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Under the Finance Bill proposals, the new residence and domicile rules targeted at wealthy non-doms will have a damaging impact on thousands of middle income internationally mobile employees working in the UK for limited periods. 

This will increase the costs incurred by their employer, and so reduce the attractiveness of the UK to foreign multinationals.

Detailed analysis of overseas bank accounts 

Foreign employees who are temporarily assigned to the UK are not normally taxed on overseas paid earnings for work performed outside the UK, unless they bring those earnings into the UK.

The proposed legislation will require them to provide a detailed analysis of their overseas bank account - and perhaps that of their spouse - if they make any direct or indirect fund transfers to the UK. 

This intrusive, costly, and sometimes quite pointless exercise will hit an estimated 29,000 individuals, based on 2005/06 figures.

Andrew Hodge, head of employer and personal taxes at Deloitte, asked how anyone could believe that such a complex regime was suitable for individuals other than the very wealthy.

“Surely a tax administration that boasts of its own investment in online systems is not about to effectively impose shoe-box accounting methods which it has been encouraging others to abandon for the last ten years?” he wondered.

Tax returns for internationally mobile employees

To avoid a compliance nightmare from 2009 onwards, Hodge warned that the government urgently needs to understand the impact of the changes, and added that if sense prevails it would restore the historic basis of calculating remittances of overseas earnings.

Over the last ten years, the major accountancy firms have invested millions in streamlining the preparation of tax returns for internationally mobile employees, with carefully-devised electronic global questionnaires and tracking systems. 

This has been done to keep compliance costs down. With a stroke of the pen these gains are now to be swept away.

The current system is fairly straightforward and understood. When the foreign employee is asked whether he has remitted foreign income or gains to the UK, all he usually needs to do is to total the funds remitted to the UK over the year. 

If the resulting figure is less than his UK earnings - as calculated based on the time worked in the UK - he has remitted nothing from his overseas current account and has no further tax liability.

If the amount remitted exceeds his earned income, he will be liable to further UK tax on the excess.

Fearsomely complex new rules 

Since 6 April this is no longer necessarily the case. What is remitted from an overseas bank account is determined by what has been added to it from the start of the tax year to the date of each separate remittance.

If an employee “overdraws” the UK earnings component of the funds credited to his account in that period, the rules require him to see what else he has remitted, for instance offshore earnings, investment income or capital gains.

The new rules are so fearsomely complex that any temporary assignee to the UK faces having to talk his accountant through the individual entries on his overseas bank statements. 

The accountant will then have to key these entries into a complex spreadsheet to determine what has been remitted. 

This will result in hours of additional work and additional time costs that could easily double or treble compliance costs. For the most part these middle earning employees are not UK tax literate.

Lottery with no winners 

Their employers usually pay for their tax returns to be professionally prepared because they have been sent to work in the UK.

Only a small minority of high earners receive and act upon bespoke tax planning advice.

Hodge concluded that the current proposals constitute a lottery with no winners.

“It is time for commonsense to prevail, otherwise 2009 will prove a compliance nightmare for foreign employees, their employers and tax advisers. There are no short cuts,” he said.

“If the work is done properly, the complexity of the new rules will add very substantially to compliance costs for the preparation of returns. This may have a real impact on the number of international companies prepared to meet the cost of their employees doing business in the UK,” Hodge concluded.

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Related links

• Deloitte