UK taxman benefits from foreign workers tax mistakes

by Ray Clancy on December 16, 2013

The UK taxman’s expat team took a record £121 million in additional tax from highly paid foreign workers last year despite a squeeze on profits from investment banking and reductions in City bonuses.

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Complicated tax affairs and lack of familiarity with the UK rules can mean that expats make more mistake with their tax returns

According to figures obtained by UK law firm Pinsent Masons, the tax take up increased from £117 million in 2011/2012 and HMRC’s tax take from investigations into highly paid foreign City workers living in the UK has jumped to record levels.

HMRC’s expat’ team investigates highly paid expats, the vast majority of whom work in investment banks, hedge funds and private equity firms. Many can make mistakes if they don’t have the right tax advice but also employers are making mistakes too, the firm points out.

The firm explained that the tax affairs of highly paid foreign workers are on HMRC’s radar as it is aware these employees have complex and substantial remuneration packages, making the tax and national insurance at stake relatively large.

It has found that some features of expat packages have particularly caught the eye of HMRC. For example, the use of dual contracts which assign an element of an individual’s income to a contract for work done overseas, were outlawed in the recent Autumn Statement.

‘With ambitious targets to meet in terms of bringing in more revenue, it is no surprise HMRC continues to see what is a  highly paid but relatively small group of individuals as offering maximum rewards in terms of tax take for much less  effort,’ said Ray McCann, partner at Pinsent Masons.

‘Most of these foreign employees work for the biggest investment banks and hedge funds. They are internationally mobile and tend to be at the upper scale of pay rates, often benefitting from more than usually sophisticated bonus arrangements and complex employment agreements,’ he explained.

The firm believes that a balance needs to be struck. ‘If HMRC gains a reputation for excessively aggressive and intrusive investigations into expats’ tax affairs, then that could harm London’s attractiveness as a global financial centre, especially when added together with other changes that impact mainly on those from overseas living in the UK, such as the remittance basis charge,’ McCann pointed out.

The Chancellor’s Autumn Statement announcement of a ban on dual contracts should boost HMRC’s take from expats a little, and may go some way to offsetting the impact on tax revenues of the new Europe wide bonus cap coming into effect in 2014.

The firm also points out that complicated tax affairs and lack of familiarity with the UK rules can mean that expats make more mistake with their tax returns, making them a lucrative target for HMRC. ‘Expats can easily make mistakes because they haven’t fully got to grips with the UK rules. They may also have income from investments in their native countries or other places they have lived, or even overseas tax liabilities that all need to be properly documented and accounted for to HMRC.  That all makes their tax affairs far from straightforward,’ said McCann.

But he also said that in many cases it is the employers who are getting the rules wrong on their international employees. ‘We regularly see cases where employee expenses, that may be non-taxable where the employee is in the UK for a very short period of time, become taxable due to the contract being extended to a more permanent basis, and the employer misses the change in status,’ explained McCann.

‘To avoid being caught out, expats should ensure that their arrangements are properly reviewed, otherwise they risk HMRC charging additional tax, national insurance contributions interest and penalties,’ he added.

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