HMRC's 'expat' team recoups record tax from highly-paid foreign bankers and hedge fund managers

Out-Law News | 10 Dec 2013 | 2:49 pm | 2 min. read

The 'expat' team within HM Revenue and Customs (HMRC) took a record £121 million in additional tax from highly-paid foreign workers living in the UK last year, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com.

The increase in tax take, up from £117m in 2011-12, came despite a squeeze on profits from investment banking and reduction in City bonuses, tax expert Ray McCann of Pinsent Masons said. The vast majority of highly-paid workers investigated by the team work in investment banks, hedge funds and private equity firms, he said.

"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," he said.

"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 charges that impact mainly on those from overseas living in the UK, such as the remittance basis charge," he said.

Personal Tax International is a specialised department within HMRC that deals with the tax affairs of UK-based foreign workers and their employers. The tax affairs of these workers can be particularly complex due to the relatively large amounts of tax and national insurance at stake and tendency towards complex and substantial remuneration packages. In addition, the correct tax treatment of an individual can sometimes depend on domestic legislation and treaties between the UK and their native countries.

Tax expert Ray McCann said that some features of expat remuneration packages had traditionally been subject to additional scrutiny by HMRC. As part of this year's Autumn Statement, the Government banned the "artificial" use of 'dual' contracts, which had been used by some employers to assign an element of an individual's income to a contract for work done overseas. From April 2014, UK tax will be charged on a worker's full employment income if a comparable level of tax is not payable overseas on the overseas portion of the contract.

McCann said that this announcement could boost HMRC's tax take from expats next year, and "go some way to offsetting" the impact on revenue of the new EU-wide cap on bankers' bonuses due to take effect in 2014. However, he pointed out that in many cases, mistakes made by expats in their tax returns were simply down to a lack of familiarity with UK tax rules and the relative complexity of their tax affairs.

"Expats can easily make mistakes because they haven't fully got to grips with the UK rules," he said. "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," he said.

Affected workers should ensure that their tax arrangements were properly and regularly reviewed by their employers to avoid being "caught out" and becoming subject to additional tax and national insurance contributions, interest and penalties, he said.