Malcolm Finney explains the complex conditions which need to be satisfied if working overseas is to result in non-residence from the UK.
It is not unusual for an individual to decide to work overseas, or to be offered a job requiring him/her to work overseas. In many cases, the work may be in countries where any salary/bonuses, etc., are not taxed locally or, are taxed, but at rates lower than those in the UK. This offers the individual the chance to perhaps accrue a bit of a nest egg.
However, this will not be so should the individual, despite working outside the UK, still be treated as resident in the UK (in which case any salary, etc. will still be subject to UK income tax).
Conditions for non-residence
Losing residence is not easy but is possible if, in broad terms, full-time work is carried on outside the UK over a complete tax year (this is referred to as the ‘third automatic overseas test’ in the legislation). The conditions which need to be satisfied are basically fourfold: sufficient hours overseas must be worked in the tax year; there must be no significant breaks from the overseas work; the number of days in the tax year on which more than three hours’ work in the UK is carried out is less than 31; and the number of days spent in the UK in the tax year is less than 91. Whether the employer is a UK or overseas company is irrelevant.
Working sufficient hours overseas and significant break
To work sufficient hours overseas during the tax year involves a complex calculation, but in essence requires that on average 35 hours (or more) per seven days are actually worked. The calculation is based on hours actually worked and not simply contracted hours. A significant break from the overseas work occurs where at least 31 days go by and not one of the days is a day on which the individual does more than three hour’s overseas work. A significant break from overseas work may arise within one continuous employment (i.e. 31 successive days arise where on none of these days is more than three hour’s work carried out overseas) or between two separate employment contract periods.
It is advisable to check that the proposed contract of employment will subsist for at least the complete tax year and that under its terms the average 35 hours per seven days’ period is capable of satisfaction in the tax year.
30 UK work days and 90 UK days limits
The remaining two conditions stipulate that the maximum number of days permitted to work in the UK in the tax year is 30 days and, in addition, no more than 90 days may be spent in the UK in the tax year. A day is spent in the UK if the individual is in the UK at midnight. If a day is spent in the UK working and the individual is also in the UK at midnight on that day, the day counts towards each of the 30-day and 90-day limits.
It is advisable to check with the employer that under the contract of employment the employer will not require work to be carried out in the UK in the tax year (or, if such work is likely to be required, that it is restricted to a maximum of 30 days).
Split-years
Invariably, a contract to work overseas will often commence part way through a tax year and may similarly terminate part way through a tax year. It is important to ascertain prior to departure whether the tax years of departure and return qualify for so-called split year treatment (effectively the tax year is split into a period of residence and a period of non-residence). This ensures that any UK tax liabilities are minimised. It may be that bringing forward a date of departure and/or delaying the date of return may enable split year treatment to be obtained which might not otherwise be the case.
Capital gains tax
Whilst losing UK residence can result in salary attributable to overseas work falling outside a charge to UK income tax, the rules with respect to avoiding any UK capital gains tax charges whilst overseas are different, in general, requiring an absence from the UK for more than five years.
Practical Tip:
Check before leaving the UK and before accepting the contract of employment that you will be able to satisfy the ‘working full-time abroad’ conditions for non-residence, if avoidance of UK income tax is one of your objectives. Renegotiate the terms of employment, if necessary.
