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A United Kingdom company employs an Indian national information technology contractor. He has no permanent address in the United Kingdom and he stays locally wherever his employer sends him. Can any tax-free travel and subsistence expenses be paid to him? Or are there any tax-free allowances that can be paid to foreign nationals working in the United Kingdom? His work generally lasts less than 18 months at each site. I understand that, for a five-year period, the employer could pay, tax free, his air flight costs to India.
A United Kingdom company employs an Indian national information technology contractor. He has no permanent address in the United Kingdom and he stays locally wherever his employer sends him. Can any tax-free travel and subsistence expenses be paid to him? Or are there any tax-free allowances that can be paid to foreign nationals working in the United Kingdom? His work generally lasts less than 18 months at each site. I understand that, for a five-year period, the employer could pay, tax free, his air flight costs to India.
Part of the income generated by the contractor in the United Kingdom is shared with a company based in India, which found the employee for the United Kingdom company. Do any withholding taxes have to be deducted from the payment made to India? The payment to India is described as commission and the directors of the United Kingdom company are not connected with the Indian company.
(Query T16,118) - Shah.
Based on the advice given as to the working pattern of the Indian national, it appears that he has been in the United Kingdom for some time and, although he has no permanent place of residence here, he is already being treated as resident and ordinarily resident.
We are asked whether staying near to where his employer sends him will entitle the employee to tax-free travel and subsistence expenses. It appears that because he does not have 'a usual place of abode' (in the United Kingdom) that the maximum £5 per night as per section 200A(4), Taxes Act 1988 relating to incidental overnight expenses will not apply here. This is also confirmed in the Revenue's Schedule E Manual at paragraph SE31817, which covers a female employee who does not have a 'permanent home', and stays in guesthouses and hotels near to the place of work. It continues:
'She has to live somewhere and the costs of accommodation are attributable to her general need for shelter, rather than her attendance at a particular workplace. Her travel is between her temporary accommodation and her temporary workplace. The cost of accommodation is not attributable to the cost of that travel. She is not entitled to a deduction for the cost of this accommodation.
'She is entitled to a deduction for the cost of travel between her temporary accommodation and her temporary workplace but what she pays for accommodation is not a part of the cost of that travel and is not deductible.'
The whole matter of tax-free travel allowance is valid because we are told that the work at each site does not exceed the 24-month 'temporary workplace' barrier (Schedule 12A(5) to the Taxes Act 1988).
Section 195, Taxes Act 1988 covers 'Travel expenses of employees not domiciled in the United Kingdom' and confirms that for a period of five years beginning with the date of arrival in the United Kingdom, as a non-domiciled employee, he would be able to claim a deduction in respect of travelling expenses to India, paid by or reimbursed by his employer. The conditions regarding the five years are that he was non-resident in both of the two years immediately preceding that of arrival or was not present for any reason in the United Kingdom for two calendar years before that date. Also, although we have not been told whether this is applicable, once a non-domiciliary has been in the United Kingdom for a continuous period of sixty days or more, then his spouse or child could visit him here, with the limit being two free journeys per tax year.
With regard to withholding tax, Article 13 of the Convention with India of 25 January 1993 (SI 1993/1801), which covers 'Royalties and fees for technical services', states:
(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise; but if the beneficial owner of them is a resident of the other Contracting State, the tax so charged is subject to stated upper limits.
"Fees for technical services" includes the provision of services of technical or other personnel. - N.K.
Working on the assumption that the contractor is resident and ordinarily resident, the following rules are relevant to expenses.
* Rules for deduction of travel expenses are covered by section 198(1A) of, and Schedule 12A to, the Taxes Act 1988, and so expenses can be reimbursed providing that they are not ordinary commuting or private travel (paragraph 2) and special rules apply for travel to temporary workplaces (paragraph 5).
* Sections 193 and 194, Taxes Act 1988 cover travelling expenses when working abroad, i.e. leaving England to work overseas. The expenses need to be reimbursed by the employer, and not claimed as a deduction by the employee for the relief to be given.
* Section 195, Taxes Act 1988 covers the treatment of travel reimbursed to a non-domiciled individual in the United Kingdom. Relief is given for travelling to or returning from a work assignment in this country provided that the employee was not resident in the United Kingdom in either of the two tax years preceding the one in which he arrived in the United Kingdom; or was not in the United Kingdom for any purpose at any time in the two years immediately preceding the date on which he arrived in the United Kingdom in order to perform his United Kingdom duties. All travel expenses are covered on commencement and termination of United Kingdom employment duties, provided that the employer reimburses them; again the employee cannot claim the deduction himself. Where the employee is in the United Kingdom for a continuous period of 60 days or more, the spouse and children's expenses can also be reimbursed, to a maximum of two visits per year. As 'Shah' points out, section 195 applies for five years from the date on which the employee arrived in the United Kingdom.
With regard to the commission payments made to India, time does not permit a full discussion on the whys and wherefores of transfer pricing, but I assume that this is not a problem and that the Indian company is not associated with the United Kingdom company due to control or any other issues. In the absence of transfer pricing provisions, the two companies can trade as they like and the commission payable does not require any withholding of tax. Normal contracts showing terms and conditions are expected (as with any transaction).
It does seem a pity for the non-domiciled Indian contractor that he is apparently missing out on the remittance basis of Schedule E, case III. It is clear that if some of his duties were outside the United Kingdom and his employment was by the Indian company, he would be at a considerable advantage. A final note in such a case: his earnings would then be called 'foreign emoluments' and, as such, normal Schedule E deduction rules are not used (see section 192(2) and (3), Taxes Act 1988) - probably of little consequence, if reimbursed by the Indian company in any case. - Felicitie.
