New ban on dual contracts announced in Autumn Statement will squeeze expats further
HMRC's tax take from investigations into highly paid foreign City workers living in the UK has jumped to record levels, according to data obtained by Pinsent Masons, the international law firm.
Pinsent Masons found that HMRC obtained £121m in additional yield in 2012-13** from the work of its 'Expat' team which investigates highly paid expats, the vast majority of whom work in investment banks, hedge funds and private equity firms.
This was up from the £117m received in the previous year, despite the fact that the squeeze on investment banking profits meant that City bonuses declined dramatically, down from an estimated £4.4 billion during the 2011 'bonus season' to £1.6 billion for bonuses paid out during the 2012/13 bonus round.***
Pinsent Masons explains that the tax affairs of highly paid foreign workers are on HMRC's radar as it is aware these employees have complex and substantial remuneration packages, making the tax and national insurance at stake relatively large.
Pinsent Masons add that some features of expat packages have particularly caught the eye of HMRC. For example, the use of dual contracts which assign an element of an individual's income to a contract for work done overseas, were outlawed in the Autumn Statement.
Ray McCann, Partner at Pinsent Masons, says: "With ambitious targets to meet in terms of bringing in more revenue, it is no surprise HMRC continues to see what is a highly paid but relatively small group of individuals as offering maximum rewards in terms of tax take for much less effort."
"Most of these foreign employees work for the biggest investment banks and hedge funds. They are internationally mobile and tend to be at the upper scale of pay rates, often benefitting from more than usually sophisticated bonus arrangements and complex employment agreements.
"In the last year though, banks' revenues from investment banking have fallen substantially, which has resulted in a big squeeze on City bonuses. That makes the additional yield that HMRC has achieved from investigations into City expats all the more striking.
"There is a balance that needs to be struck here – if HMRC gains a reputation for excessively aggressive and intrusive investigations into expats' tax affairs, then that could harm London's attractiveness as a global financial centre, especially when added together with other changes that impact mainly on those from overseas living in the UK, such as the remittance basis charge."
Ray McCann adds: "The Chancellor's Autumn Statement announcement of a ban on dual contracts should boost HMRC's take from expats a little, and may go some way to offsetting the impact on tax revenues of the new Europe-wide bonus cap coming into effect in 2014."
Pinsent Masons says that complicated tax affairs and lack of familiarity with the UK rules can mean that expats make more mistake with their tax returns, making them a lucrative target for HMRC.
Ray McCann explains: "Expats can easily make mistakes because they haven't fully got to grips with the UK rules. They may also have income from investments in their native countries or other places they have lived, or even overseas tax liabilities that all need to be properly documented and accounted for to HMRC. That all makes their tax affairs far from straightforward.
"In many cases, we actually find that it is the employers who are getting the rules wrong on their international employees. We regularly see cases where employee expenses – that may be non-taxable where the employee is in the UK for a very short period of time – become taxable due to the contract being extended to a more permanent basis, and the employer misses the change in status."
Ray McCann adds: "To avoid being caught out, expats should ensure that their arrangements are properly reviewed, otherwise they risk HMRC charging additional tax, national insurance contributions interest and penalties."
**Year ending 5 April