Breaking News

Remittance basis: FAQs on new special mixed fund rules

Contents:

What are the Special Mixed Fund rules?

The Special Mixed Fund rules in sections 809RA to 809RD of the Income Tax Act 2007 (ITA 2007) replace SP1/09 from 6 April 2013. They allow employees who meet certain criteria to use a simpler alternative to the normal mixed fund rules.

Those criteria are that in the tax year they:

  • qualify for Overseas Workday relief
  • are taxed on the remittance basis
  • have an employment which requires duties to be performed in both the UK and overseas - and that these have been carried out

Employees who want to use the Special Mixed Fund rules must nominate a bank account to be their 'qualifying account'. In order to be treated as a qualifying account, the account must meet certain conditions which are described in FAQ 5 below.

If the employee uses the Special Mixed Fund rules they will not have to operate the normal mixed fund rules on each transaction from their qualifying account in order to determine whether any remittance they make is taxable. Instead they can total up all the remittances to the UK for the tax year and treat that as a single remittance made at the end of the year. Likewise, they can total the amount of offshore transfers made in the tax year and treat that as a single offshore transfer made at the end of the year.

What is overseas workday relief? (section 26 Income Tax (Earnings and Pensions) Act 2003)

Overseas Workday Relief (OWR) applies to resident non-domiciled employees who work both inside and outside the UK, who are taxed on the remittance basis and who meet the new 'requirement for a 3 year period of non-residence' in section 26A Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The relief means that such individuals are liable to UK tax on their earnings for their UK duties in full but only liable to UK tax on their earnings for overseas duties to the extent that they are remitted to the UK. You can find out more about OWR in 'Guidance Note: Overseas Workdays Relief (OWR)' (www.hmrc.gov.uk/international/rdr4.pdf).

Who can use the Special Mixed Fund rules?

In order To use the Special Mixed Fund rules for a tax year an employee must:

  • qualify for Overseas Workday Relief
  • be taxed on the remittance basis
  • have an employment which consists of duties performed both in the UK and overseas

How do the Special Mixed Fund rules work?

Under the Special Mixed Fund rules, all remittances and offshore transfers made from a qualifying account in a tax year are treated as a single remittance and a single offshore transfer, both made at the end of the year.

In other words, instead of applying the normal mixed fund rules to each transfer from the account as it is made over the year to work out the composition of each transfer from the account, at the end of the year the individual must:

  • Work out the proportion of UK income and overseas income in the account for the year (this is normally based on the proportion of UK and overseas workdays)
  • Identify all the different categories of income and gains in the account
  • Add together all remittances made to the UK from the qualifying account during the year and treat them as having been a single remittance made from the account at the end of the tax year
  • Add together all of the offshore transfers made from the account during the year and treat them as having been a single offshore transfer made from the qualifying account at the end of the tax year
  • Apply the normal ordering of the mixed fund rules to the single remittance in (iii)
  • Apply the normal ordering of the mixed fund rules to the single offshore transfer in (iv)

What conditions must an account meet in order to be used as a qualifying account?

In order to be eligible to be nominated as a qualifying account, an account must:

  • be an account of the individual (solely or jointly with others)
  • be an overseas account
  • have a balance of no more than £10 on the day that the first deposit of qualifying earnings from their employment is made into the account

If an account meeting these criteria is nominated as a qualifying account then it will be a qualifying account from the date of the first deposit of qualifying earnings into the account. This date is known as the 'qualifying date' for that account.

'Qualifying earnings' from the employment are general earnings from an employment for a tax year when the individual is resident, qualifies for Overseas Workday Relief, and performs duties of that employment both in the UK and overseas (if the year is a 'split year' for residence purposes, then those duties must be performed in the UK part of the year).

I have a joint account with my partner. Can I use that as my qualifying account?

Yes, provided that the account meets all the conditions for being a qualifying account, and that your partner doesn't make any financial contribution to the account (that is, they do not make any deposits to the account apart from their share of interest earned by the account).

The same is true for accounts held jointly with anyone, not just those held jointly with a spouse or partner.

But if you have nominated a joint account as a qualifying account, nobody else can nominate that account as their own qualifying account.

I already have an overseas sterling bank account. Can I use that as my qualifying account?

Provided it meets the criteria set out above, any bank account may be used as a qualifying account. You will need to make sure the account balance is no more than £10 before qualifying earnings are first paid into the account.

How many qualifying accounts can I have?

You may only have one qualifying account at a time.

Can I change my qualifying account during the year?

Yes, you can change which account is your qualifying account during the course of the year. However, when a new account becomes your qualifying account, the previous account ceases to be a qualifying account because you can only hold one qualifying account at a time.

When you change your qualifying account during the year, you should treat the date on which you changed the account as if it is the end of the tax year for the purposes of the special mixed fund rules, so that the single remittance and single offshore transfer are deemed to be made on that date. In other words, you will have to work out how the rules applied to the first qualifying account until the point that it ceased to be a qualifying account (part way through the year), and must work out how they applied to the later qualifying account from the point it becomes a qualifying account to the end of the tax year.

But you can still apportion your earnings between UK and overseas duties for the whole year.

At the actual end of the tax year you will need to carry out the same procedure for the income in the new qualifying account – the single remittance and single offshore transfer will cover transactions made in the period between the date you first used the new qualifying account and the end of the tax year.

Can an account that has been my qualifying account in the past be my qualifying account again in the future?

If an account has been your qualifying account in the past but then ceased to be your qualifying account for whatever reason, it cannot later be used as your qualifying account again. This is because an account can only become a qualifying account on its 'qualifying date'. An account can only have one qualifying date, and so cannot become a qualifying account a second time. 'Qualifying date' is defined in FAQ 5.

Note that you may use the same qualifying account from one year to the next – a qualifying account does not automatically cease to be a qualifying account at the end of the tax year.

How do I tell HMRC which account is my qualifying account?

You can notify HMRC which account was your qualifying account for the tax year in the whitespace notes of your tax return. Where you have changed qualifying accounts part way through the year, you must include details of all qualifying accounts which you have used during the year.

You will need to set out which accounts you have used as qualifying accounts for the tax year and the dates on which each account was a qualifying account.

On what date does my account start to be a qualifying account?

The account will be a qualifying account from the date on which the first deposit of qualifying earnings is paid into the account. This is called the 'qualifying date' for the account. Qualifying earnings are defined in FAQ 5.

Are there any restrictions on what can be deposited into a qualifying account?

Yes. Individuals may only deposit into their qualifying account:

  • earnings from their employment, where the earnings are paid into the account in a tax year when the individual is eligible for Overseas Workdays Relief and performs duties of that employment both in the UK and overseas
  • the proceeds from the disposal of certain employment related securities and employment related options; and
  • interest arising on the account

Any other amounts other than those listed above are known as 'prohibited sums'. Deposits of prohibited sums may affect the status of the qualifying account.

What happens if I or someone else accidentally deposits a prohibited sum into my qualifying account?

When a prohibited sum is deposited into your qualifying account, you must transfer out of the qualifying account an amount equal to the prohibited sum within 30 days of becoming aware (or when you reasonably should have become aware) that the prohibited sum had been deposited into the account. Depositing a prohibited sum into a qualifying account is known as a 'breach of the deposit rule'.

Sometimes, before you become aware that a prohibited sum has been deposited in the account, or before you have made the transfer out of the account, further prohibited sums might have been deposited into the account. In those cases, the amount that you need to transfer out of the account in order to correct the errors is the total of all prohibited sums deposited into the account.

You may only 'reverse' errors in this way twice in any 12 month period.

If, in a 12 month period, you deposit a prohibited sum into your qualifying account having already 'reversed' errors twice in that period, then the account will be subject to the normal mixed fund rules from the start of the tax year in which the final deposit of a prohibited sum took place.

Example

Mr A has a qualifying account at the beginning of 2015/16 into which his employment income is paid. On 15 May 2015 Mr A deposits some rental income from a property he has in Spain. This is a breach of the deposit rule. Realising this could affect the qualifying status of the account, Mr A transfers the full amount deposited to another of his offshore accounts on 29 May 2015. As the breach has been remedied within the 30 day period allowed, the account remains a qualifying account.

On 30 June Mr A receives some dividends from a foreign company (not connected to his employment) and deposits them into his qualifying account. This is again a breach of the deposit rule and, once again, realising his mistake, Mr A transfers the full amount of the dividend to another offshore account within the 30 day period. The qualifying account again remains a qualifying account.

On 15 September a further sum of income from the property in Spain is deposited into the qualifying account. As this is the third breach of the deposit rule in a 12 month period it can not be remedied and the account is treated as a normal mixed fund from 6 April 2015. The simplified mixed fund rules will no longer apply to the account for the year 2015/16.

What happens if I don't transfer the prohibited sum out of my qualifying account in time?

If the prohibited sum is not transferred out of the qualifying account by the end of the 30 day period, the account will be treated as though it were a normal mixed fund (and not a qualifying account) from the start of the tax year in which the prohibited sum was deposited into the account.

If I breach the deposit rule, do I need to report it to HMRC?

You do not need to report a breach of the deposit rule to HMRC. You will however need to remedy the breach within 30 days of finding out about it if you can do so and want to maintain the qualifying account status. If you do not remedy the breach the account will operate as a normal mixed fund for the whole tax year in which the breach occurred.

What will happen if I ignore/ don't notice that I have made three breaches of the deposit rule in 12 months?

If you breach the deposit rule on 3 separate occasions and do not remedy them you will have breached the deposit rule and should calculate your tax liabilities using the normal mixed fund rules. If you do not, your return will be incorrect and subject to HMRC's normal compliance check and penalty regimes.

If your account ceases to be a qualifying account because of a breach of the deposit rules, you may still nominate a different account as your qualifying account for the remainder of the tax year.

What happens if I arrive and become resident in the UK part way through the tax year?

If, part way through the tax year you become UK resident for that year, you will need to consider whether the qualifying date for the account that you wish to nominate as your qualifying account has already passed. This might be the case if, for example, you are continuing the same employment that you had prior to becoming resident and your salary prior to that date was being paid into that account.

If the qualifying date for an account has passed you will have to nominate a different account as your qualifying account.

I arrived in the UK expecting to perform some UK duties and some overseas duties, but it has turned out that I've only performed UK duties in this tax year. Can I use the Special Mixed Fund rules?

No. You must have performed duties both in the UK and overseas for the employment in the tax year to use the Special Mixed Fund rules.

If in the following tax year you meet all of the criteria for using the special mixed fund rules then you will be able to use the special mixed fund rules from the start of that tax year.

I have one employment with UK duties, and one with overseas duties. Can I use the Special Mixed Fund rules for both?

No. The Special Mixed Fund rules can only be used in relation to employments where the individual performs UK and overseas duties in the same tax year for the same employment.

I have one employment which requires me to work in the UK and overseas, and another employment where I only work overseas. Can I pay the salaries for both employments into my qualifying account?

No. Income from an employment for which you have only UK or only overseas duties would be a prohibited sum, and cannot be deposited into a qualifying account.

I could have been using the new rules since the beginning of the tax year, but have only just found out about them. Can I use the account that I've been having my salary paid into as my qualifying account?

If the account had a balance of no more than £10 on the qualifying date for that account, then it may be nominated as a qualifying account from that date. If not you will need to use a different account, or open a new account, in order to use the special mixed fund rules. The 'qualifying date' for an account is defined in FAQ 5.

I no longer qualify for Overseas Workday Relief but I still have money in what was my qualifying account. Can I still use the Special Mixed Fund rules?

No. You are only eligible to use the Special Mixed Fund rules where the conditions set out in the answer to Q1 are met. As one of the conditions is that you qualify for OWR, the special mixed fund rules can't apply to the account after you have ceased to qualify for OWR.

My employer paid last year's bonus into my qualifying account. Does that count as an error?

No. Any earnings from the employment that are paid in a year when you qualify for Overseas Workday Relief and have both UK and overseas duties of that employment can be deposited into the qualifying account, even where those earnings are for an earlier year.

My salary is paid into two separate accounts, one in my home country and one sterling overseas account. The sterling account is my qualifying account. How do I decide how much of the salary in the sterling account relates to my UK workdays?

Where your salary is paid into two separate accounts in a 'split-payroll' scenario the normal mixed fund rules determine what earnings are paid into each account.

In general, if you remit income from your qualifying account it will relate to income from your UK workdays in preference to income from your overseas workdays, provided that you receive more income relating to your UK workdays for that year than the amount you remit.

If earnings relating to UK duties from the employment remain after taking account of all remittances from the qualifying account, then how those earnings are split between your qualifying account and your non-qualifying account depends on whether you have made any remittances (directly or indirectly) from your non-qualifying account.

If you have not made any remittances from your non-qualifying account, then the proportion of the earnings in your sterling account which relate to UK earnings (after the remittance but before the single offshore transfer) can be calculated using the formula:

(U – R) / (E – R)

Where U is the total of your earnings from the employment for the year that relate to UK duties, R is the amount of the remittance, and E is your total earnings from the employment for the year.

I'm using SP1/09 at the moment. Do I have to start using the Special Mixed Fund rules from 6 April 2013?

No. If you were using SP1/09 before 06 April 2013 then you may continue to do so. However, if you choose to start using the special mixed fund rules you cannot later revert back to SP1/09.

I'm using SP1/09 at the moment but I want to switch to using the Special Mixed Fund rules instead. Do I have to open a new account?

If you are currently applying SP1/09 to an account, it is likely that the qualifying date for that account was prior to 06 April 2013, in which case that account could not normally be nominated as a qualifying account. However, HMRC will, as a transitional easement, accept that an SP 1/09 account may be cleared out and used as a qualifying account.

How do I tell HMRC that I'm using the Special Mixed Fund rules?

You can notify HMRC you are using the Special Mixed Fund rules by giving details of your qualifying account on the whitespace notes of your tax return.

I can't use the Special Mixed Fund rules. Where can I find out more information about the remittance basis/ the normal mixed fund rules?

Find guidance on the remittance basis (www.hmrc.gov.uk/international/remittance.htm)

I have more than one employment for which I perform duties both in the UK and overseas. I pay the earnings for all of these employments into my qualifying account. When I apportion my earnings, can I add together the workdays from all of my employments for calculating what proportion of my workdays were overseas?

No. You have to apportion the income from each of the employments individually.

Example

Ms B has two employments. For the first employment, Ms B performs 25% of the duties in the UK and 75% overseas, and has an annual salary of £40,000. For the second employment Ms B performs 50% of the duties in the UK and 50% overseas, and has an annual salary of £30,000.

Ms B must apportion the earnings from each employment separately between UK and non-UK duties. So from the first employment Ms B has:

£10,000 relating to UK duties (£40,000 x 25%)
£30,000 relating to non-UK (£40,000 x 75%)

And from the second employment Ms B has:

£15,000 relating to UK duties (£30,000 x 50%)
£15,000 relating to non-UK duties (£30,000 x 50%)

I receive UK and overseas benefits from my employer - how do I deal with these?

You add the value of the benefits to the rest of your income, and apportion as normal. UK benefits are treated as having been remitted to the UK, and that remittance is treated as coming primarily from the earnings of the employment relating to UK duties. Overseas benefits are treated as consisting primarily of earnings from the employment relating to overseas duties.

You should note that because the value of the benefit has been included in the calculation of the apportionment of your earnings, this will mean that the ratio of earnings for UK and non-UK duties that are in your qualifying account may differ from your UK/ non-UK workday split.

Example

Mr C has an employment where he performs 75% of his duties in the UK and 25% of his duties overseas. Mr C receives an annual salary of £150,000 and has a UK based benefit of £30,000 in respect of his children's school fees.

First Mr C must apportion his earnings between UK and non-UK duties, based on work-days. Based on this Mr C has:

Total earnings for apportionment: £180,000 (£150,000 salary + £30,000) benefit.

£135,000 relating to UK duties (£180,000 x 75%)
£45,000 relating to non-UK duties (£180,000 x 25%)

The UK benefit is treated as having been remitted to the UK and consists primarily of earnings relating to UK duties. As Mr C has more than £30,000 of earnings relating to UK duties, all £30,000 of the UK benefit is treated as being from those earnings.

Therefore Mr C's remaining earnings consist of:

£105,000 relating to UK duties.
£45,000 relating to non-UK duties.

Under SP1/09 I had more than one account. Why can't I do the same under the special mixed fund rules?

SP1/09 was silent on a number of issues, such as the number of accounts that were permitted. Because the special mixed fund rules are set out in legislation, they have to work in all situations.

If multiple qualifying accounts were permitted, there are situations where it would be impossible to calculate the tax liability. For this reason, the rules are restricted to having only one qualifying account.

When will further detailed guidance be published?

Further guidance will be published later this year.


Quasi-Legal General, 27/06/2013
Crown Copyright material is reproduced by permission of the Controller of Her Majesty's Stationery Office.