Earlier this year HMRC published a note on dual contracts, clarifying its position on the interpretation of “merely incidental” duties and what records they expect an individual to retain.
The note’s release follows the conclusion, from HMRC’s perspective, of many, successful investigations into the use of dual contracts.
Dual contract arrangements have been popular with non-domiciled individuals who enter into one contract to cover performance of duties in the UK and a second with, for example, their offshore management company to cover duties performed outside the UK. The duties of the overseas employment must be performed wholly outside the UK; should any activity under the overseas contract be undertaken within the UK it must be “merely incidental” to the duties performed outside the UK. Where these arrangements are followed, for non-domiciled individuals who have chosen to be taxed on the remittance basis only, earnings in respect of the overseas employment are subject to UK tax when they are remitted to the UK.
For several years the use of dual contracts arrangements has been on HMRC’s radar. HMRC has stated that there is nothing to prevent an individual from entering into an employment contract with more than one employer. However, they will still challenge dual contract arrangements where they consider one employment to have been artificially split into two. HMRC’s March guidance note now provides examples of duties it considers to be categorized as “merely incidental” and those it does not consider falling within the classification of “merely incidental”. Duties considered to be “merely incidental” include the arranging of meetings and business travel and the reading of generic business emails that do not relate to the employee’s role. Examples provided of duties considered not to be “merely incidental” include the provision of instructions or guidance to colleagues, preparatory work, and applying general expertise in any function which the employee is contracted to perform overseas.
In practice, the most typical type of activities we see being split under dual contracts are those relating to marketing and investor relations activities. Applying the examples that HMRC has provided in their guidance note to the context of an offshore marketing role: if an employee prepares any marketing material in the UK ahead of an offshore marketing trip or any post meeting discussions or general follow up is had with the overseas investors from within the UK, then these activities would not be considered merely incidental and would result in the overseas employment being carried out in the UK.
HMRC also uses this note to clarify that it considers it is reasonable to require access to diaries, emails, expenses claims and supporting receipts, telephone records and client files, for some or all of the dual contracting period under investigation. If the individual is unable to provide this data, HMRC states that it will seek to obtain this from the employer, including the overseas employer, and is willing to exercise its exchange of information powers.
The use of dual contract arrangements is often used to develop substance at the offshore management company level, thus improving the group’s ability to retain fees offshore. Transfer pricing is a favorite HMRC investigation point; many fee flow arrangements which may have been considered acceptable in prior years are now being scrutinized.
In response to HMRC’s activity and given the current economic climate, businesses and their principals will have to adopt a robust attitude towards tax risk management, reviewing their business practices on a regular basis to check that accurate, consistent and up to date documentation reflecting the reality of the situation is being maintained to ensure that tax structures are not being undermined.