Note: This file contains an analysis of the old Schedule E
provisions. It is only relevant for years before 2003/2004.
Reference should also be made to the current edition of
Taxation of Foreign Domiciliaries, as much of the material
there (not reproduced here) is also relevant for the earlier
years.
EMPLOYMENT INCOME BEFORE 2002/3:
SCHEDULE E
1. Schedule E
Tax is charged under Schedule E on income falling within one of
five paragraphs. Paragraph 1 is the most important and is the main
subject of this chapter. Paragraph 5 catches the residue where
Aany other provision of the Tax Acts@ directs tax to be charged
under Schedule E. The Schedule E provisions are unusually
convoluted and diffuse (and in the context of tax that is really
saying something).
2. Case I charge (resident and ordinarily resident employee)
The starting point of our trail is Case I of Schedule E:-
1 Tax under this Schedule shall be charged in respect of any office or
employment on emoluments therefrom which fall under one or more than
one of the following CasesC
Case I: any emoluments for any year of assessment
[a] in which the person holding the office or employment is resident and
ordinarily resident in the United Kingdom,
[b] subject however to section 192 if the emoluments are foreign
emoluments (within the meaning of that section) ...
Section 19 ICTA 1998 (paragraphing added).
At first sight, this imposes a charge on an arising basis on all
employment income of an individual who is UK resident and
ordinarily resident - even if not UK domiciled. The reference to s.
192 and foreign emoluments leads the reader to the foreign
domiciliary exemption.
3. Foreign domiciliary exemption to Case I charge
Section 192(2) provides:
Where:
[a] the duties of an office or employment are performed wholly outside the
United Kingdom and
[b] the emoluments from the office or employment are foreign
emoluments,
the emoluments shall be excepted from Case I of Schedule E.
(Paragraphing added.)
4. AForeign emoluments@
The next stage in our path is the definition of Aforeign
emoluments@ and this is found in s.192(1):
... Aforeign emoluments@ means the emoluments:
[a] of a person not domiciled in the United Kingdom
[b] from an office or employment under or with any person, body of
persons or partnership resident outside, and not resident in, the United
Kingdom...
[c] but shall be taken not to include the emoluments of a person resident in
the United Kingdom from an office or employment under or with a person,
body of persons or partnership resident in the Republic of Ireland.
(Paragraphing added)
5. Non-resident employer: Revenue practice
The Schedule E Manual paragraph 40103 provides:-
The benefit to the employee is clear. There is likely to be a big reduction in
the amount of emoluments chargeable to income tax in the United
Kingdom. You should examine the facts closely before accepting that
emoluments fall within this exception. In particular you should find out
whether the employer has any place of business in the United Kingdom. If
you can trace an accounts file for the employer, ask the accounts Inspector
for instructions on the employer=s residence status.
Particular care must be taken to ensure that this requirement is
satisfied if the employer is a Acaptive company@: see Cooke v
Blacklaws 58 TC 255.
6. Employer resident in Ireland
The remittance basis does not apply if the employer is resident in
Ireland. This is achieved by the drafting technique of saying that
emoluments from an Irish employer are not Aforeign
emoluments@. That might surprise the residents of Eire. The rule
is consistent with that applied to foreign investment income: see
4.20 (Foreign income taxed on arising basis: income from
Ireland).
7. Duties wholly performed outside the United Kingdom@
The next relevant provision is s.132(2) ICTA 1988, which
provides:
Where an office or employment is in substance one the duties of which fall
in the chargeable period to be performed outside the United Kingdom,
then, for the purposes of Cases I and II of Schedule E, there shall be
treated as so performed any duties performed in the United Kingdom the
performance of which is merely incidental to the performance of the other
duties outside the United Kingdom.
In other words, UK duties may be ignored if they are Amerely
incidental to the performance of the other duties outside the
United Kingdom@.
What are incidental duties? The Revenue interpret this strictly:
5.7 Whether duties you perform in the United Kingdom are Aincidental@
to your overseas duties depends on all the circumstances. If the work you
do in the United Kingdom is of the same kind as, or of similar importance
to, the work that you do abroad, it will not be merely incidental unless it
can be shown to be ancillary or subordinate to that work. It is normally the
nature of the duties performed in the United Kingdom rather than the
amount of time spent on them that is important, but if the total time you
spend working in the United Kingdom is more than 91 days in a year, the
work you do will not be treated as incidental. Examples of duties which
are normally not regarded as incidental are:
B attendance at directors= meetings in the United Kingdom by a director
of the company who normally works abroad
B visits to the United Kingdom as a member of the crew of a ship or
aircraft
B visits to the United Kingdom in the course of work by a courier.
5.8 If the work you do in the United Kingdom has no importance in itself
but simply enables you to do your normal work abroad, it may be treated
as incidental. The decision will depend upon all the circumstances in your
case. Examples of duties which are regarded as incidental are:
B visits to the United Kingdom by an overseas representative of a United
Kingdom employer to report to the employer or to receive fresh
instructions
B training in the United Kingdom by an overseas employee as long as
B the total time spent in the United Kingdom for training is not more than
91 days in a year, and
B no productive work is done in the United Kingdom in that time.
(IR 20 paragraphs 5.7 and 5.8).
The statement is consistent with the only authority on this point,
Robson v Dixon 48 TC 527. This concerned a pilot based in
Holland whose thirty-eight landings in the UK over a five year
period were not regarded as merely incidental to his overseas
duties. The test therefore does seem to be one of quality and not
quantity; the duties performed in the UK must be minor compared
with the overseas duties and they must further the purposes of the
overseas duties without having a character or importance of their
own.
8. Case III charge
Employment income outside the scope of Case I can be taxed
under Case III, which applies to:
Any emoluments for any year of assessment in which the person holding
the office or employment is resident in the United Kingdom (whether or
not ordinarily resident there) so far as the emoluments are received in the
United Kingdom.
(s.19 ICTA 1988: Schedule E Case III).
9. Resident but not ordinarily resident employee
This section considers the employee who is UK resident but not
ordinarily resident. Such a person is outside the scope of Case I.
This takes us to Case II which imposes tax on:
Case II: Any emoluments,
[a] in respect of duties performed in the United Kingdom,
[b] for any year of assessment in which the person holding the office or
employment is
[i] not resident
[ii] (or, if resident, not ordinarily resident)
in the United Kingdom,
[c] subject however to section 192 if the emoluments are foreign
emoluments (within the meaning of that section).
See s.19(1); paragraphing added for convenience.
The reference to s.192 is misleading as this section now provides
no relief from Schedule E Case II.
10. Summary
10.1 Summary of position for resident and ordinarily resident
employee
The foreign domiciliary who is resident and ordinarily resident in
the UK enjoys the remittance basis on employment income only
if:
(1) The employer is not resident in the UK; and
(2) The duties of the employment are wholly performed outside
the UK (ignoring incidental duties).
In other cases the income is taxed on an arising basis under Case I.
10.2 Foreign domiciled, UK resident but not ordinarily resident
employee
A foreign domiciled employee who is resident but not ordinarily
resident in the UK pays income tax on an arising basis in respect
of duties performed in the UK. He enjoys the remittance basis on
all other employment income.
10.3 Non-resident employee
The non-resident employee (wherever domiciled) pays income tax
in respect of duties performed in the UK. There is no other tax
charge.
The matter can be summarised in this table:-
Non-resident
Resident
Scope of
Basis of
Assessment
Assessment
OR Not OR OR or not OR
Case I
Y
N
N
Unlimited
(unless case III)
Arising
Case II N
Y
Y
UK duties
Arising
Case III Y
Y
N
Foreign duties Remittance
and Aforeign
emoluments@
11. How much of the emoluments are attributable to duties in
the UK?
SP 5/84 para 2 states:
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
of the emoluments are attributable to the UK duties. Apportionment of
emoluments is essentially a question of fact, but for many years now the
Revenue have accepted time apportionment, based on the number of days
worked abroad and in the UK, except where this would clearly be
inappropriate, and it is not intended to disturb this practice. For example,
in the case of an employee with 200 working days in the UK and 50
working days outside the UK, the proportion of emoluments attributable to
UK duties would be 200/250.
Time apportionment would be inappropriate if there are different
rates of pay in the two places of work, but the employee will need
to provide evidence of this.
12. Dual contract arrangements
Where an employee has duties which are performed partly within
and partly outside the UK, the common strategy is for him to have
two contracts of employment:-
(1) Under one contract he would undertake the UK activities. The
contract for UK duties will be chargeable on the arising basis
under Case I.
(2) The other contract would be in respect of his activities in the
rest of the world. The contract for foreign duties will be excepted
from Case I and chargeable on the remittance basis under Case III.
The employer must be non-resident.
It would be tidier to have a separate employment with separate
companies - even if they are members of the same group. This
stops the Revenue arguing there is actually only one contract. But
this is not essential.
The attribution of income between the two employments is
governed by statute:
The amount of the [excepted] emoluments shall not exceed such
proportion of the emoluments for that year from the relevant employment
and the other employment or employments (if any) as is shown to be
reasonable having regard to the nature of and time devoted to the duties
performed outside and in the United Kingdom respectively and to all other
relevant circumstances.
See s.192(5) and Schedule 12 paragraph 2(2) ICTA 1988.
The Revenue examine these arrangements closely. Schedule E
Manuals 40103-4 set out the Revenue view:-
SE40103. Foreign emoluments exception: dual contract arrangements
Non-domiciled individuals sometimes come to work for United Kingdom
resident employers. Depending on the length of their visit they may be
Resident and Ordinarily Resident from the date of arrival. They may locate
in London but the job may have European or global dimensions which
requires foreign travel and the performance of duties outside of the United
Kingdom.
Emoluments from a single employment with duties performed inside and
outside of the United Kingdom are chargeable under Case I, assuming that
the employee is Resident and Ordinarily Resident. Even though the
individual is not domiciled there is no exception from Case I.
In the circumstances described above the employee may be offered two
employments instead of one:
A Employment 1 covering the performance of duties in the United
Kingdom and
A Employment 2, usually with an associated company resident offshore,
covering duties performed in the rest of the world, excluding the United
Kingdom.
The two, or more, employments may require very similar duties to be
performed. The only significant difference is the geographical areas in
which those duties are carried out.
The advantage to the taxpayer is that the emoluments from Employment 2
are excepted from Case I of Schedule E and are only chargeable under
Case III if remitted to the United Kingdom. For this reason, dual contract
arrangements are popular among non-domiciled employees assigned to
work in the United Kingdom.
Identification
Taxpayers should complete a separate copy of the Employment Pages in
the SA Return for each employment held during the relevant year. This
includes the two or more employments held under a dual contract
arrangement. Employment Pages returning the second Aoffshore@
employment may only carry a statement of total emoluments paid or
provided. If there has been no remittances in the year there will be a
matching deduction in Box 1.31.
Action in Districts
You may seek to establish that:
A There are two (or more) employments in reality and not one
employment that has been artificially divided to exploit the provisions of
Section 192(2).
A No duties under the Aoffshore contract@ have been performed in the
United Kingdom
If emoluments paid under the two (or more) contracts appear to be
disproportionate you may consider invoking powers provided by
Paragraph 2 Schedule 12 ICTA 1988 (applied to these circumstances by
Section 192(5)). The legislation permits the Inspector to reapportion the
remuneration on a commercial basis, to ensure that the amount paid in
respect of UK duties is a fair proportion of the total remuneration from
both or all associated employments.
Where the facts of a case lead you to suspect that the provisions of
Paragraph 2 Schedule 12 should be invoked, submit the papers to Personal
Tax Division, Solihull., before taking any other action. Further guidance
and information on dual contract arrangements may be obtained from the
Personal Tax Division, Solihull.
See example SE40104.
SE40104. Dual contract arrangements: example
A US citizen is employed by ABC Inc, a company resident in the US. The
employee is assigned to work in London for a subsidiary company DEF
Ltd for a period of 5 years. It is estimated that 40% of duties will be
performed outside of the United Kingdom, in Europe and the US.
The employee relocates to London. In consequence of his intention to
remain in the United Kingdom for 5 years he is Resident and Ordinarily
Resident from the date of arrival but not domiciled.
The employee is invited to structure the employments as described below:
ABC Inc.
This employment continues from before and throughout the period of the
assignment. The letter of assignment specifies a list of clients and duties to
be serviced and dealt with outside of the United Kingdom.
DEF Ltd.
The new employment commences with the employee=s arrival from the
US. Duties specified in the contract include a portfolio of clients and line
management responsibilities in the United Kingdom.
The contract with ABC Inc is remunerated at a rate approximately 50%
higher than that with DEF Ltd.
Comments
The employee is not domiciled in the United Kingdom. ABC Inc is not
resident here but resident in the US. If the duties of this employment are
performed wholly abroad then the emoluments will be excepted from Case
I of Schedule E and only charged under Case III if they are received in the
United Kingdom.
Emoluments from DEF Ltd fall into Case I and are not excepted.
If the employee was assigned to carry out one employment, but at a later
date that was sub-divided to exploit Section 192(2), you may challenge
and seek evidence that there are two employments in reality.
ABC Inc and DEF Ltd are Aassociated@ within the meaning of Section
416 ICTA 1988. The disparity in levels of remuneration may require use of
Paragraph 2 Schedule 12 ICTA.
Seek advice from Personal Tax Division, Solihull. before taking action on
points (3) and (4) above.
12.1 Implications for employer
Inspectors Manual para. 5348 provides:-
Apart from the Schedule E implications there are other questions to
consider:A Is the cost of remunerating the individual under his contract for overseas
duties effectively borne by a UK company and claimed as a deduction in
computing profits which are chargeable to Corporation Tax? If so, there is
a mismatch which will need to be considered with some care.
A Do the individual=s activities under the contract for overseas duties
generate income, and if so to whom does it accrue? Is income which
would otherwise accrue to a company which is liable to Corporation Tax
being routed to an overseas company?
A If the profits of a company which is liable to Corporation Tax are
computed on a cost plus basis are the costs being depressed by reason of
the split employment?
13. The Schedule E remittance basis
Schedule E Case III imposes the charge on any emoluments
received in the UK.
Section 202A(1)(b) provides:-
income tax shall be charged under Case III of Schedule E on the full
amount of the emoluments received in the United Kingdom in the year in
respect of the office or employment concerned.
But this adds little to s.19. Section 132(5) ICTA 1988 is more
significant:
For the purposes of Case III of Schedule E, emoluments shall be treated as
received in the UK if Athey are paid, used or enjoyed, in or in any manner
or form transmitted or brought to, the United Kingdom ... .
These words are perhaps intended to extend the concept of
Areceived in the UK@ beyond that which applies to the Schedule
D remittance basis. Though it is arguable that the draftsman only
had in mind a modern paraphrase of the antique language of the
four sub-heads of Schedule D, Case V. There is no authority
discussing these words. (The question was raised but left open in
Harmel v Wright 49 TC 149.)
It is clear that most of the rules of the Schedule D remittance basis
apply to the Schedule E remittance basis; and in particular the
principle of Carter v Sharon 20 TC 229 apply, with the result that
income transferred abroad to others may be remitted by them to
the UK without any charge to tax.
Section 132(5) also provides:
subsections (6) to (9) of section 65 shall apply for the purposes of this
subsection as they apply for the purposes of subsection (5) of that section.
This brings in the deemed remittance rules.
The Schedule E Manual provides at 40302:-
Paid in the United Kingdom
Emoluments are Areceived in the United Kingdom@ if they are paid to the
employee in cash in this country or if the employee=s bank account here is
credited with them. Employees may arrange to have emoluments paid into
offshore bank accounts to avoid this rule. Money that is transmitted from
the employer=s bank in the United Kingdom to the employee=s offshore
bank is not treated as received here. It has been in the banking system all
of the time; the employee did not have access to it.
This conclusion is correct, though the statement that the money
has Abeen in the banking system@ is layman=s language.
14. Claims
No claim is required: a remittance basis for Schedule E Case III
income is compulsory. This is probably deliberate as there are few
circumstances where a taxpayer would wish not to make a claim.
Compare 5.7 (Claims).
15. Chattels purchased out of employment income and
brought to UK
If employment income is applied in the purchase of assets which
are brought to the UK, it is suggested that the income has been
transmitted to the UK Ain some manner or form@. This is the
Revenue view: Schedule E Manual 40302:-
Assets
If an employee receives emoluments abroad but then uses them to
purchase assets such as a car or a painting and then brings the assets into
the United Kingdom the cost of the assets is regarded as an amount
assessable under Case III.
This is also supported by an obiter comment of Carnwath LJ;
Grimm v. Newman [2002] STC XXX, para. 100-101. Contrast this
with the Schedule D remittance basis: see 5.23 (Remittance of
chattels in specie).
16. Remittance after employment ceases
Section 19(4A) and s.202A ICTA 1988 frustrate attempts to
exploit the source doctrine for Schedule E purposes. These
provisions cause the charge under Schedule E Case III to be on the
full amount received in the UK in the year of assessment whether
or not the employment is held at the time of the remittance. Again,
this may be contrasted with the more favourable position under
Schedule D: see 5.46 (Source ceasing principle).
17. Remittance when not UK resident
However, to be chargeable under Case III, the emoluments must
be in respect of a year of assessment in which the employee was
resident in the UK. Accordingly, any emoluments earned for a
year during which the employee was not UK resident can be
remitted at any time without any charge to tax.
18. Remittance after acquisition of United Kingdom domicile
Where:
(1) A foreign domiciliary retains Schedule E Case III income
abroad.
(2) He acquires a UK domicile.
(3) He subsequently remits the income.
The income is still taxable. This is plain from the wording of
Schedule E Case III. Section 202A ICTA 1988 provides:-
(1) As regards any particular year of assessmentC
(a) income tax shall be charged under Cases I and II of Schedule E on the
full amount of the emoluments received in the year in respect of the office
or employment concerned;
(b) income tax shall be charged under Case III of Schedule E on the full
amount of the emoluments received in the United Kingdom in the year in
respect of the office or employment concerned.
(2) Subsection (1) above appliesC
(a) whether the emoluments are for that year or for some other year of
assessment;
(b) whether or not the office or employment concerned is held at the time
the emoluments are received or (as the case may be) received in the United
Kingdom.
Contrast the position for Schedule D Case V income; see ?
(remittance after acquisition of UK domicile).
19. Remittance after death of employee
The draftsman has even provided for this case. Section 202A
continues:-
(3) Where subsection (1) above applies in the case of emoluments
received, or (as the case may be) received in the United Kingdom, after the
death of the person who held the office or employment concerned, the
charge shall be a charge on his executors or administrators; and
accordingly income taxC
(a) shall be assessed and charged on the executors or administrators, and
(b) shall be a debt due from and payable out of the deceased=s estate.
If executors receive Case III emoluments in the UK, there is a tax
charge. If they receive emoluments out of the UK and assent to
beneficiaries, there is no charge.
20. Mixed Schedule E Case II and Case III emoluments
Statement of Practice 5/84 explains:-
SP 5/84 (28 March 1984) Employees resident but not ordinarily resident in
the UK: liability under Schedule E Cases II and III
1 An employee resident but not ordinarily resident in the UK is liable to
UK tax under Schedule E Case II, on emoluments wherever received for
duties performed in the UK. He is also liable under Schedule E Case III,
on emoluments for duties performed outside the UK but only to the extent
that they are received in or remitted to the UK.
...
3 Where an employee resident but not ordinarily resident in the UK
performs the duties of a single office or employment both in and outside
the UK and is remunerated wholly abroad, he is permitted, by a broad
interpretation of the decision in the case of Sterling Trust Ltd v IRC 12 TC
868, to say that any remittances made to the UK are made primarily out of
emoluments for that year in respect of duties performed in the UK
assessable under Case II, and only any balance out of emoluments
assessable on the remittance basis.
4 However, where part of the emoluments have been paid in the UK, or
benefits have been used or enjoyed in the UK, it has been the practice of
the Revenue to regard the proportion of emoluments paid, used or enjoyed
in the UK, as in respect of duties performed both in and outside the UK,
and to treat that proportion of such emoluments as is attributable to duties
performed outside the UK as Areceived in@ the UK for the purposes of
Case III.
5 The Board of Inland Revenue has now decided that the procedure should
be simplified for employees whoC
(a) are resident but not ordinarily resident in the UK;
(b) perform duties of a single employment both in and outside the UK, so
that they are potentially liable under both Schedule E Cases II and III, in
respect of emoluments from that employment; and
(c) receive part of their emoluments in the UK and part abroad.
In such cases, provided the emoluments assessable under Case II are
arrived at in a reasonable manner (ie in the presence of special facts, the
proportion of the emoluments, including benefits in kind, relating to UK
duties is arrived at on a time basis by reference to working days), the
Revenue are prepared to accept that Case III liability will arise only where
the aggregate of emoluments paid in, benefits enjoyed in, and emoluments
remitted to, the UK exceeds the amount assessable under Case II for that
year; and to restrict the Case III assessment to the excess of the aggregate
over the Case II assessment.
21. Foreign service exemption for termination payments
Termination payments are subject to tax under Schedule E
paragraph 5, so the Case III rules (which apply to paragraph 1) do
not apply here.
When a foreign domiciliary comes to the UK having worked for
an overseas employer for a number of years, he may receive a
termination payment after his arrival in this country. This would
ordinarily be chargeable under Schedule E by s.148 ICTA 1988 to
the extent that it exceeds ,30,000. However, Schedule 11,
paragraph 8 provides a territorial exemption.
Exclusion or reduction of charge in case of foreign service
9C(1) If the employee=s service in the employment in respect of which the
payment or other benefit is received included foreign service, thenC
TA 1988, 11 SCH 9
(a) in certain cases, tax is not charged under section 148 (see paragraph
10);
(b) in other cases the amount charged to tax is reduced (see paragraph 11).
(2)@Foreign service@ for this purpose meansC
(a) service in or after the tax year 1974-75 such thatC
(i) the emoluments from the employment were not chargeable under Case I
of Schedule E (or would not have been so chargeable, had there been any),
or
(ii) a deduction equal to the whole amount of the emoluments from the
employment was or would have been allowable under paragraph 1 of
Schedule 2 to the Finance Act 1974, paragraph 1 of Schedule 7 to the
Finance Act 1977 or section 192A or 193(1) of this Act (foreign earnings
deduction);
(b) service before the tax year 1974-75 such that tax was not chargeable in
respect of the emoluments of the employmentC
(i) in the tax year 1956-57 or later, under Case I of Schedule E;
(ii) in earlier tax years, under Schedule E.
10 Tax is not charged under section 148 if foreign service comprisesC
TA 1988, 11 SCH 10
(a) three-quarters or more of the whole period of service down to the
relevant date, or
(b) if the period of service down to the relevant date exceeded ten years,
the whole of the last ten years, or
(c) if the period of service down to the relevant date exceeded 20 years,
one-half or more of that period, including any ten of the last 20 years.
11C(1) Where there is foreign service and paragraph 10 does not apply, the
person chargeable to tax under section 148 may claim relief in the form of
a proportionate reduction of the amount charged to tax.
The amount charged to tax means the amount after any reduction under
paragraph 7 (application of ,30,000 threshold).
(2) The proportion is that which the length of the foreign service bears to
the whole length of service in the employment before the relevant date.
(3) A person is not entitled to relief under this paragraph in so far as the
relief, together with any personal relief allowed to him, would reduce the
amount of income on which he is chargeable below the amount of income
tax which he is entitledC
(a) to charge against any other person, or
(b) to deduct, retain or satisfy out of any payment which he is liable to
make.
(4) For the purposes of sub-paragraph (3)C
(a) Apersonal relief@ means relief under Chapter I of Part VII; and
(b) the amount of tax to which a person is or would be chargeable means
the amount of tax to which he is or would be chargeable either by
assessment or by deduction.
A payment satisfying the above conditions can be remitted free of
income tax to the UK. It is a moot point whether the payment may
give rise to CGT, but it may be that in practice the Revenue do not
take that point.
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