HMRC ramps up the pressure on dual contracts

5 April 2012 | Guy Abbiss

HMRC has published a paper to clarify its view on two important aspects around the use of separate employment arrangements (dual contracts).

What are dual contracts?

Many organisations with employees providing services to group companies in more than one location find it makes economic and business sense for those employees to be employed by the companies that benefit from those employees’ services and bear the economic cost of them.

For example, an employee who lives and works in the UK for a UK company may also work in France for the benefit of the French subsidiary which pays him accordingly. Where the employee is resident but not domiciled in the UK and the duties of the overseas employment are performed wholly outside the UK, the income for those duties is taxable in the UK only to the extent that they are paid in or remitted to the UK. Limited duties performed in the UK will be treated as being performed outside the UK provided that they are ‘merely incidental’ to the main and substantive duties of the overseas employment.

This provides the employee with the opportunity to limit his UK tax liability to that arising out of his UK-based contract.

HMRC view

HMRC takes the view that the commercial reality of some arrangements means that an employee only has one employment. A successful challenge on these grounds brings all of the employee’s overseas income into charge in the UK because the duties of the (one) employment have been performed in the UK as well as outside the UK.

HMRC does accept that it is possible for an employee to have more than one employment. Where that is the case, it focuses its enquiries on whether incidental duties of the overseas contract performed in the UK should be regarded as truly ‘merely incidental’. If it can be shown that the UK duties are a substantive and integral part of the overseas duties, (and not ‘merely incidental’ duties) all of the income of the overseas employment is brought into the UK tax net since the condition that the employment duties are all performed outside the UK is not met.

HMRC’s recent statement

HMRC has recently published a clarification of its view of the meaning of ‘merely incidental’ as well as its view of the documents it expects employers and employees to retain and make available in the event of an enquiry into a dual contract.

HMRC’s longstanding view has been that certain UK activities must always be regarded as non-incidental and therefore not overseas duties. For example, answering a telephone call or an email in the UK to give advice or instructions to a non-UK client or colleague. HMRC adds that “…..given the ease and speed of twenty first century communications, an employee who performs duties of one employment overseas and another in the United Kingdom, is liable to find it increasingly difficult whilst working in the United Kingdom to avoid performing substantive duties of their overseas employment….”.

HMRC’s view about the documents to which it should, in its view have access (diaries, e-mails, expenses claims and supporting receipts, telephone records and client files) seems like a statement of intent with regard to dragging wholly overseas employments into the UK tax net through the non-incidental route.

The employer perspective

A successful HMRC challenge on the grounds that the employee performs non-incidental duties of the overseas employment in the UK does not expose the employer to PAYE/NIC obligations. This is because the employee is not working for the UK company and the company for which he is working does not have a presence in the UK that obliges it to operate PAYE. The fact that there really are two employment contracts is still of great importance even if the individual’s tax position is successfully challenged.


HMRC’s antipathy to dual contracts is not new. This statement does not change this and makes clear its opposition to them. We strongly recommend that employers take appropriate professional advice when considering implementing dual contract arrangements or in relation to existing arrangements.

For further information or to discuss the issues raised, please contact John Mooney or Bina Gayadien on +44 20 3051 5711.


Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.

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