Foreign Income double tax issue

Momzilla · 6 March 2018 at 12:29AM

I am a US citizen who relocated to the UK from the USA last year (2017). Prior to that time I was employed, and accrued a month's vacation pay. I moved over, and had the vacation pay deposited to my bank in the USA after I had arrived in the UK. (Basically, I was on vacation for a month in the UK.) The IRS has taxed it as employment income. (IRS tax year ended 31 Dec.)

I asked HMRC if they considered this amount as taxable, and I have received two answers - one yes, one no. My thought is that it was earned (accrued) prior to becoming a UK resident it is, thus, non-taxable. The employer has no presence in the UK and I performed no work for them while here. I have been advised by friends that my interpretation is correct, and referred to "statute" but am unable to locate anything on the HMRC website that discusses this. Can anyone point me to such language?

[There is no way to get a credit against my 2017 USA taxes if taxed by HMRC because I would have had to have the HMRC tax paid by 31 Dec 2017 to list it on my 2017 IRS tax forms, and the HMRC tax doesn't formally accrue until April 2018. I'd prefer to not be double-taxed!]

jimmo · 6 March 2018 at 1:22AM

In the UK the first principle is to establish whether you are taxable or not on the specific income you receive. Then, if you are taxable, the next question is which year you are taxable for.
In your case you did not work for your American employer after becoming resident in the UK Therefore your earnings from that job are not taxable in the UK.
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42201

EdSwippet · 6 March 2018 at 9:48AM

Momzilla wrote: »

There is no way to get a credit against my 2017 USA taxes if taxed by HMRC ...

Because this is income that was earned for 'services performed in the US', it is primarily taxable to the US and you would instead have to claim any credit against UK taxes. Details in the US/UK tax treaty.

In practice there probably should not be any UK tax due on it, but even if there is then it is very likely that taking credit for your US tax will wipe it out. Remember that you can take a UK tax credit against most US state tax liabilities too. Also US medicare tax, if I recall correctly.

Momzilla · 6 March 2018 at 1:49PM

Technically I was still on their employment roster, just on "vacation" - but yes, I did no work here in the UK. Thanks for the link to the regulations. I'll be sure to read them carefully.

Momzilla · 23 March 2018 at 2:25PM

Ok, so I'm still a bit confused, sorry, and wonder if anyone could help? I just want to make sure I'm doing this correctly so I do not incur the wrath of HMRC at any point.

I was on paid vacation (terminal leave) from my US employer for the month of May in lieu of just taking a final paycheck with all the vacation hours cashed out on it before I left. I did no work for the organization at all in May, and no work at any time in the UK. This method was done to facilitate my moving onto the organization's retirement program, which would kick in after the end of the month.

While I was on vacation I relocated from the US to the UK. My US employer deposited two bi-weekly paychecks, with all the usual deductions for US taxes, retirement, health insurance, etc., into my US bank account for that month, after the date on which I became a UK resident (May 4). They also put a substantial bonus on the last check as a reward for excellent service over the prior working year. (These awards are routinely given every year to employees who exceed standards.)

Both the USA and the UK consider me as resident for the year (2017 for IRS, 2017/18 for HMRC) - I was present in both countries long enough in each of their tax years to be considered resident by both. I believe the term is "dual resident". (?)

I inquired as to reporting this income and have two responses from HMRC - one is that it's not taxable, because it is all associated with my employment overseas before I became a resident. The other is that it is "rightly" taxable in the USA, but that it would also be taxed in the UK because I received the pay and the bonus after becoming a UK tax resident. They said I would need to report it as foreign income, and then I could request a tax credit for taxes paid to the USA against those due to the UK.

Trying to work ahead a bit, I have downloaded the HMRC tax forms for 2016/17 to get an idea of what I'm going to have to do next month. When looking at the HMRC form HS302, it seems solely for claiming relief under the terms of a double-taxation agreement as a non-resident who is using a remittance basis. I had not planned on using the remittance basis for the 2017/18 tax year as it would actually leave me in a much worse situation.

Is there still a way to request a tax credit from HMRC on these two checks ~without~ claiming remittance basis for my entire tax year? The amount of tax in question is not huge (around 400 pounds) but I'm retired now so that is still a hit on my budget.

Also, I did go through the regulations via the link posted, but could never find anything that specifically stated that there would not be tax charged by the HMRC on these checks. If there is something that I've missed that someone can point me to, I would very much appreciate your response.

Thanks for your help!

EdSwippet · 23 March 2018 at 5:17PM

Momzilla wrote: »

Is there still a way to request a tax credit from HMRC on these two checks ~without~ claiming remittance basis for my entire tax year? The amount of tax in question is not huge (around 400 pounds) but I'm retired now so that is still a hit on my budget.

I think you might be expecting this to be more complex than it really is. Or more accurately, you are expecting a horrific process similar to the appalling US form 1116, and the relative simplicity of the UK system here is confusing you!

If you look at the foreign part of HMRC's self-assessment forms, SA106, you should find that all you really need to do is to simply list out on your UK return the US tax you had to pay on any income that falls into both a US tax year and a UK one. If you follow the process through, either on paper or online, you should find that this number then just comes directly off your overall UK tax liability. I am assuming that this is the right way round for you to claim credits -- that is, because this is for work you did in the US the US has the primary taxing rights on it -- but you should check this.

Where the US rate is more than the UK one you can only claim up to the UK rate -- to prevent your UK tax going negative! -- so there can be some fiddly working-out to do on that. But ultimately all you have to do is say how much you were paid from the US after becoming UK resident, and then claim (up to) your US tax liability against UK tax.

It is interesting -- not to mention, somewhat disturbing -- that HMRC themselves cannot decide whether or not this income really needs to be included on your UK tax return. In practice though, if you follow the process and it works out as it should, the result to you would be the same in both cases. For example, £10k extra income giving a notional £2k extra in UK tax but then negated by a £2k foreign tax credit versus is a mathematical zero.

Still, at least HMRC recognises that there are other countries on the face of the planet. The IRS, on the other hand, ...

Momzilla · 23 March 2018 at 10:11PM

Yes.

Thanks for that advice. When the 2017/18 forms are available, I'll just step through it. You've taken a load off my shoulders here, for sure!

Foreign Income double tax issue

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