Dual contracts: tax advantage or admin burden?

HMRC is determined to clamp down on non-domiciled individuals who abuse the rules, warns Mike Hayes

In last December’s Autumn Statement, the Chancellor announced measures to tackle the artificial use of dual contract arrangements. These can be manipulated by a small number of high earning, non-domiciled individuals attempting to obtain a tax advantage. HMRC published its views on this matter back in April 2005 and it was only a matter of time before legislation was introduced to deal with its concerns.

Dual contract arrangements arise when an individual enters into an employment contract with more than one employer. Such arrangements can give tax advantages to UK resident non-domiciled employees who have duties abroad and they are popular with this group of individuals.

For the purposes of this article, all references to ‘non-domiciled’ denote a domicile outside of England, Scotland, Wales and Northern Ireland. Domicile is a matter of private international law and in-depth discussion of this subject is outside of the scope of this article.

Remittance charge

A UK resident non-domiciled individual can elect annually to pay tax on their foreign earnings as they arise (the ‘arising’ basis), or only to the extent that they remit those foreign earnings to the UK (the ‘remittance’ basis). However, there is a cost to having this ability to limit the UK taxes due on their foreign earnings; individuals who have been UK resident in seven out of the last nine tax years are required to pay the remittance basis charge of £30,000 for each year that the remittance basis is claimed. This rises to £50,000 a year when the individual has been UK resident for 12 or more years out of the preceding 14 years. Defining ‘remittance’ is outside of the scope of this article, but essentially it means bringing, using or enjoying monies with a foreign source in the UK.

Dual contract arrangements are advantageous where a non-UK domiciled employee works partly inside and partly outside the UK. The arrangement is structured so that the employee has two employment contracts; one with a UK employer for UK work and another with a foreign employer for non-UK work. Provided the employee claims the remittance basis as outlined above, only the earnings under the contract with the UK employer are taxable in the UK (assuming the employee does not remit the earnings from the foreign employer).

How it works

Take for example, a global hedge fund business. This may employ a UK resident non-domiciled individual to work for a non-UK company, whose role is to market their funds to investors outside the UK. The employee’s contract stipulates that he can only perform this role overseas (possibly for tax reasons relating to the business). The employee may have been chosen for this role owing to his flair for languages, with the tax benefits being purely incidental.

However, the business does not require a full-time marketing person and so the individual is employed to work out of the London office as an investment adviser to the fund as well. The contract for investment advice is with the UK company so the individual is employed by this entity for that role. In this case, the UK duties are subject to a UK employment contract and the earnings are taxable in the UK.

Depending on the foreign jurisdiction where the non-UK employment is held, there may be employment law considerations that are attractive to the employer, as well as potential tax or social security savings.

The diagram above illustrates a typical situation that may be seen in a hedge fund business. In this arrangement, the employee’s earnings from the Cayman company are paid into a non-UK bank account and kept offshore. Net earnings from the UK employment are paid in the UK. The written contracts have been drafted to fairly reflect the true employment relationships and include proper job descriptions, details of remuneration package, etc. Both roles are capable of independent existence and the line managers, payroll, expense procedures and so on, are completely separate.




Cayman Company

UK Company

Total Gross12,000250,000
Employee social security-(8,217)
Total Net120,000143,185
Employer social security-33,438








 Global earnings
Total Gross370,000
Employee social security209,141
Total Net33,401
Employer social security 
Reduction in net pay21%







Sceptical HMRC

While there is nothing illegal about such arrangements, HMRC has long believed that in many cases, the commercial reality is that the employee has only one employment.

One of the main areas of disagreement has arisen where the split in duties has been merely geographical; so, a situation where an employee performs marketing duties to prospective clients in the UK under a UK contract of employment and markets the same products to overseas clients under a non-UK contract of employment would be unacceptable to HMRC. The main area of attack has been to try and prove that the employee performed substantive duties of the overseas contract while in the UK.

With the advance in electronic communications, it has become increasingly easy for HMRC to pinpoint exactly where an email was sent from and much more difficult for the employee to disprove!

The culmination of HMRC’s dislike of these arrangements, however commercial, was the publication of draft legislation, the ‘Artificial use of dual contracts by non-domiciles’ on 16 January 2014. Budget 2014 announced several minor changes to the original proposals, mainly to relax the rules in certain situations.

If enacted as drafted, overseas employment income arising on or after 6 April 2014 in certain circumstances will cease to be eligible for the remittance basis (except that these proposed measures will not apply to overseas earnings eligible for overseas workday relief).

The conditions are as follows:

  • The individual has both UK and overseas employment(s) either with the same employer, or where the UK employer is associated with the overseas employer;
  • The UK and overseas employment are related to each other; and
  • The foreign tax rate that applies to the income of the overseas employment, calculated in accordance with the amount of foreign tax credit relief available, is less than 65% of the UK’s additional rate of tax.

In the illustration above, our hedge fund employee meets these conditions from 6 April 2014 so his overseas earnings are no longer eligible for the remittance basis and are therefore taxable in the UK on an arising basis. As he pays tax at 0% on his earnings in the Cayman Islands, this is less than 65% of 45% (ie, 29.25%) and so he must pay tax on those earnings in the UK. The additional income tax due will be payable under self assessment where the foreign employer does not have a tax presence in the UK.

It is interesting to note that these changes are only effective for income tax purposes; HMRC has so far been silent on the national insurance implications. Should national insurance contributions (NICs) become payable on the overseas earnings, it is possible that the employee will be required to pay employees’ NICs on those earnings by setting up a direct payment arrangement with HMRC. No employers’ NICs would be due unless the overseas employer has a place of business in Great Britain. This is not a problem in the example here, but could be where an individual has separate contracts with the overseas head office and the London branch of, say, a bank or insurance company. The cost to the employer, if employers’ NICs are due, would be an additional 13.8% of the employee’s overseas earnings.

Note that credit for foreign taxes paid on overseas earnings would generally be allowed against the UK taxes paid.

HMRC has announced that these measures will affect around 350 non-domiciled individuals and will increase tax receipts by £75m for  2015/16. It would be interesting to see how HMRC arrived at these numbers when non-domiciled individuals with overseas earnings from dual contract arrangements have not been required to declare them on their self assessment tax returns.

Author: Mike Hayes, Partner, Kingston Smith LLP www.kingstonsmith.co.uk

Mike Hayes FCA |Partner, Kingston Smith

Hayes has over 27 years’ experience in advising businesses and their owners across a wide range of taxation issues. He has particu...

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