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Taxation Readers’ Forum: Emigration error

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant David Whiscombe answers a fellow professional’s query concerning a client who works as an expat in France and trades through a UK registered company.

‘We act on behalf of a client who trades through a UK registered company. He and his wife own 50% of the shares each and they are both directors.

The husband does all the work and has always chosen to draw out most of the profits from the company by way of salary. He has only just told us that, in September 2019, he emigrated to France. He now has a contract as an IT specialist with a French company and all his work is carried out in France. At the present time, he has no intention of returning to the UK. From October to May, we have continued to operate his payroll and have paid PAYE income tax and National Insurance contributions (NIC), making returns under the RTI scheme.

We now think that, with the control of the company moving to France, he should not be accounting for UK corporation tax but would, presumably, come under the French corporation tax system. Further, it seems we have paid PAYE tax and NIC that should not have been deducted in the first place.

Can Taxation readers advise on how we unravel the situation. Fortunately, the last accounts prepared were those for the year ended 31 March 2019 so if the company is either dual resident or now resident in France, no harm will have been done.’ Query 19,585 – Mr Buckle.

David Whiscombe’s reply: A PAYE ‘no tax’ code would have been applicable in these circumstances

‘Advice from a professional adviser with competency in French taxation will be indispensable; it is always unwise to make assumptions about foreign jurisdictions.

Subject to that important caveat, it does seem likely that the company will be both resident in France under French domestic law as well as being treaty-resident there under the treaty tie-breaker clause, and so treated for UK tax purposes as a non-resident company. This would probably apply from September 2019. Assuming the company owns no chargeable assets, the cessation of UK residence will not itself precipitate any charge to UK tax for the company. An accounting period will end on the date on which UK residence ceases and a return will need to be filed for that period in the normal way. It seems unlikely on the facts that the company will, once non-resident, be carrying on any trade or business in the UK so as to have any liability to UK tax.

It is unlikely on the facts that the client will meet the conditions to be non-resident for 2019-20 as a whole, but it is possible (but not certain – check the requirements carefully) that he will be able to take advantage of the ‘split year’ rules for UK residence so as to be treated as non-resident from September 2019. If that is the case, he will have no liability to UK income tax in respect of earnings for work performed outside the UK after that time.

When the client files his tax return for 2019-20 he should therefore exclude from it all such earnings (in other words, apparently, earnings arising after September 2019) but should include all tax deducted from earnings whether before or after September. The position (that the employer has deducted tax from some earnings that are not in fact subject to UK tax) should be explained in the white space. This will, in effect, reclaim the PAYE tax that has been ‘wrongly’ deducted from the earnings.

That said, the tax was in fact correctly deducted as a matter of strict law, because the employer has applied to the payment of earnings the PAYE code that has been issued by HMRC. If the facts had been known in advance it is likely that a non-cumulative NT or ‘no tax’ code would have been issued. For clarity, none of this has anything to do with the UK/France DTA, and is a consequence only of UK domestic law.

If split-year treatment does not apply for 2019-20, the client may nonetheless be treaty-resident in France from September 2019. The recovery of UK PAYE tax deducted from September would then require a treaty claim on form HS302 (tinyurl.com/y6gtpbug).

For PAYE tax deducted since April 2020, the quickest repayment would be to apply for code NT to be applied on a cumulative basis.’

The article is also available on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

David Whiscombe

Consultant

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