As an incentive to foreign companies to set up business in the UK, both the UK company and the employees of the foreign company seconded to the UK can receive certain special tax breaks; some available for an allotted time period only and others for the duration of the employees stay.  We should make clear from the start that in the UK there are significant differences between a person who comes to the UK expecting to be here for less than two years (who can obtain significant tax benefits) and one who expects to be here for over two years.  The tax breaks include:

A.    National insurance will not be payable by them or the UK company for the first 12 months if his employment with the Company in the other jurisdiction is kept open.  This can lead to a very significant saving!  For example, an employee whose annual salary is £40,000 (FY 2009) will save £3,802 and the company will save a further £5,120 providing a total saving of £8,922.
B.    A living allowance can be made available to the employee which is not chargeable to UK tax.  This is described in more detail below.
C.    The employee can claim a deduction for any number of visits to their home in the other jurisdiction for five years from the date they commence their duties; this applies whether the company pays for them or they pay them and the company reimburses them, but not if they bear the costs themselves.
D.    Their spouse and children can come to the UK twice in each tax year whilst the employee is working here and have their visit paid or reimbursed by the company without a tax liability arising provided that the employee is here for a continuous period of 60 days or more (i.e. does not make regular visits back to the other jurisdiction)
E.    Routine health checks and medical screening are exempt provided that all the company’s employees benefit from them; eyesight tests for employees required to use a visual display unit as part of their normal duties are also tax-free.  Other benefits such as payment of insurance premiums for private medical treatment or payments to hospitals etc. for such treatment are taxable
F.    Removal expenses of up to £8,000 can be paid; these cover such items as transporting belongings, legal costs of the employee buying (as opposed to renting) a property and temporary accommodation paid for while looking for permanent  accommodation and are in addition to items C. and D. above.  In the unlikely event that more than £8,000 is paid only the excess over £8,000 is taxable
G.    If the company lends money so that the employee can pay a deposit on a rented property no benefit will be chargeable if that and any other loan (e.g. a season ticket loan) is less than £5,000.  However, if they exceed that amount, a charge of 6.25% per annum on the whole of the loan is liable to income tax.

UK Living Allowance – Income Tax Efficient Remuneration Strategy

UK tax law allows a living allowance payment to be made to an individual who is on secondment from a foreign jurisdiction for less than 2 years without charge to UK income tax.  The living allowance is intended to compensate the individual but only in the following circumstances.

1.    A payment can be made equal to that of the employees rent.  The property rent can be leased under the name of the employee.
2.    All travel expenses incurred while commuting to and from work can be met by the employer.
3.    As well as the accommodation under 1 qualifying for relief, all of the additional costs attributable to the employee on secondment are allowable.  This includes food and drink, utility bills and personal expenditure attributable solely to business travel.
4.    In addition, a reasonable subsistence payment can be made to the employee.  The amount of the subsistence considered reasonable is hard to say, however, I believe that an amount of £20 per day is reasonable (based on what HMRC pay their employees).

The method by which we claim the relief is by way of expense claim on the employees return of benefits received known as form P11D.  Essentially, the employee declares the benefit received and then claims that this expense is solely for business purposes and therefore not chargeable to UK income tax as employment income.  To avoid the necessity of returning such details on a P11D, we can request a dispensation from HM Revenue & Customs for the various expenses named above (unfortunately, a dispensation can not be given in respect of round sum allowances).  The employee must keep records, including receipts, of all expenses incurred which are covered by the dispensation.  We do not need to mention the amounts, but it is important to note that HM Revenue & Customs can refuse any such expense claims if they believe the amount to be unreasonable and/or disproportionate to the employees position in the business.

It should be noted that the burden of proof will fall upon the employee and the company in the event of any challenge from HM Revenue & Customs.  It is therefore important to keep concise and up to date records maintaining all relevant documentation.  It is also advisable to schedule the actual costs annually and then make the allowance based on this.

This allowance is only available to an individual who intends to come to the UK on secondment for less than two years and who at no point in their stay intend to remain here longer.  If the individual remains in the UK for greater than two years they become automatically UK Resident and Ordinarily Resident and this allowance is no longer available.  In addition, if their intention to remain changes or is found by HM Revenue & Customs to always be that they wish to stay in the UK, then the allowance becomes unavailable from the tax year in which the intention changed.

Blackstone Franks LLP

Thomas Adcock, Senior Tax Consultant  and Subhash Thakrar, Senior Partner
They are at: tadcock@blackstones.co.uk/ sthakrar@blackstones.co.uk