Overseas workdays relief
Written by Ray Coman
In the context of an increasingly mobile workforce, the tax relief for working overseas while remaining on a UK payroll has come into focus. Overseas workday relief enables an employee to exclude, from UK tax liability, earnings related to duties performed outside the UK.
Changes from 2025/26 based on domicile
Work in the UK and work for the UK
Eligibility for OWR
OWR applies for the first tax year in which an individual is UK resident, and the following two tax years; provided that the taxpayer has not been UK resident in the three years prior to arrival in the UK. The government has announced a new regime of assessing foreign income which will take effect from 6 April 2025, and which will require the claimant to have been non-resident for at least ten years prior to date of arrival in the UK. It is expected that the length of non-residence prior to arrival in the UK to be eligible for OWR will extend from three to ten in alignment with the new foreign income and gains regime. Government clarification on the 'prior years' condition is awaited.
Changes from 2025/26 based on domicile
The remittance basis is being replaced. Up to 5 April 2025, OWR is applicable to non-domiciled people using the remittance basis, and provided the earnings are not remitted to the UK. In practice, this typically means the funds are paid into a bank account outside of the UK. Provided the related monies are not brought into the UK until the individual leaves the UK, the related income tax is avoided.
The remittance basis is being abolished from 2025/26. From that date, it is no longer a requirement for the funds to be paid into a foreign bank account.
Arrivals to the UK, who have been non-resident for at least ten years previously, will not be taxable on foreign income and gains for the first four years of UK residency.
Duties performed overseas
A common misconception is that an overseas workday is simply any day that is spent physically outside the UK. However, the regulations specifically indicate that the duties of employment need to be performed outside the UK for a workday to qualify as overseas.
If UK duties are anything more than “merely incidental” to the UK, they are treated as being performed in the UK. HMRC provides clarification, with examples, of what is meant by ‘merely incidental’ in Employment Income Manual 40204. Various case studies provide examples in which UK duties are subordinate to non-UK duties in establishing the location in which the duties have occurred.
Work in the UK and work for the UK
A snappy distinction for this purpose is that of working in the UK as opposed to working for the UK. With increasing remote working, it is possible to continue to carry on duties working for the UK, while being physically located elsewhere.
The Employment Tax manual 77020 provides an example of an employee being sent to work for an overseas branch of an international company while continuing to be paid through a UK payroll. In that case, the duties of employment were no longer for the UK.
Economic employer
The UK has adopted the notion of economic employer under Article 15 of the Organisation for Economic Co-operation and Development (OECD) treaty.
An economic employer is one who has the authority to instruct the employee as to their actions. It is not necessarily the same as the employer with whom the contract of employment has been written.
HMRC can tax income to the extent that the ‘economic employer’ remains UK based. An economic employer is determined to extent that the UK economy is set to benefit from the employment and carries the risk of that employment. If the economic benefit of a person’s work accrues to the UK division or function of the employer, the duties are UK related.
The PAYE Manual 82000 clarifies that a stay of less than 60 days is generally considered insufficient for a person to be integrated in the operation of the UK entity. The economic location of longer visits would be assessed with respect to the individual circumstances of each case.
Apportionment of workdays
The regulation states that UK and non-UK duties are to be apportioned on a ‘just and reasonable’ basis. The nominator and denominator would therefore exclude days that are not worked.
Conclusion
OWR is available where the UK remains the legal employer but a non-UK entity is the economic employer. The examples cited in the HMRC guidance RDR4 Overseas Workday Relief refer to secondments. These are typically distinct arrangements from those in which a remote worker makes residency decisions which are not related to duties of employment.
