Dual contracts do they work any more

29 maaliskuuta 2007

We examine whether, in view of HMRC’s increasingly aggressive view of dual contract arrangements, they can ever be effective to minimise UK tax liabilities for non-UK domiciled individuals.

Dual contract arrangements have always been very useful where an employee is non-UK domiciled and carries out duties of employment both in and outside the UK. They work by splitting the employment contracts; one for UK duties and one for non-UK duties, normally with two employing companies in the same group (although the non-UK contract must be with a “foreign employer”).

The foreign employment must be performed “wholly outside the UK”, although duties performed in the UK which are “incidental” to duties performed outside the UK are considered to be performed outside the UK for these purposes.

The result is that, if effective, any earnings realised outside the UK will not be subject to UK tax unless they are “remitted” to the UK (broadly, brought into the UK in any way). Of course, there may be a tax charge in the country in which the non-UK duties are performed.


It has always been difficult to convince HMRC that there is a separate non-UK contract of employment, the duties being “wholly performed outside the UK”. It is crucial that there are, in effect, two completely separate and distinct employments with separate roles under each. This can often be difficult to prove. It would not, for example, be sufficient for an HR Director to carry out duties in the UK under one employment contract and then, under a separate employment contract, act as HR Director for say, the rest of Europe.

In order to support the case for two separate employments, HMRC usually take into account the following factors: separate email addresses, reporting lines, business cards, telephone extensions etc would be required as a minimum. Each employment contract should also make it clear that the individual has very different duties in each jurisdiction.

HMRC’s view

HMRC published a Tax Bulletin in April 2005 which sought to challenge dual contract arrangements on the basis that employers were merely splitting geographical locations for the same duties, rather than splitting different roles.

The content of HMRC’s interpretation casts doubt on whether dual contract arrangements can ever be effective. It refers, for example, to an employee performing some of the “substantive duties of his foreign employment while in the UK – for example, “responding to an urgent call from the UK”. HMRC would not regard this as being “incidental” to the non-UK duties, because, they contend, it is of “equal importance to the overseas duties”, although the writer would perhaps dispute this.

HMRC will look at the commercial reality of the arrangements and, in particular, the split of compensation between the UK and non-UK contracts. If the non-UK compensation is not commensurate with the duties carried out overseas, HMRC are likely to attack the arrangements.

What if it goes wrong?

HMRC suggest the consequences would differ depending on why the arrangements failed.

If HMRC deem there to be just one employment, the UK employer would be liable for all income tax and social security payments due in respect of the non-UK employment, plus penalties and interest. The investigation may well go back years if the arrangements have been in place for a long time. It is worth noting that HMRC can re-open the previous six tax years for investigation and up to the previous twenty years if they suspect fraud on the part of the employer.

If the arrangements fail because the employee performs duties in the UK which are more than “incidental” to the non-UK duties, all non-UK earnings would be subject to UK tax, but the non-UK employer would only be liable to HMRC in respect of the tax if it has a taxable presence in the UK such as required to operate PAYE.

If the employer pays the tax due on behalf of the employee, the employee will be deemed to have received a taxable benefit equal to the amount of tax paid grossed up by the employee’s marginal tax rate.

What should you do?

It is worth noting HMRC’s approach to dual contract arrangements and ensure that any such arrangements go beyond a mere geographical split of duties.

The type of duties should also be considered – many dual contract arrangements are put in place for senior executives who may have a more “corporate advisory role”, such that it is almost impossible to clearly distinguish two separate employments.

The tax and social security penalties, not to mention the time involved in sorting out the position when it goes wrong, would suggest that these arrangements need to be very carefully drafted and monitored. Existing arrangements should be reviewed and greatly exercised in drafting any new arrangements.


In the right circumstances, dual contract arrangements can work. However, HMRC is looking increasingly closely at such arrangements to ensure the correct tax is paid and therefore advice should be taken prior to them being entered into.

Although it is possible to request HMRC confirmation as to the amount of income which should be subjected to UK tax, often HMRC will subject all earnings to UK tax in the first instance and then “look-back” at the end of the tax year to determine whether any part of the income should not have been subjected to UK tax.

If you would like further information on this issue, please contact Guy Abbiss, Tracey Horne or Colin Kendon.