International aspects
However, perhaps the most controversial aspect of the reform proposals was the international aspect. There are several strands to this issue, including:
UK tax position of non-residents: Under the original proposals non-UK residents would potentially be taxable, broadly, to the extent they received carried interest relating to services performed in the UK, regardless of (i) how little time they spent in the UK and (ii) when the carry arose. Although the Government indicated that relief would potentially be available under a double tax treaty provided that the executive did not perform the UK services through a personal UK "permanent establishment", this was far from a complete or desirable solution. The meaning of "permanent establishment" in the context of a deemed trade is unclear and non-residents are more likely to simply avoid the UK altogether rather than come to a meeting here and find themselves having to claim tax relief from HMRC. In addition, a significant "tail" liability will be practically problematic for individuals who receive carried interest many years after having performed services in, and then permanently left, the UK.
Non-UK tax position of UK residents: The imposition of a deemed trading income charge increases the likelihood of double taxation for UK residents whose carried interest is subject to a different charge overseas (e.g. a capital gains liability). Such a mismatch in categorisation could prevent relief being available or make the process of claiming it much more difficult.
Updated position
The Government has clearly recognised the problems faced by non-residents and has announced that it will introduce three statutory limitations on the territorial scope of the new regime.
1. A transitional rule will be introduced under which UK services performed by a non-resident before the 30 October 2024 Autumn Budget will be treated as performed outside the UK. This should ensure that carried interest relating to those services falls outside the scope of the new charge.
2. A UK workday threshold will be introduced under which any UK services performed in a tax year by a non-resident will be treated as performed outside the UK (so, broadly, ignored), provided the individual spends less than 60 workdays in the UK during that tax year.
3. A three-year limit to any "tail" liability for non-residents will be introduced. This will allow UK services performed in a tax year to be treated as non-UK services (so, broadly, ignored) provided three full tax years have passed during which the individual is non-UK resident and does not meet the 60 UK workdays threshold.
In addition, the Government has reiterated its view that where there is an applicable double tax treaty in place, relief should be available unless the UK services are attributable to a UK permanent establishment of the individual.
The Government has also confirmed that when apportioning carried interest between services performed in the UK and those performed abroad, it will mandate a time-based method, by reference to the number of UK workdays in the relevant period.
The policy update does not expressly address the non-UK tax position of UK residents. This is perhaps understandable, but it would have been comforting to see reassurance from HMRC that it intends to work with key foreign jurisdictions to prevent double taxation.
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