Insights

HMRC has recently updated its International Manual to provide guidance on the taxation of deferred employment income where an individual leaves the UK before receiving remuneration earned during a period of UK employment.

The guidance is significant because it confirms what we have long considered to be the correct interpretation of both UK domestic legislation and the UK's double taxation treaties.

The issue

A common scenario arises where an employee performs duties in the UK, earns a bonus or other form of deferred remuneration, and subsequently relocates to another country before the payment is received.

The question is whether the UK retains taxing rights over that remuneration and, if so, to what extent.

HMRC's clarification

HMRC's updated guidance confirms three important principles.

• First, deferred remuneration is generally taxed under UK domestic law when it is received, rather than when it is earned. The relevant tax charge therefore arises at the point of receipt.
• Second, the employee's residence status during the deferral period is not the determining factor for treaty purposes.
• Third, when applying the relevant double taxation treaty, it is the individual's treaty residence at the time the remuneration is received that determines how taxing rights are allocated between the UK and the other country.

In practice, this means that where an individual has become resident in another treaty jurisdiction before the deferred remuneration is paid, the treaty analysis must be performed by reference to that residence status at the date of receipt.

Why this matters

The guidance will be particularly relevant to internationally mobile employees, senior executives and participants in long-term incentive arrangements who relocate after earning, but before receiving, employment income.

In many cases, the practical effect will be that the UK's taxing rights are limited under the relevant treaty, notwithstanding that the remuneration relates to duties performed while the individual was UK resident.

Our view

The HMRC recent pronouncement is welcome because it provides explicit confirmation of an approach that we have consistently adopted when advising clients and preparing UK tax returns involving deferred employment remuneration.

Whilst alternative interpretations have been advanced in some quarters, HMRC has now confirmed that the correct treaty analysis focuses on the individual's residence at the time the deferred remuneration is received and becomes taxable under UK law.

For internationally mobile employees and their advisers, this represents an important and helpful clarification of HMRC's position.

HMRC guidance: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm163155