Employers have expressed relief that government proposals to scrap the current non-dom tax regime will not mean the end of all tax concessions for international employees.
This was the view of Andy Kelly, partner at BDO’s Global Employer Services team, as he commented on proposals set out in the chancellor’s Spring Budget last week.
Under the proposals, the non-dom regime will end from 6 April 2025 and be replaced with the foreign income and gains (FIG) regime. Crucially, Kelly said, this new regime will still allow internationally mobile employees (IMEs) to access valuable expatriate tax concessions.
However, there are still a number of “known unknowns” to be answered before employers can breathe a full sigh of relief, the BDO partner warned.
Concessions attract talent
Employees who are eligible for the replacement regime will not pay tax on foreign income and gains arising in the first four tax years after becoming a UK tax resident. They will also be able to bring these funds to the UK tax free. They will pay tax on UK income and gains from the first year of UK residence. After the four-year FIG regime, employees will become taxed on worldwide income and gains. Overseas workdays relief (OWR) will remain restricted to three UK tax years.
To be eligible for the FIG regime, an individual must have been non-UK tax resident for a period of 10 years, although transition rules will apply.
Kelly said: “Set against a competitive global landscape for internationally mobile employees, it’s important for the UK to retain tax concessions to attract talent and encourage inward investment.
“While we don’t envisage any significant adverse impact to employers of IMEs, there will be several practical implications and hurdles to overcome.
“We expect HMRC to allow employers to operate PAYE on a reduced percentage of earnings for IMEs eligible for OWR. Due to the three tax year availability of OWR, we generally expect no increased UK tax burden for employers of tax equalised or partially tax protected IMEs. In fact, the employer tax burden may decrease due to the removal of the restriction on bringing foreign earnings to the UK.”
He said employers may wish to revisit their global mobility tax policy given how attractive it is to employees to remit previously unremitted (and untaxed) pre-April 2025 earnings as a result of the reduced 12 percent tax rate. But the window of opportunity to do this is just two-tax years from 6 April 2025.
“The timing of this will be particularly relevant to US taxable IMEs due to the way foreign tax credit is claimed for US tax purposes.”
Kelly said there could also be an impact where Double Tax Treaties (DTT) the UK has with other jurisdictions contain provisions to allow income to be exempt from tax in the other jurisdictions only if that income is remitted to the UK. Countries with which the UK has such DTT provisions include France and Germany.
“Depending on the tax policy operated, in certain circumstances these scenarios could result in additional tax burden or refunds to the employer,” he said.
Employers will need to keep a close eye on developments, Kelly added. “Specifically, we await clarification of how other expatriate tax reliefs available to non-doms currently, such as via the foreign travel rules covering relocation travel, work permit applications, home leave and travel between overseas and a UK workplace will be impacted.
“As they are available to non-doms for up to five years, we would like to see this relief retained under the FIG regime for the same duration. We also await details of how the rule changes will impact UK residents, and currently non-dom IMEs, and their employers, where dual contract arrangements are in place.”
