Friends with Benefits
A brief small business guide to having a shareholder that is based in an overseas market
A month rarely passes in which one of the professional tax magazines does not carry an article, comment or legal finding concerning an aspect of the taxation of employees working overseas. This is reflected in the increasing number of such questions that we field from our clients, although, in light of our primarily small and medium enterprises client base it is often a shareholder director of a UK company who is based overseas.
I was recently asked to advise on the UK tax exposure of various benefits in kind provided to an individual living overseas, a non UK resident, who is the controlling shareholder and a director of a UK trading company.
The Act (ITEPA 2003 s15 and s27) tells you that you pay tax on earnings (which includes Benefits in Kind) to the extent that they are ‘in respect of duties performed in the United Kingdom’. Section 15 is the charging provision for earnings from duties performed in the UK in a year in which the employee or director is resident in the UK and Section 27 deals with the earnings from UK duties of a non-resident employee or director.
The Revenue Manual (EIM 40221) helpfully says that ‘where all of the duties are performed here calculation is not difficult but where duties are performed partly in the United Kingdom and partly overseas, time apportionment is generally used’ and proceeds to advise on the calculation to arrive at the amount of general earnings in respect of duties performed in the UK. Its approach is quite simple:
- calculate total general earnings (both cash and non-cash benefits) from the relevant employment for the year
- establish the number of workdays that the employee worked in respect of the employment in the year. This is the denominator in the apportionment fraction.
- establish the number of workdays that the employee spent working in the United Kingdom in the year. This is the numerator in the apportionment fraction.
This is not good news for a director who, perhaps on approaching retirement, has moved to sunnier climes and whose duties are limited to attending Board Meetings in the UK. All his earnings and Benefits in Kind will be taxed in the UK. This might be avoided if the director ‘attends’ such meetings virtually by phone or Skype.
The courts have consistently taken the view that time apportionment should not be applied to earnings that can be specifically allocated either to duties performed in the UK or to duties performed elsewhere. So, to take an extreme example, time apportionment would be wholly inappropriate in a case where an individual performs duties in the UK and, say, in Canada and is provided with a car in the UK to facilitate the performance of those duties. It would be difficult to argue that the benefit of the car is not ‘in respect of duties performed in the UK’.
By the same token, the benefit of a car provided in Canada would not be regarded as being ‘in respect of duties performed in the UK’. It will always be a question of fact and time apportionment should be adopted as a last resort only where an alternative approach is not available.
By Stephen Deutsch of BKLTax, member firm of the UK200Group and of the UK200Group Tax Panel