On 29 October 2021, HMRC announced an intention to review overseas workday relief (OWR). Despite being termed as such, OWR is not a ‘relief’ and, indeed, is not ‘claimed’. Rather, OWR is the term used for the situation where earnings related to overseas duties are not taxable in the UK on the basis they are assessable on the remittance basis and have not been remitted to the UK.
Typically, OWR applies for the tax year when residence commences in the UK (either the whole year or for the UK part where the year is a split year) and the following two tax years. The full residence conditions can be found in ITEPA 2003 s 26A and HMRC guidance on the relief can be found in RDR4.
OWR is intended to encourage businesses to invest in and send employees to the UK. Whilst most countries have such incentives, the oddity with OWR is that employees are required to keep their overseas earnings outside the UK. This seems somewhat counterintuitive to the policy aim, given allowing employees to remit and spend their earnings in the UK would better benefit the UK economy.
Whilst the above summary suggests OWR is straightforward, as readers who deal with expatriates will know, in practice OWR is extremely complicated and HMRC enquiries into the amount of the relief usually take years to complete, even without a pandemic. This complexity arises due to the nuances of the remittance basis rules, particularly the mixed fund rules outlined in ITA 2007 s 809Q and the different rules for transfers to the UK and offshore transfers. With the increased use of contactless payments, the number of transactions per tax year that need to be analysed is considerable and very time consuming for taxpayers, advisors and HMRC.
The complexity of the mixed fund rules led to the introduction of special mixed fund (SMF) rules (ITA 2007 s 809RA) to simplify the calculation. Under the SMF rules, the employee can nominate an overseas bank account to receive earnings relating to both the UK and overseas duties of their employment, such nomination to be made by 31 January following the end of the tax year. The nomination has to include the qualifying date, which is the first date on which there is paid into the account more than £10 of general earnings from both the UK and overseas duties of the employment for a tax year in which the individual is UK resident and the s 26A
residence rules apply. This may not be determined until after the end of that tax year, but the account needs to be opened in year and not contain more than £10 before the qualifying date! The account can also only receive earnings of one person, which appears to be hangover from a bygone era. Due to the complexity of meeting the eligibility criteria, these simpler SMF rules do not always apply. Accordingly, prudent advisers will advise numerous separate accounts are opened, e.g. separate accounts for each tax year, for bonuses which have different earnings periods, etc.
HMRC’s ambition is to have a digital tax administration but OWR cannot be policed by computer. It has lots of traps for the unaware and involves a lot of time-consuming investigation by HMRC. Any review of OWR should focus on radical simplification so that:
employees can more easily understand it;
employees can spend their earnings in the UK; and
compliance can efficiently be policed by HMRC.
As a first step, the SMF rules should be removed with earnings for non-UK duties escaping UK taxation whether or not remitted to the UK when the s 26A residence conditions are met.
Home >Articles > Overseas workday relief subject to HMRC review
Overseas workday relief subject to HMRC review
On 29 October 2021, HMRC announced an intention to review overseas workday relief (OWR). Despite being termed as such, OWR is not a ‘relief’ and, indeed, is not ‘claimed’. Rather, OWR is the term used for the situation where earnings related to overseas duties are not taxable in the UK on the basis they are assessable on the remittance basis and have not been remitted to the UK.
Typically, OWR applies for the tax year when residence commences in the UK (either the whole year or for the UK part where the year is a split year) and the following two tax years. The full residence conditions can be found in ITEPA 2003 s 26A and HMRC guidance on the relief can be found in RDR4.
OWR is intended to encourage businesses to invest in and send employees to the UK. Whilst most countries have such incentives, the oddity with OWR is that employees are required to keep their overseas earnings outside the UK. This seems somewhat counterintuitive to the policy aim, given allowing employees to remit and spend their earnings in the UK would better benefit the UK economy.
Whilst the above summary suggests OWR is straightforward, as readers who deal with expatriates will know, in practice OWR is extremely complicated and HMRC enquiries into the amount of the relief usually take years to complete, even without a pandemic. This complexity arises due to the nuances of the remittance basis rules, particularly the mixed fund rules outlined in ITA 2007 s 809Q and the different rules for transfers to the UK and offshore transfers. With the increased use of contactless payments, the number of transactions per tax year that need to be analysed is considerable and very time consuming for taxpayers, advisors and HMRC.
The complexity of the mixed fund rules led to the introduction of special mixed fund (SMF) rules (ITA 2007 s 809RA) to simplify the calculation. Under the SMF rules, the employee can nominate an overseas bank account to receive earnings relating to both the UK and overseas duties of their employment, such nomination to be made by 31 January following the end of the tax year. The nomination has to include the qualifying date, which is the first date on which there is paid into the account more than £10 of general earnings from both the UK and overseas duties of the employment for a tax year in which the individual is UK resident and the s 26A
residence rules apply. This may not be determined until after the end of that tax year, but the account needs to be opened in year and not contain more than £10 before the qualifying date! The account can also only receive earnings of one person, which appears to be hangover from a bygone era. Due to the complexity of meeting the eligibility criteria, these simpler SMF rules do not always apply. Accordingly, prudent advisers will advise numerous separate accounts are opened, e.g. separate accounts for each tax year, for bonuses which have different earnings periods, etc.
HMRC’s ambition is to have a digital tax administration but OWR cannot be policed by computer. It has lots of traps for the unaware and involves a lot of time-consuming investigation by HMRC. Any review of OWR should focus on radical simplification so that:
employees can more easily understand it;
employees can spend their earnings in the UK; and
compliance can efficiently be policed by HMRC.
As a first step, the SMF rules should be removed with earnings for non-UK duties escaping UK taxation whether or not remitted to the UK when the s 26A residence conditions are met.
