Joint Forum on Expatriates Tax and NICs
Minutes of meeting 8 May 2008
Present
HM Revenue & Customs (HMRC)
Peter Ashby – Grant Thornton LLP
Nigel Doran – Macfarlanes
Philip Paur – Deloitte & Touche LLP
Andrew Buckle – Deloitte & Touche LLP
Barry Cocks – KPMG LLP
Sarah Robert – KPMG LLP
Eleanor Meredith – PricewaterhouseCoopers LLP
Liz Morgan – PricewaterhouseCoopers LLP
Steve Wade – Ernst & Young LLP
Matthew Fox – Grant Thornton LLP
Martin Dwyer – HMRC – CPTT
Rob Pearce – HMRC – CPTT
Mike Harmon – HMRC – PAYE Technical
Graham Lewis – HMRC – PAYE Technical
Jon Clarke – HMRC – CAR ESSU
Taxation of Bonuses
Although there was no fixed agenda as such Dwyer opened the meeting by highlighting the issues he hoped would be covered. The meeting agreed that Dwyer had identified the major areas of concern and therefore agreed to proceed on the basis suggested.
Clarification of HMRC Position
Harmon referred back to the meeting held on 18 October 2007 during which he had set out in clear terms the HMRC view of the technical position as he understood it. This had prompted much reaction from advisors and businesses alike and as a consequence of this Harmon had agreed to take further advice from the Board’s Solicitors Office.
This advice confirmed that HMRC may have placed too much emphasis on conditionality where a basket of facts and indicators were available for consideration. Following the principle established in the case of Bray v Best (STC159 1989) HMRC would now determine the period to which any given payment was to be attributed by reference to the facts in each case. Harmon made reference to a legal opinion expressed by Counsel (Michael Sherry) which had been provided to HMRC by Deloitte & Touche LLP. Harmon confirmed that HMRC were now able to accept the conclusions expressed in this opinion.
Evidence and Indicators
Dwyer explained that reviewing cases by reference to their particular facts would involve HMRC in seeking access to relevant documentation. He was interested to establish what the external advisors take into consideration when considering for themselves when bonuses were ‘for’.
HMRC were advised that the starting point would normally be asking the employee what he believed the bonus to be in respect of. In some cases the information supplied would be sufficient to enable the advisor to complete the SA tax return accordingly. However, in general there will be some contemporaneous documentary evidence such as bonus plan documentation, bonus award notification or similar. In some circumstances it may be possible to deduce from the Contract of Employment that bonus entitlement by reference to performance periods was a clear expectation.
Often documentation would include reference to good leaver or change of control provisions which supported the view that bonuses were earned over a period and allowed for delivery of pro-rated amounts in these circumstances.
HMRC confirmed that where they felt an enquiry was appropriate they would seek access to such documentation, approaching the employee or employer as necessary to obtain this. HMRC accepted that conditionality would be a factor in most bonus arrangements but confirmed that where other evidence pointed to the earnings being related to a period these would be taken into account. The decision as to what period such earnings were ‘for’ would always depend on the facts and it would be essential for HMRC to clarify the understanding of the parties with regard to the bonus payment.
The meeting concluded that in most cases it should be possible by reference to the evidence available to deduce that the payment was indeed earned over a period. However, it was accepted that there may be occasions where the evidence did not point in this direction and where this was the case HMRC explained that they would take the view that the bonus was ‘for’ either the tax year of payment or, if conditions applied, the tax year in which these conditions were met.
HMRC were advised that in general there were three types of bonus payments in operation within the market place. The first of these were termed spot bonuses and were payable by reference to no particular earnings period. It was generally accepted that spot bonuses would be ‘for’ the year in which they were paid, unless they were paid for a specific period, eg a half year bonus to 30 June paid in July would be split between two tax years.
Secondly there were annual bonuses which were based on performance over a given period but which would normally include a conditional element requiring that the employee must remain in employment at the time the bonuses are payable to qualify for payment. HMRC confirmed that where the evidence in respect of such bonuses pointed to reward by reference to a performance period the bonus would be regarded as ‘for’ a period despite the existence of the conditional element. It was the case of course that any individual who left the employment in advance of the payment date would not receive a bonus and in such circumstances there would be no payment to consider.
The third and most complex arrangements were Long Term Incentive Plans (LTIP’s). These would typically provide for reward by reference to earnings periods of varying duration. They would often seek to include a retention element and may provide for the reward to be taken in the form of cash or shares.
Transition Period
HMRC recognised that some taxpayers, advisors and employers may have acted in accordance with the advice contained within the published notes of the meeting held on 18 October 2007.
Where it was evident that individuals had submitted 2006-07 Self Assessment returns in accordance with this published advice HMRC would not make enquiries to challenge the impact of conditionality in these cases.
It was confirmed during the meeting that some advisors had provided guidance to their employer clients relating to PAYE operation in the light of the published advice of 18 October 2007. HMRC confirmed therefore that where it could be shown that an employer had applied the published HMRC view regarding the impact of conditionality and as a consequence had excluded from PAYE bonuses which were in fact earned over a given period, HMRC would not seek to contend that these employers had failed to operate PAYE in these circumstances.
However, since the HMRC position was clarified at the joint forum on expatriate tax and NIC meeting held on 28 February 2008 it was HMRC’s view that for 2007-08 SA return reporting the position was now clear and as a consequence in those cases where PAYE may not have applied to the full extent of bonuses now considered taxable in the UK, HMRC would expect the SA returns to account for any residual liabilities.
The external representatives confirmed their understanding and agreement to this position but were reluctant to provide HMRC with details of those employers who had operated PAYE in accordance with the HMRC guidance dated 18 October 2007.
Existing Open Cases
Dwyer explained that he would now advise his colleagues within CPTT to revisit those cases temporarily set aside whilst HMRC resolved its position regarding the impact of conditionality. The general feeling was that in most of these cases information had already been provided to HMRC which contained the necessary evidence to enable a conclusion to be drawn regarding whether or not the earnings delivered were reward for services over a given period. However, it was also accepted that there remained some more complex cases involving LTIP’s where a lack of clarity regarding the methodology of apportionment of earnings to particular periods remained.
Dwyer confirmed that he would provide some interim guidance to CPTT which would at least hopefully ensure that the more straightforward open cases can be resolved with the minimum of additional enquiry. The more complex open cases may still require technical input and additional information before proposals regarding the relevant apportionment can be put on the table.
In the long term it was hoped that HMRC would be able to produce definitive guidance with examples to outline a variety of scenarios so that these could be used as a reference point for HMRC staff and external advisors.
Foreign Tax Credit Relief
Following the clarification of HMRC’s position regarding the impact of conditionality it was felt that there would now not be large numbers of cases where there was misalignment between periods for which the UK considered an earning was for and the period for which an overseas fiscal authority had considered the same earnings to be chargeable. However, where there were no pointers to a particular earnings period the impact of conditionality would still be relevant and in these circumstances HMRC would regard the earnings as for the year in which the condition was met irrespective of the position adopted by other countries.
In such circumstances HMRC was nevertheless prepared to “respect” the period for which any other fiscal authority charges a bonus to tax under their domestic legislation and will calculate any Foreign Tax Credit Relief due in the UK by reference to this period. As a consequence even where the UK charges the earnings by reference to a different period we will calculate credit by reference to the effective rate and Foreign State sourcing for the year in which that State has taxed the earnings. This will mean that in practice, whether HMRC assesses earnings as a reward for services rendered over a particular period or not the amount of credit available in the UK will be calculated by reference to the period when the other State has taxed these same earnings. HMRC will establish the effective rate of foreign tax paid for this period and determine the extent of any doubly taxed income by reference to the number of days spent working in the State within this period.
Treaty Exemption was discussed, particularly in respect of bonus payments made after an individual ceases to be resident in the UK but which relate to a period when he was R/OR in the UK. Clarification was requested as to whether or not the individual would be entitled to exemption under a Double Taxation Treaty if he was a treaty resident of a partner country for the year in which the payment was received and part of the earnings period to which the bonus related had involved working outside the UK. In these circumstances the external advisors felt that the UK would be limited by the treaty to taxing only that part of the bonus which related to UK workdays within the period for which the payment was “for”. Dwyer agreed to take this query away and clarify with the relevant technical specialists with a view to reporting back at the forthcoming Joint Forum Meeting on 22 May 2008.
Deferrals
HMRC explained that one of the difficulties they faced was attributing earnings delivered from deferred compensation arrangements where deferrals had been effectively made pre and during UK assignment. It was agreed that it was important to distinguish between pure deferred compensation and retirement benefit arrangements but where we were indeed looking at deferred compensation the external advisors confirmed that it was by no means the case that detailed tracking arrangements existed across the board. There may be some cases where it was indeed possible for individuals to know by reference to the tracking applied, the link between the amounts paid out and the amounts originally deferred, but in many cases no such sophisticated tracking was applied.
In these circumstances HMRC asked for confirmation of the advice given to employers by advisors regarding how to determine the amounts taxable in the UK. The general feeling was that since there was no legislation or guidance to assist in this respect advisors would be left to produce a solution which in their view provided an equitable answer. It was accepted however there were various possibilities including first in first out, last in first out, and straightforward apportionment over the life of the deferral plan. It was recognised that there was no easy answer to this issue since often the arrangements were particularly complex. However, it was agreed that it would be useful if possible to include reference to these difficulties together with some guidance and an example within whatever examples and guidance intended to be inserted in the Employment Income Manual in due course.
Salary Sacrifice
HMRC also pointed to difficulties relating to the Salary Sacrifice of bonuses linked to the provision of other reward, possibly shares. The difficulty related to any linkage between the delivery of shares or other earnings and the period over which the amount originally sacrificed was earned. HMRC explained that there was often an assumption that the earnings delivered could be related back to the period for which the amount sacrificed was earned, notwithstanding the fact that the sacrifice documentation provided for no such link and effectively gave up all rights and claims in respect of the amount sacrificed. HMRC advice was that the Bray v Best principle applied – it was dependant upon the facts. The salary sacrifice documentation should contain evidence of the wishes of the parties if it was indeed the case that whatever would ultimately be paid to the employee was intended to be referable to the period over which the amount sacrificed was earned. If such evidence was not available it was likely that HMRC would take the view that the link to this earnings period was broken by the employee’s decision to give up all rights to earnings for the original reference period.
Money’s Worth Charge (Section 62 ITEPA 2003)
HMRC confirmed that they were taking steps to align more closely the treatment of securities based remuneration with the rules applying to cash. However for the avoidance of doubt where a monies worth charge in accordance with Section 62 arose it was already the case that the interpretations agreed in respect of cash bonuses would apply.
Examples and Guidance
The meeting concluded with a general understanding of the HMRC position and a wish that this be clarified by reference to guidance with examples within the Earned Income Manual at an earlier opportunity.
HMRC have prepared some simple examples relating to annual bonuses and intend to share these with representatives of the joint forum in advance of the next meeting on 22 May 2008. However, examples of more difficult LTIP type arrangements will need more time to develop. It was suggested and agreed that some of the more complex cases which remain open could form the basis of anonymised examples in due course. However in the meantime HMRC asked for the co-operation of external advisors to provide any examples for consideration to contain not only the technical position adopted by the advisor but the rationale for this.
HMRC have also produced some detailed examples relating to share based remuneration and it was agreed that these should be made available for discussion through the Share Schemes Sub Group.
Sharing of information within HMRC
The external representatives explained that it was both frustrating and costly to be asked to supply policy documentation in connection with (for example) a S9A enquiry where this had already been supplied to and reviewed by HMRC in connection with an EC enquiry. HMRC were asked to ensure that details of all documentation held was made more widely available in order to prevent such duplication. Furthermore, where HMRC have agreed on the treatment applicable this should also be shared so as to ensure that no unnecessary enquiries are raised under S9A to challenge or clarify treatment in accordance with a methodology already agreed elsewhere by HMRC.
Martin Dwyer
HM Inspector of Taxes
