OVERSEAS WORKDAY RELIEF

If you are domiciled outside the UK and you arrived in the UK within the last three years, you may be entitled to claim UK tax relief for any work undertaken outside the UK. This is known as Overseas Workday Relief (OWR).

The Criteria

To be eligible for the relief you must meet the following criteria:

  1. You must be domiciled outside the UK – See here for more information on Residence & Domicile 
  2. You must claim the remittance basis of taxation – See here for more information on the Remittance Basis
  3. Have three consecutive full tax years of non-residence prior to the year of arrival in the UK
  4. Your income related to foreign workdays must be paid directly outside of the UK

Provided you meet these conditions, OWR is available to reduce taxable pay for the first three tax years from arrival. There is no limit to the number of three-year periods in which OWR can be claimed, as long as there are three consecutive years of non-residence prior to you coming, or returning, to the UK. The only limitation would be with regards to claiming the remittance basis and your domicile status.

The relief is calculated by apportioning your income earned in the UK to foreign and UK duties. Only the UK earnings are taxable in the UK and will generally result in a refund on the basis that full UK income tax has been withheld on the foreign earnings under PAYE. The UK earnings can be transferred to the UK but the foreign earnings must be retained outside of the UK indefinitely to be eligible for the full relief.

The Account

You must be paid directly into an offshore account. Many high street banks, such as HSBC, Barclays, Lloyds etc will have accounts available in the Channel Islands (Jersey/Guernsey/Isle of Man) that are considered as “offshore accounts” for the purposes of UK tax, but will still have UK banking credentials. This will allow your employer to pay you into the account with minimal confusion and you can transfer money to the UK with ease.

If you wish to remit money to the UK from the offshore account, it is important to know exactly what income is being remitted (to avoid an unnecessary tax charge), especially where the account contains income that has already been taxed in the UK and can be remitted tax free. There are complex rules that govern Transfers to the UK, but HMRC have kindly provided a simplified version if the offshore account is set up correctly.

HMRC have published legislation (s809 ITA 2007) which states that accounts which satisfy certain conditions (Qualifying accounts) can remit funds without the need to analyse each individual transaction. Instead, the remittance rules applied on the last day of the tax year only. Accounts that satisfy conditions will qualify for the “special mixed fund rules”. These rules will allow you to freely transfer money to the UK, but on the last day of the tax year, you must have enough money in the account to cover your OWR claim. For example, if you earn £100,000 and you work 20% of your days outside of the UK, you must have at least £20,000 in the account on the 5th April to claim the full relief.

An offshore account will be considered qualifying if it contains:

  • Income from a single employment (The account may be joint as long as the spouse does not also get paid into this account)
  • Interest arising on the account
  • Gains arising from foreign exchange transactions in respect of funds in the account
  • Gains arising on employee share scheme related transactions
  • Proceeds from employee share scheme related transactions in respect of amounts paid by the employee acquiring shares.

In short, the account should not receive any other transfers other than from a single employer. If the account does not qualify for the special mixed fund rules, then complex analysis may need to performed to determine how much of the foreign earnings have been retained outside of the UK.

Due to the complexity with making transfers to the UK, it is STRONGLY RECOMMENDED that a new qualifying offshore account is set up for each tax year. This will optimise the relief available and will make transfers to the UK easier.

The qualified account must be nominated on the Tax Return and must contain less than £10 immediately before the “qualifying date”. This date is the first date on which funds are paid into the account relating to earnings in the tax year during which OWR is claimed.

It is important to note that deferred compensation which relates to a period in which OWR was claimed, will also qualify for relief. An example of this would be a bonus relating to a previous year’s performance or deferred stock awards that were granted in an earlier year. This may allow an OWR claim beyond the three year period.

 

If you believe that you may be entitled to claim overseas workday relief or you wish to further discuss any of the above information, please do not hesitate to contact us and we can assist in making the relevant claims for relief.