UK tax on foreign employment income

[go-fish]

Hello,

I worked for a UK employer until December 2012. I received a P45 for this employment. For some reasons, I had to take up employment in the USA for 3 months time. I paid taxes in the USA for the US income. I came back in April this year and took up employment with a new employer and started paying UK taxes for the income thereafter. I didn't take any action after coming back as I thought that since UK and USA have a double taxation agreement and I paid taxes in respective countries, things should be okay.

Today, I received a P800 which considered only the initial P45 in tax calculation for 2012-13 and showed refund due to me. I am getting a feeling that something is not correct. Since I have been always paid through PAYE in the UK , I never had to file tax return, so not sure what to do to set things right. Please could anyone experienced advise what should be done so that I don't end up being accused of tax fraud.

Please advise if I have to file tax return and I do that before October 31, will I be subject to any penalties?

Many Thanks

[go-fish]

Hello,

I worked for a UK employer until December 2012. I received a P45 for this employment. For some reasons, I had to take up employment in the USA for 3 months time. I paid taxes in the USA for the US income. I came back in April this year and took up employment with a new employer and started paying UK taxes for the income thereafter. I didn't take any action after coming back as I thought that since UK and USA have a double taxation agreement and I paid taxes in respective countries, things should be okay.

Today, I received a P800 which considered only the initial P45 in tax calculation for 2012-13 and showed refund due to me. I am getting a feeling that something is not correct. Since I have been always paid through PAYE in the UK , I never had to file tax return, so not sure what to do to set things right. Please could anyone experienced advise what should be done so that I don't end up being accused of tax fraud.

Please advise if I have to file tax return and I do that before October 31, will I be subject to any penalties?

Many Thanks

Additional info - I am an Indian citizen but have a British permanent residency (ILR).

[go-fish]

Any response, please.

[Lambs]

G,

While resident in the UK, you are generally liable to worldwide income and gains - including those in the US.

According to standard domestic UK tax law, a 3-month 'stint' in the US will not stop you remaining resident in the UK.

So generally, you will have to account for your foreign earnings to the UK tax authorities - but you should be able to set any foreign (US) tax paid on that income, against any corresponding UK liability - although what you cannot do is end up with an effective refund of US tax through the UK regime: the US credit may get you down to 'nil' but no further.

You are right to mention that the UK/US DTA is relevant. But there are several factors to consider and it is no easy ask for a forum to provide the answers. If you don't mind my asking, what was the nature of the work - was it a private third-party employer, a secondment within a group of companies, or a governmental appointment?

Finally, there is the question of domicile. If you are an Indian citizen, it may well be that you are domiciled without the UK: what we refer to as a "non-dom". In which case, the "remittance basis", which taxes in the UK broadly only that income, etc., which is put at your disposal in the UK, may well apply. If you have remitted all your US income to the UK anyway, the point is moot. (Clearly something where advice beforehand might have served you better). But likewise, if the tax paid in the US exceeds your potential UK liability, then again, effectively moot. (But again, you'd prefer to know before the tax bill lands). It may be helpful if you can give us an idea of the amounts involved. The rules are broadly similar at any level of income. But the tax rates are not.

HMRC will say that you should have notified them of potential chargeability to UK tax over and above your normal UK liability, in the tax year ended 5 April 2013, before 5 October. You are potentially exposed to penalties for that failure to notify - but NOT so long as you are settled up (or otherwise have no UK liability for 2012/13) by 31 January 2014 - the normal filing/payment date. But I think you will probably have at least to file a UK return by no later than 31 January next.

Much to think about, which may be why the stalwarts on the forum have taken time to ponder.

Regards,

Lambs

[go-fish]

@ Lamb

Thanks for your detailed response.

Actually, I left UK to take up full-time employment as a local employee in the US branch of my UK employer. I received a P45 from the UK employer when I left. So technically, it was not an international assignment or secondment as my US employment earnings related completely to duties performed in the USA for a US based employer. Hence, I was on US payroll and wholly taxed at source as per US tax laws. I did not have any UK source employment income from December,12 to April, 13. It was not a pre-defined 3 month stint, I didn't like it so left the job and came back. I have been reading about this on the internet, and I partially understand that UK tax liability on foreign employment earnings come into picture when one is working overseas on behalf of a UK employer or agent through assignment, secondment etc. In my case, since its different, would not DTA allow for not being taxed in UK for my US source income?

My taxable income for UK employment as per P45 is about GBP 30,000 and taxable income from US employment is GBP 20,000 (after currency conversion). I have already paid taxes on respective amounts at source. I paid GBP 3000 (after currency conversion) as US taxes. The received P800 reflects only GBP 30,000 and taxes me in 20% bracket, which results in a refund. What I want to be clear about is should I calculate my UK tax liability on combined earnings of GBP 50,000 and offset the calculated tax by GBP 3000 foreign tax credit. This will result in underpayment and I will owe tax.

Please advise.

[Lambs]

G,

Without going into all the detail, all the UK/US DTC does is permit the US to tax you, as well as the UK. If you had known from the outset that you were not going to spend more than 6 months there AND your employer had no PE in the US, you might have avoided US tax. But I suspect that you will have had a US-based payroll operator, who understood that you were there indefinitely and taxed you accordingly.

None of this prevents the UK from maintaining its right to tax you as a resident in the UK. You can shed UK residence by reference to UK domestic legislation only by working full time overseas for at least a complete UK tax year.

You should not ignore domicile. In these circumstances it stands to help you far more than the DTC - unless you have already remitted your US income.

Unfortunately, you stand to pay significantly more than 15% tax in the UK, if you are indeed taxable here on the full amount of US income - you will straddle both Basic Rate at 20% and Higher Rate tax at 40%.

Regards,

Lambs

[go-fish]

What should I do now to get things right?

I remitted the US earnings (around GBP 10000) to UK after 5 April, 2013 so should they be taxed in 2013-14 tax year?

How should I calculate income taxes for my case?

Would I be able to claim any foreign tax credit for taxes paid in US?

[Lambs]

G,

The issue of domicile and remittance is one of the most complex areas of personal taxation. The viability of the remittance basis at income levels like this depends on your presence in the UK for the last several years. For how many years were you in the UK, prior to your leaving for the US? It may not be worthwhile. But as I said earlier, you can claim relief for US Income Tax paid, if that income also be chargeable in the UK.

Regards,

Lambs

[go-fish]

I was in the UK for about 2 years.

[go-fish]

Any further guidance, please.

Since I have already remitted the earnings, does remittance tax basis come into picture now? Also I read that one looses personal exemption when taxed on remittance basis. So should I go for arising basis?