Expatriate taxation - CIOT - The Chartered Institute of Taxation

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CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 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. Peter Ashby 12 6.2.07
CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 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 Peter Ashby 13 6.2.07
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