Split Year Treatment - Case 1 - starting..........

What do you consider "starting full-time work overseas" to mean?

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Esteemed tax peers.  

Thinking about split year treatment and satisfaction under Case 1.

The legislative heading speaks of "starting full-time work overseas" and whilst the term "starting" isn't used again I have a sensitivity around a current situations...

I'm employed by a UKCo... I'd quite like to live overseas and benefit from split year treatment from, say, 1 February, however, I can't get my visa sorted in that time frame, but I can get a visitor visa that would allow me to head overseas and work, albeit I wouldn't be able to work for a local employer and would have to continue to be employed by the UKCo which is a subsidiary/parent of the local employer.  This feel more like a business trip to me than someone starting full time work overseas.

There's then also the issue that I would be limited on the nature of work I could undertake locally, and hence I perhaps couldn't satisfy the full time working requirement, but let's stick with starting for now... does anyone have a contrary view to my sensitivity?

Thanks, N

Replies (8)

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By kim.shaw-and-co.com
25th Dec 2023 12:06

Strongly recommend reading through HMRC's manual on Split Year treatment and then coming back if you have any questions about the application of particular aspects of it to a particular set of circumstances :

https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittan...

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Replying to kim.shaw-and-co.com:
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By Northern Taxman
26th Dec 2023 17:42

Thanks, already done that though and these circumstances as one would expect aren’t covered.

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Replying to Northern Taxman:
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By kim.shaw-and-co.com
29th Dec 2023 00:47

It's as good as acknowledged in the reference I gave you, including the formula to be applied. However ... if the nuances are not obvious ... the Split-Year (Case 1) SRT test is based on criteria of average net hours worked overseas in a reference period, whether strictly permitted locally there or not, in the performance of duties of an employment (whether with a UK employer or an overseas employer or between several employments).

As such, any visa issue(s) are foreign ones and not UK ones specifically in terms of the application of the SRT. What is relevant for this purpose is whether you actually work overseas (i.e. 'perform duties of one or more employments') for sufficient hours in a reference period and meet all the other relevant criteria.

"Full time work" within the meaning of the SRT is a formulaic calculation and not something which is determined qualitatively.

UK-inbounds frequently find themselves UK-resident in a tax year and as a result of the rolling 365-day test under Case 5, the UK Part of their split year of UK residence (on arrival) can easily be triggered during a pre-secondment business trip. What you are alluding to is essentially a broadly similar concept in reverse. HMRC examples are very generic but real life is rarely like that - so you have to model out the results.

If you want to read about how riddled with flaws the SRT legislation is this is a very good place to start - and he has written a book in it !

https://mckieandco.com/wp-content/uploads/2021/01/CIOT_SRT_Talk_-_Somers...

Calculations in terms of net overseas hours for SRT purposes (determining the start date of an overseas part of a split year) are completely different to the notion of 'days worked overseas' when apportioning income between UK and overseas parts of a 'split year' and between UK and overseas within any overseas part of such a year. Don't fall into the trap of thinking these are one and the same thing - they are very different. Consider also any temporary-non-residence issues and that you are taxable for the whole of the current tax year on any UK-source income including investment income (including in any overseas part).

When you apportion income by source (UK or overseas) for a period of non-residence (including the overseas part of a 'split year') you are UK-taxable only on such income as relates to work performed in the UK whoever your employer is, under domestic UK legislation. Tax Treaties can over-ride the results of this in certain circumstances, but this is a complex area beyond discussion here - and it can get even trickier for directors of UK Group companies.

HMRC think that apportionment means UK work days out of total 'days worked' where a contract does not require work to be performed (for example) only overseas, but I could write a book on the history of this and how there is absolutely nothing in legislation to actually say that is the case. Suffice to say prepare for years of stalled tax enquiries if you try to compute apportionment of apportionable income in any other way.

Bear in mind also HMRC are likely to require extensive evidence of (substantive rather than merely incidental) work performed overseas making up both your net overseas hours (for SRT) and your 'days substantially spent working overseas' (for income apportionment) in all circumstances but if your right to work abroad is questionable 'pre-Visa' this is even more likely.

Think work diary, copies of all your emails evidencing work being performed during each and every hour spent "working", copies of restaurant receipts for any 'work lunches' showing the time you paid the bill cross-referenced to your work diary, Google tracking of your daily movements etc. etc.

Put them together in a 'bible of evidence' and have all available compiled to send them in a matter of days after a Compliance Check being opened into your Self Assessment Return (else they are likely to promptly serve an Information Notice on, at the very least, your UK employer who they can rope in if they have any doubts). Also take out some good tax enquiry insurance !

Your UK employer may have issues in the country you go out to work in as far as your position of having worked there (if you become resident and wish to avail of any Treaty Relief) but those are very complex matters on which local advice on the destination country would have to be sought by potentially affected parties.

I am not recommending that you breach any foreign immigration laws here, simply stating the position as it is 'in principle' when the SRT is applied to the facts and circumstances of your work and residence. If a split year flows from those then that is how it flows - and it is mandatory not optional to apply split year provisions if a split year arises. Fail to be non-UK resident under the SRT for the subsequent tax year and the split year will fail, so be very sure you are clear what you are doing.

You will likely be subject to 100% UK PAYE until you cease to be employed by your UK employer (which may kick in again if you come back to perform work for them as a 'UK Host' in UK from overseas after transferring employment to an overseas parent/sub unless they have an Appendix 4 or 8 in place as appropriate). It is late in the day to consider a s690 direction to limit PAYE for the current tax year... but you never know if circumstances support it and you can demonstrate eligibility / your employer would co-operate you could in principle give it a go.

If relevant, your employer should apply online ASAP because the paper wait is 4 months plus vs 4-5 weeks for an online application (sometimes less). It will also get you into Self Assessment if you are not already in it though your tax code may change to 0T. Likely faster for a UK employer to get a s690 with even a % work in UK split w.e.f. the start of the overseas part of a split year than a NT tax code at this stage in the year if any residual UK work is envisaged :

https://www.gov.uk/government/publications/paye-apply-for-a-section-690-...

Depending on where you are going, there may well be a continuing liability to Class 1 NIC on all of your pay for a year or more at the very least until you cease to work for a UK employer (an overseas secondment often isn't enough to lose it) .. another complex area.

All these related issues are complex for both employer and employee so it is best to seek specialist help to get the planning right. Many decent Group employers offer outbound employees a consultation with an advisor versed in Global Mobility issues.

The more you know what questions to ask in such a consultation the more value it is likely to be to you. That said, it never ceases to amaze me how many people still arrive in or leave the UK without any meaningful planning or tax advice before taking the plunge, or simply evolve into residence positions without realizing it.

Hope that is of some help in addressing the 'sensitivity' ?

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Replying to kim.shaw-and-co.com:
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By Northern Taxman
08th Jan 2024 11:46

My apologies for the lateness of reply to this message, but thank you so much. Your analysis is broadly in agreement with mine, which is a relief! The tax my client was interested in mitigating is CGT and the issues around temporary non-residence are well known to him, having fallen foul of the legislation before [albeit in relation to income tax]. The issue in this case is visa related in that we're talking about working in the USA under an ESTA which allows only minimal 'business trip' type activities to be carried on which probably will not facilitate sufficient hours being worked... and local advice is super cautious no to fall foul of the ESTA guidance.

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Replying to Northern Taxman:
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By kim.shaw-and-co.com
09th Jan 2024 00:06

Northern Taxman wrote:
The issue in this case is visa related in that we're talking about working in the USA under an ESTA which allows only minimal 'business trip' type activities to be carried on which probably will not facilitate sufficient hours being worked... and local advice is super cautious no to fall foul of the ESTA guidance.

If the individual is not a US citizen, are they even going to get near information regarding the substance of his 'actual' activities from information provided to the UK tax authorities in connection with UK tax matters ?

Provided he can evidence sufficient relevant work (e.g. from cleansed emails etc), the UK does not differentiate between countries overseas in which work was performed. Despite them turning the legislative lens 180 degrees round in their Guidance, s15 ITEPA 2003 is clear that excluded earnings are those earnings which are "not" for employment duties performed in the UK rather than those earnings which are "for" duties performed overseas.

I'd have thought that performing substantive duties of the UK employment whilst physically present in the USA, including duties for the ultimate benefit of the UK employer where a US company receives them and pays via a management charge (which does not necessarily have to be specific as to the country in which the services were physically performed provided transfer pricing aspects are covered and no domestic US sales tax issues arise) would amount to what HMRC describe as "overseas duties" if performed during the overseas part of a split year ?

Overseas gains may indeed be mitigated provided an overseas part successfully arises depending on the precise circumstances... but as you rightly point out if the claim for split year treatment fails or temporary non-residence rules kick in (in relation to a gain arising during a period of temporary non-residence), then relief may end up being lost.

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By FactChecker
29th Dec 2023 12:50

OP, I very much doubt you'll get a more comprehensive and helpful answer from anywhere than that provided above by kim.shaw-and-co.com (without paying for it) ... but, as they say, you still need "specialist help to get the planning right" in a practical/non-theoretical world.

So I don't know what's driving your "I'd quite like to live overseas and benefit from split year treatment from, say, 1 February" ... but it would make excellent sense to pause that decision until you are better informed on the details of your particular options.

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By Tax Dragon
29th Dec 2023 13:13

I typed this:

'As you say, "starting full-time work overseas" is just the heading (44). Headings have no legal effect and, as with many an aweb question, the heading doesn't always reflect the substance of the issue. Unlike an aweb question though, the text beneath the heading should be taken as correct.

'As Kim says, 43, 44 and 14 are formulaic. Feed the facts in, press compute, read off the answer.

'As Kim also says, having determined that a year is split (for case 1 this requires an initial guess, as the para 14 condition (44(4)) cannot be tested until the end of the next tax year), there're then more formulae to find out where the year is split.'

ages ago. Before FC added his comment. I went out before finally posting now.

Re FC's comment... I agree that your use of the word "benefit" is a little curious. I wonder what benefit you have in mind.

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Replying to Tax Dragon:
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By Tax Dragon
29th Dec 2023 13:24

I didn't post before I went out because I was going to add some comment about the company. I thought you had shares in your employer. I don't know where I got that from.

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