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New guidelines on UK and non-UK earnings published

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24th Oct 2005
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By Nichola Ross Martin

HMRC has published guidelines in on how to apportion UK and Non-UK earnings for Class 1 and 1A National Insurance purposes.

The new guidelines are in Tax Bulletin 79. Previous guidance in TB 59, 63 and Statement of Practice 5/84 explained how to compute "non-UK workdays" for tax. However, these are not the same for NIC purposes, and some employers will have operated NIC on the whole salary and refunds may be due.

This scenario arises where the employee is not covered by the EC Treaty and EC Regulations 1408/71, by bi-lateral Social Security agreements, Regulation 145 (1) or Regulation 146 Social Security (Contributions) Regulations 2001 and where the employee is:
* not ordinarily resident in the UK,
* works in the UK under contract to their foreign employer, and
* returns overseas to perform duties overseas for the purposes of that foreign employer, and
* paid a salary in respect of their UK employment and their employment with the sending employer, and
* it can be shown that the employment costs were met by the overseas employer and therefore for the purposes of that foreign business.

Where these criteria are met, salary in respect of the days working overseas for the foreign employer can be excluded from the computation of earnings for NIC purposes.
The practice for computing Class 1A NIC on certain taxable benefits does closely follow the apportionment method used for tax following SP 5/84.

The tax position
An employee resident but not ordinarily resident in the UK is liable to UK tax under Section 25 ITEPA in respect of duties performed in the UK. Such employees are also liable under Section 26 on emoluments for duties performed outside the UK but only to the extent that the emoluments are received in the UK. Where the duties of a single office or employment are performed both in and outside the UK, an apportionment is required to determine how much is attributable to UK duties and how much attributable to foreign duties.

The NIC position
In Social Security law, it may harm the future benefit entitlement of the employee if they fragment their contribution record by paying to the schemes of several countries, so the rules are designed to minimise gaps on their UK contribution record.
When a person leaves the UK to work overseas, there is no liability for Class 1 NICs on the earnings paid in respect of that employment unless:
* EC Regulations or a Bi-lateral agreement applies to keep the person in the UK scheme, or
* Regulation 146 Social Security (Contributions) Regulations 2001 (SSCR 2001) applies to keep the person in the UK scheme, or
* the special rules for certain groups such as mariners, aircrew and continental shelf workers apply, or
* the trip overseas is merely a temporary absence from the UK based employment.

For NIC purposes the world can be usefully divided into:
* European Economic Area (EEA)
* EC Treaty and EC Regulation 1408/71 applies to employees moving between EEA Member States to work. It modifies SSCBA 1992 and regulations.
* RA /DCC Countries
* Bi-lateral Social Security agreements modify SSCBA 1992 and regulations.
* Rest of The World
* SSCBA 1992 and contributions regulations are unmodified.

A list of which countries are EEA, RA or DCC countries is included in TB 79.

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