Double-Taxation Agreements – A Residency Case study

What are your understandings about double-taxation agreements

There’s an old saying that “it’s better to ask forgiveness than permission” but when it comes to tax that’s usually not the case (unless you’re content to deal with a potentially lengthy HMRC investigation, late payment interest and behaviour-geared penalties).  It is far better, in our opinion, to seek advice in advance of undertaking transactions or making representations to HMRC – this is the case even with something as seemingly straight forward as a tax return, after all, it is called a “self-assessment” tax return and the responsibility to ensure accuracy lies with the taxpayer not the Revenue. 

It won’t have escaped your notice that the world experienced somewhat of a disruption in 2020, some would say “unprecedented” (but if you’re anything like me, that word makes you twitch these days).  For internationally mobile individuals, or those working predominantly overseas this caused utter chaos to their working patterns and many who’d been non-UK resident for the majority of their working lives now had to think about their UK day count.  This was on top of juggling home-schooling, increased workload due to colleague furlough, risk of contracting Covid, and fear of job insecurity.  With this in mind it’s hardly surprising that many people failed to even consider there may be UK tax implications of foreign employment income. 

That’s exactly what happened to Dr Mallard. 

Dr Mallard had worked for an overseas oil company since the early nineties.  His children are now grown and his wife had travelled with him for work although they retained a property in Nottingham.  In March 2020 Dr Mallard, having been in Paris since March 2019, returned to the UK before borders were closed. 

Throughout 2020/21, Dr Mallard travelled between the UK and France as restrictions allowed, spending the majority of his time in the UK.  He undertook work for his employer in both countries and received his salary net of French tax withheld (as he had throughout his employment).  Dr Mallard submitted his UK tax return on time including details of foreign employment income (including double-taxation relief) and UK days (including a deduction for exceptional circumstances).  In February 2023, HMRC opened an enquiry in Dr Mallard’s tax return. 

It transpires that, due to the mistaken belief that foreign income is subject to tax only in the country in which it is earned (a common error), Dr Mallard had simply used estimated figures for foreign salary and UK days.  In addition, he had assumed that there would be additional leniency regarding the number of days which can be ignored due to “exceptional circumstances”.  The errors prompted HMRC to consider whether similar errors had occurred in other years. 

After a period of back and forth with HMRC resulting in little progress, Dr Mallard instructed Edge to assist with their enquiries.  After notifying HMRC of our instruction and requesting all copy correspondence we set about identifying Dr Mallard’s actual UK day count to ascertain his UK residency status since 2016/17 (three years prior to the tax year he returned to the UK due to Covid).  We also reviewed foreign employment income details and French tax returns for years we had determined he was UK resident. 

Under the UK-France double-taxation agreement, employment income is taxable where a person is resident unless duties of that employment are performed in the other country.  Income so-arising is treated income of that country which has priority over taxation.  This meant that Dr Mallard had overpaid tax in France. 

In the course of reviewing all prior and later tax years, it also came to light that similar errors had been made in 2019/20 and 2021/22.  Unbeknownst to Dr Mallard, HMRC had also contacted UK Border Force to obtain departure and arrival dates. 

In order to present Dr Mallard’s position we prepared a disclosure report which included details of his historic working arrangements and international movements, the effect of Covid on him personally and professionally, a detailed explanation of his residency status for all tax years (including those where no errors had been identified), comments on our review of the double-taxation agreement, and computations of the additional UK tax due.  Before submission to HMRC, Dr Mallard reviewed and approved the contents of the report and a call was held to confirm understanding. 

HMRC reviewed and accepted our findings regarding Dr Mallard’s residency status and UK tax liability, they also provided written confirmation of their view of the tax treatment such that Dr Mallard is able to make an approach to the French tax authorities and obtain a refund.  Following an in-depth discussion regarding the behaviour and mental state of Dr Mallard, HMRC accepted our view that the errors arose due to a failure to take reasonable care but this was not deliberate. 

Meet Cate our residency expert here at edge who has an in-depth knowledge of double-taxation agreements and is the author of this article

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What is Double-Taxation?

Double-taxation treaties are simply agreements between two states (usually countries, but can also include agreements between smaller political units – see for example the tax agreements between the UK and its Crown Dependencies of Jersey, Guernsey and Isle of Man). Not all countries have Double-taxation