resident should be governed by SP 5/84; and 

d) that relocation expenses for leaving the UK should be exempt in every 

case. 

16.30 There is a clear need for a statutory provision to support this or a published 

ESC. 



17 Issue 17: Relocation expenses and temporary detached duty relief. 

17.1 The issue here is whether there is a statutory prohibition on an expatriate 

claiming to have relief for relocation expenses connected with a change of 

residence and simultaneously claiming travel expenses for travelling from a 

temporary home to a temporary workplace, the so-called detached duty relief. 

17.2 One aspect of the rules for relocation was explained in detail in Issue 17. 

Applicable law and general discussion 

17.3 The statutory provisions for relocation expenses are within ITEPA section 

272, and travel expenses are found in sections 337 to 342. 

17.4 The key point (for this issue) for relocation expenses is that the expenses or 

benefits (for both are eligible for relief) are exempt from tax if they are 

reasonably connected with “a change in the employees residence”. This term 

is explained in s273, where three conditions are to be met in order for relief to 

be available. The conditions are ascribed letters A, B and C. 

17.5 Condition A gives three opportunities to meet the condition. You will meet it 

if: 

1) you become employed; 

2) there is an alteration of the duties of the employment; or 

3) there is an alteration of the place where the employee is normally to 

perform those duties. 

17.6 It is self evident that expatriates will always meet condition number 3, so we 

can move to condition B, which is found in section 273(2) as follows. 

17.7 Condition B is that the change of residence is made wholly or mainly to allow 

the employee to reside within a reasonable daily travelling distance of the 

place where the employee normally performs the duties after the 

“employment change”. 

17.8 The words “employment change” are defined by section 275 to be whatever 

change is met by condition A. Once again, expatriates will meet this condition 

provided they have changed their residence. The only doubt is where they 

will “normally perform their duties of the employment after the change”. It 

seems extremely likely that the Courts would decide that, after relocating to 

the UK, the duties of the employment will normally be performed outside the 

UK. 

17.9 Finally, condition C is found in section 273(4) as follows 

“Condition C is that the employee’s former residence is not within a 

reasonably daily travelling distance of “that place”. That place is clearly the 

place where the duties are to be carried out after the change in condition A. 

Once again, it is self-evident that anyone coming to the UK with your family 

and/or belongings will satisfy this condition.” 

The only difficulty arises by virtue of whether there has been a change of 



“residence”. 

17.10 You would think that using this expression in its everyday meaning, when an 

employee moves his family with him to another country to enable the 

employee and family to live together, there would be no debate about whether 

the employee has changed his residence. 

17.11 However the additional reliefs created by ITEPA sections 337 to 339 have 

caused doubts in the minds of HMRC. 

17.12 These latter sections are in ITEPA Part 5, which means there is a deduction 

allowed from an employee’s taxable earnings in connection with travel 

expenses, as defined. 

17.13 In section 337, travel expenses are deductible provided: 

a) the employee is “obliged to incur and pay the travel expenses as holder of 

the employment”; and 

b) the expenses are necessarily incurred on travelling in the performance of 

the duties of the employment. 

17.14 The first point to note is that this section does not actually require the 

employee to incur the expenses. If the employer pays them directly to the 

provider, then section 72 allows a claim under section 337. 

17.15 What are travel expenses The HMRC Employment Income Manual (EIM 

31815) accepts that: 

“Travel expenses include the actual costs of travel and also the 

subsistence expenditure and other associated costs that are incurred as 

part of the cost of making the journey.” 

17.16 This statement derives from case law and common sense. Most 

intercontinental journeys do require subsistence and accommodation. 

17.17 There are restrictions on relief under section 337 to be found in section 338. 

Relief is not given for “ordinary commuting”, for “private travel” or for anything 

that is for practical purposes substantially private travel. 

17.18 Ordinary commuting is defined as travel between an employee’s “home” and 

a “permanent workplace”. We will look at the word “home” later. 

17.19 The legislation was drawn up following a long and heavily-debated period of 

consultation and the result was hastily drawn-up legislation. However, the 

Courts would initially have to work with the legislation and then look to 

Hansard if it were not clear what the legislation meant. 

17.20 For reasons only known to the draftsman, the legislation defines a permanent 

workplace as a place that is “not a temporary workplace” in section 337(2). 

However, a temporary workplace is defined in subsection 3 as being a 

workplace where the employee carries out a task of limited duration or a 

workplace for some other temporary purposes. 



17.21 What is a task That appears to be impossible to decide, and there is no help 

in the legislation. Writing a letter may be a task, but it only makes sense to 

read “task” as secondment, for these purposes. 

17.22 What is “some other temporary purpose” One can only assume that 

“temporary” means less than or equal to the 24 months defined in subsection 

(5) to which subsection (2) is subject. 

17.23 Bizarrely, subsection (5) defines what is not a temporary workplace. This is a 

place where the employee’s attendance is in the course of a period of 

“continuous work at that place” lasting either: 

a) not more than 24 months; 

b) all or almost all of the period for which the employee is likely to hold the 

employment; or 

c) when it is reasonable to assume that either (a) or (b) will be true. 

17.24 The legislation then defines a “period of continuous work at that place” as 

being a period where the work is carried out at that place to a significant 

extent. If it is not carried out at that place to a significant extent, then the 

workplace can be defined as an area if the conditions of subsection 8 are 

met. 

17.25 What this shows is that the legislation is convoluted and very difficult to 

interpret. However, as this section is considering the interaction of relocation 

expenses and travel expenses, the highly convoluted nature of the legislation 

may help. Having gone to such enormous lengths to define what is allowable 

as a deduction, there is no mention of the relief being denied if relocation 

expenses are paid and are exempted by section 272. 

17.26 An expatriate assigned to the UK for 24 months or less has only to show that 

a) He has a home in the UK. 

b) He has been assigned to the UK in furtherance of his employment outside 

the UK. 

c) He has a temporary workplace. 

d) He has incurred eligible expenses for himself. 

e) He was obliged to incur them. 

f) They were necessarily incurred. 

17.27 He does not have to show: 

a) that the expenses were wholly or exclusively incurred; or 

b) whether he has received any exemptions under section 272. 

17.28 In effect, there is nothing to prevent exemption under section 272 and relief 

under section 337 if an expatriate has relocated his home from another 

country to the UK, provided he meets the conditions of sections 337 to 339. 



17.29 In passing, it is worth commenting on one of the examples given by HMRC to 

show when travel expenses will not be deductible. At EM 31838 there is an 

example 4, which states: 

“A Swedish employee is seconded to a temporary workplace in Exeter for 

15 months. He is a keen sailor and chooses to obtain accommodation in 

Salcombe, which is more expensive than Exeter. 

“On these facts the cost of accommodation in Salcombe is not attributable 

to the need for accommodation for the business trip. Relief should be 

limited to the cost of appropriate accommodation in Exeter and no relief 

can be permitted for the cost of travel between Salcombe and Exeter.” 

17.30 The absurdity of this example is that, if the employee were not keen on 

sailing, it implies the cost would be deductible. Everyone chooses a location 

for a reason. Proximity to schools, the football stadium, open countryside, 

etc. The fact that an employee makes a choice as to where his 

accommodation is cannot be grounds for denying relief. All the legislation 

requires is that he has a home. Once he has chosen it, he will be obliged to 

travel to the temporary workplace to work. Booklet 490 does cover “unusual 

lavishness”, but this would not appear to be unusually lavish! 


17.31 It has been current practice for most accountants to claim both reliefs if the 

conditions for both are satisfied. I am aware that this is not accepted by 

HMRC, but it is unclear on what grounds. 

Proposed solution 

17.32 HMRC are clearly concerned that expatriates appear to be getting relief 

simultaneously for what they consider to be a permanent relocation (by way 

of exemption of relocation expenses) and a temporary relocation (by way of 

travel expenses). 

17.33 If HMRC consider an expatriate who is relocated with his family for 24 months 

or less should not be entitled to the relief, they should issue a Statement of 

Practice to this effect. That would at least require taxpayers to make a 

disclosure in their tax returns following Langham v Veltema. 

17.34 However, although a Statement of Practice would clarify exactly how HMRC 

interpret the law, it is equally clear that a taxpayer would be able to interpret 

this differently, make a disclosure on his tax return to this effect and still claim 

relief. 

17.35 It would therefore require a change of law to be definitive. 

17.36 In the absence of a definitive interpretation from HMRC, taxpayers may feel 

confident in claiming both reliefs simultaneously. 



18 Issue 18: Capital gains tax 

18.1 There are three minor areas of concern for expatriates as far as capital gains 

tax is concerned. The first two relate to those who work temporarily in the UK. 

The third relates to those who work temporarily outside the UK. 

a) How does the remittance basis of taxation operate in practice and why is 

this not a statutory provision 

b) Why is there no tax relief for capital losses on a remittance basis, but 

there is a tax on capital gains 

c) Why are the gains in years of temporary residence rolled up and taxed in 

one year, the year of return to the UK This takes no account of annual 

exemptions. 

a) and b) - Remittance basis and losses 

18.2 These issues interact to such an extent that they are logically considered 

together. 

18.3 There should be a rule that expatriates are not taxed any more than ordinary 

taxpayers. On the whole, this is clearly true, as there are so many ways that 

expatriates are taxed less harshly than domestic equivalents. However, this is 

not always the case where there are gains taxed on the remittances basis. 

18.4 A simple share option which is exercised and where the proceeds of the sale 

of the shares are sent to the UK for purchasing a major asset, eg a main 

residence, may not give rise to a charge to income tax but will give rise to a 

charge to Capital Gains Tax. 


18.5 Section 2(1) charges CGT on UK residents or UK ordinarily residents. TCGA 

section 12 charges CGT on a non-UK domiciled person. The effect of the two 

sections is to charge CGT on most expatriates on the amounts of any 

chargeable gains on non-UK assets only to the extent they are received in the 

UK, plus any chargeable gains less allowable losses on any UK-situs assets. 

18.6 Section 2(2) defines the words “received in the UK” as meaning “all amounts 

paid, used or enjoyed or in any manner or form transmitted or brought to the 

UK”. This is a wide definition, as it will apply not just to sums of money but 

also to any assets representing those gains. This means a tracing record 

would be required to see what gains have been made, what has been 

remitted to the UK and whether that remittance will create a chargeable gain. 

18.7 Most short-term expatriates would not have any difficulty dealing with these 

provisions, as they could exclude all gains made prior to their arrival and 

isolate all their existing funds on arrival to ensure that proceeds from gains 

made whilst resident in the UK are separated and identified so that all 

proceeds can be retained outside the UK. 

18.8 The way the remittance basis works in practice is to treat the proceeds and 

gain as being remitted to the UK on a prorated basis. If 40% of the proceeds 

are returned to the UK, then 40% of the gain is remitted to the UK. 



18.9 The main problem is the inability of the taxpayer to mix gains and losses on 

non-UK assets when a remittance is required. For example, in a portfolio of 

shares, there may be gains and losses. The effect of the legislation is that 

only the proceeds from the gains are considered remitted. In a sense, there is 

logic in this. If an asset becomes worth less, then, of course, there is no gain 

to be remitted to the UK. However, if someone were to make sequential 

investments and then send the remittance of the proceeds to the UK, an 

inequitable result can occur. 

18.10 For example, if an asset in the US is purchased costing £5,000, is sold for 

£20,000, (ie a gain of £15,000 arises) and if those proceeds of £20,000 are 

invested in another asset and that asset sold for £10,000 and these proceeds 

remitted to the UK, a gain of £7,500 would have been remitted, even though, 

economically, the taxpayer has made a gain of only £5,000. 

18.11 The calculation is as follows: 

First asset sale proceeds £20,000 

First asset gain £15,000 

Remittances £10,000 

18.12 The taxable gain is £15,000 times the remittance of £10,000 over proceeds 

£20,000, ie half the gain of £15,000, ie £7,500. 

18.13 In addition, the CG Manual specifies that gains may be treated as being a 

remittance partly of gain and partly of cost, so that the gain is only remitted on 

a pro-rata basis. Whilst this is a useful concession, there is actually no 

applicable law to support this, and no extra-statutory concession. Moreover, 

the rule is only applicable where a single asset is involved. If the proceeds of 

an asset are reinvested, then it would be more difficult to evaluate the split of 

the proceeds between gains and losses. 

Proposal for a) and b) 

18.14 It should be possible to offset gains and losses in any year so that the 

resulting net gain should be the limit of the remittable gains, not the gross 

gains. As this situation is unlikely to occur often in practice, there is probably 

no need for legislation for this, but a public domain statement would be 

sufficient. 

c) No annual allowance for temporarily non-resident expatriates 

18.15 The provisions of TCGA 2002 section 10Aact in an unexpected and probably 

unintended way to prevent the offset of the annual exemption 

18.16 Where a person is temporarily non resident in the UK, as defined in section 

10A, then the rules in sub-section 2 requires the gains and losses of the 

intervening years to be treated as though they were gains and losses of the 

year of return for any assets owned when the person left the UK. 



18.17 There is an exception for any gains or losses that accrue on assets acquired 

when the taxpayer is neither resident nor ordinarily resident in the UK, which 

would also apply to the split year concession under Extra Statutory 

Concession D2. Section 10A subsection 3(a) states that an asset acquired by 

the taxpayer “in the year of departure” when he was neither resident nor 

ordinarily resident is ignored. As the taxpayer has to be, in law, either 

resident or not resident for the whole year, this statutory recognition of an 

ESC is a welcome good practice, presumably influenced by the Tax Law 

Rewrite programme. 

18.18 Whilst the position for temporary residents is better than for non-UK 

domiciliaries, in that losses can be offset against gains, there is no roll up of 

the annual exemption or ability to offset the annual exemption against the 

gains so realised in years of complete absence. In effect, the temporarily nonresident 

individual is being taxed more harshly than the UK-resident taxpayer 

who remains resident. 

Proposal 

18.19 To restore equity to those expatriates who have left the UK for a temporary 

purpose, the gains should be calculated on a year by year basis and the 

gains and losses for each year should be netted together, then any resulting 

gains subject to reduction by the annual exemption for the year concerned. 

Only gains remaining after that process should be charged in the year of 

return. 



19 Issue 19: SP 5/84 and overseas workdays 


19.1 Sections 25 and 26 define what is taxable when you are not ordinarily 

resident (NOR). Section 25 taxes general earnings from duties performed in 

the UK and section 26 taxes earnings from duties not performed in the UK. 

19.2 This may be an esoteric diversion, but the UK is not defined; however, section 

41 refines the meaning by explaining that the UK sector of the continental 

shelf is included in the UK. This is in turn defined by section 41(2) as: 

19.3 “The "UK sector of the continental shelf" means- 

a) any area designated by Order in Council under section 1(7) of the 

Continental Shelf Act 1964, and 

b) any waters within the seaward limits of the territorial sea of the United 

Kingdom.” 

19.4 The seaward limits of the territorial sea are defined as an area where all parts 

are within 12 nautical miles of UK land. A nautical mile is 1852 metres. 

(One wonders why the draftsman could not simply say the UK is all UK land 

and the seawaters surrounding it up to a distance of 22.224 kilometres.) 

19.5 Further clarification comes from section 39, which states that duties 

performed in the UK whose performance is merely incidental to the 

performance of duties outside the UK are treated as duties performed outside 

the UK. However, this applies only where the employment is, in substance, 

one whose duties fall to be performed outside the UK in the tax year 

concerned. It therefore appears to have no relevance to any employment 

where there are substantive duties in the UK. 

19.6 We therefore reach the conclusion that general earnings are to be 

apportioned between the UK and elsewhere purely on the basis of “the duties 

performed”. There is no mention of time apportionment in the legislation, and 

no mention of how the general earnings are to be apportioned between UK 

and non-UK earnings. 

Case law applicable 

19.7 Does Leonard v Blanchard apply On balance, no. This case was about 

whether emoluments for days of absence from the employment, ie when 

there were no duties performed, should be ascribed to non-UK days or UK 

days under ICTA 1988 section 132(1). This case was narrowly decided 

insofar as the judges decided that the year was composed of 365 workdays 

and that only days worked outside the UK were exempt from UK tax, within 

the ambit of the exemption being claimed. HMRC and taxpayers agree that 

earnings should be apportioned over workdays for expatriates. (It would, of 

course, be better for those short-term visitors to the UK to claim that each day 

in the UK is apportioned 1 / 365 th of their total earnings.) 



HMRC practice 

19.8 Statement of Practice SP5/84 applies to show how HMRC will apportion 

emoluments in the absence of any statutory or case law ruling. It states that 

the apportionment is a question of fact. However, for many years 

(presumably up to 1984), it has been the practice to accept apportionment 

based upon the number of days worked in the UK and abroad. 

19.9 There is no definition of a day worked in the UK or a day worked outside the 

UK. It is, therefore, according to HMRC in 1984, a “question of fact” as to 

how the general earnings are apportioned between the UK and elsewhere. 

19.10 What facts would support the apportionment between the UK and elsewhere 

One would have to look at the contract of employment in the first instance, to 

see whether there was any evaluation of the apportionment of the annual 

emoluments between the UK and elsewhere. Failing that, there is no reason 

to suppose that any logical division of general earnings would be denied by 

the Courts, ie allocating on days worked or on hours worked, especially given 

the wording of the legislation requiring actual performance of duties. 

19.11 A subsidiary issue is whether there is a need to substantiate what duties are 

being performed whilst outside the UK, and what evidence is needed to 

substantiate that duties were being performed. For the normal expatriate 

working in the UK, the trip to the airport and the departure flight represent 

time when the duties are performed in the UK. Only when the aeroplane 

leaves UK airspace has the employee ceased to perform duties “in the UK”. 

19.12 The point about evidence arises because HMRC often enquire whether the 

employee is actually performing duties. This is probably born out of a 

concern to see whether the employee is actually working at all or whether he 

is effectively on a holiday. There appears to be nothing in the law or in case 

law to prevent the employee from allocating general emoluments to the period 

outside the UK, providing he was performing duties. 

19.13 Performing duties has no defined meaning, and would presumably be based 

upon the facts. However, there is a logical persuasion that once an employee 

has left home and arrived at his normal place of work, he has started his 

duties and, once he has left home to travel to any place other than his normal 

place of work, then his duties start when he leaves home and finish when he 

gets back. 

19.14 This interpretation could have surprising results, as it means that the 

apportionment on a hourly basis for someone who goes to the US for a week 

could mean that, rather than spending five days of his 231-day working year, 

as favoured by SP5/84 (2.16%), he may have worked for 100 hours out of his, 

say, 2300 hours worked (4.35%). 

19.15 In summary, there is no statutory or case law definition of what is a workday 

for SP5/84 and, consequently, no agreed method of dividing general earnings 

in accordance with SP5/84 other than accepting HMRC’s view of the law. 



Proposal 

19.16 As SP5/84 was introduced before mobile phones, computers and 

Blackberries, it is time to review the way SP 5/84 is operating. The use of a 

Statement of Practice is essential to have the broad guidelines agreed with 

HMRC so that, when an expatriate files his return, he can either say he has 

applied SP 5/84 or disclose that he has deviated from this, and why. 

19.17 The need for a longer version of SP 5/84, with worked examples to show the 

principles, is essential to ensure that expatriates can self-assess themselves 

with a degree of certainty. 

19.18 This revision should deal with time apportionment, when deviation from time 

apportionment may be accepted, what evidence is needed when working 

overseas and whether the earnings that are to be allocated to sections 25 and 

26 are gross earning (ie including tax and NIC if applicable) or net of tax 

where the expatriate is tax equalised. 



SCHEDULE 1 

CIOT requirements from the Research Programme 

Title: 

Project on expatriate taxation practice not legislated for. 

Introduction 

The CIOT, through its Tax Policy Sub-Committee (TPSC), commissions occasional 

papers and projects on tax issues. The general objectives in so doing include 

promoting change, stimulating discussion and generally taking forward the CIOT’s 

learned society role. 

The CIOT now wishes to commission a paper in the area of expatriate tax. 

Why expatriate tax 

The main reason for considering expatriate taxation as an area for a research paper 

is that it is a sector of tax practice that depends hugely on “custom and practice” 

rather than the rule of legislation. There are many aspects that work in practice but 

do so in a manner that depends to a degree on goodwill on both sides. This is not 

necessarily wrong but concerns with this sort of approach include: 

• whether the practices that have evolved are fair to taxpayers and their 

employers 

• whether they are as efficient as could be from all sides 

• whether they help or hinder the attractiveness or otherwise of the UK as a 

venue for investment 

• whether these practices are properly known and understood, particularly by 

those who are not specialist in the area but who do get involved from time to 

time. 

Thus the intention of the project is to, as far as possible, codify the areas of difficulty 

which are currently solved by practice. Hopefully it will be possible to point to areas 

where legislative solutions are needed (and the direction of those solutions). The 

result should be a paper that is a working document for those trying to develop better 

rules in this area. 

One reason for progressing this idea now is that the establishment of the “joint forum 

on expatriate tax and NICs” between HMRC (with the particular involvement of their 

complex personal tax teams) and professional/trade bodies indicates a willingness on 

the part of HMRC to make progress in this area. 

What is an expatriate 

The main focus of the paper should be on the situation of someone coming to work in 

the UK from outside the UK. Thus they will typically be resident, possibly ordinarily 

resident but not domiciled. 



It is for discussion whether the paper also tries to cover the reciprocal situation, i.e. 

the UK individual who leaves the UK for a period to work abroad. 

Note that the emphasis is very much on the position of employees rather than 

entrepreneurs/high net worth individuals, though there may be some elements of 

overlap.

Expatriate taxation - CIOT - The Chartered Institute of Taxation

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