EIM13690 - Termination payments and benefits: section 401 ITEPA 2003: exceptions: 'foreign service': definition
Source: gov.uk (2025-02-19)


Section 413 ITEPA 2003

EIM13680 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13680) explained that a payment or other benefit which falls within section 401 ITEPA 2003 may be fully excepted from a charge to income tax if a sufficient proportion of the employee's service counts as 'foreign service'. Foreign service has a special meaning for this purpose.

Meaning of 'foreign service'

For a payment or other benefit within section 401 ITEPA 2003 to which the exception may apply, it is necessary to establish whether a sufficient proportion of the employee’s service counts as 'foreign service'. 'Foreign service' means service to which a), b), c) or d) below apply:

a) Service in or after the tax year 2013 to 2014 to the extent that it consists of duties performed outside the United Kingdom in respect of which earnings would not be relevant earnings.

b) Service in or after the tax year 2013 to 2014 if a deduction equal to the whole amount of the earnings from the employment was or would have been allowable under Chapter 6 of Part 5 ITEPA 2003 (deductions from seafarers’ earnings) (see EIM33000 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim33000)).

c) Service in or after the tax year 2003 to 2004 but before the tax year 2013 to 2014 such that any earnings from the employment would not be relevant earnings.

d) Service in or after the tax year 2003 to 2004 but before the tax year 2013 to 2014 such that a deduction equal to the whole amount of the earnings from the employment was or would have been allowable under Chapter 6 of Part 5 ITEPA 2003 (deductions from seafarers’ earnings) (see EIM33000 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim33000)).

This guidance deals only with the legislation relating to periods of service after 5 April 2003. If service before 6 April 1974 is involved, see EIM13705 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13705).

If there is a period of service when there are no earnings from the employment, apply the guidance as if there were.

Meaning of 'relevant earnings'

Periods from 6 April 2025

From 6 April 2025, 'relevant earnings' means earnings to which section 15 ITEPA 2003 applies and, if the individual is a qualifying new resident, which are not qualifying foreign general earnings under section 41T ITEPA 2003 (see EIM43565 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim43565)).

For the purposes of Foreign Service Relief, it is necessary to consider whether the individual is a qualifying new resident for the purposes of Chapter 5C of Part 2 ITEPA 2003.

Subject to certain transitional provisions which can affect whether an individual is a qualifying new resident for the purposes of Chapter 5C, whether an individual is a qualifying new resident in a tax year is determined by section 845B ITTOIA 2005. Section 845B provides that an individual is a qualifying new resident in a tax year if they ar a UK resident in that tax year and the individual was not a UK resident for a continuous period of at least 10 years immediately preceding that tax year.

Where an individual is a qualifying new resident in a tax year, they will continue to be a qualifying new resident in any of the 3 tax years immediately following that tax year, in which they are UK resident.

An individual is not a qualifying new resident if they are a Member of the House of Lords or House of Commons in any part of a tax year.

For more information on qualifying new residents, see EIM43560 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim43560).

Periods between 6 April 2008 - 5 April 2025

From 6 April 2008 to 5 April 2025, 'relevant earnings' means earnings which are for a tax year in which the employee is ordinarily resident in the UK and to which section 15 ITEPA 2003 applies (see EIM40002 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim40002)) and to which that section would have applied even if a claim to the remittance basis was made. So if any other situation applies to the earnings, the period counts as 'foreign service.

Periods before 6 April 2008

Up to 5 April 2008, 'relevant earnings' means earnings to which section 15 or section 21 ITEPA 2003 as then enacted applies (see EIM40002 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim40002)). So if the earnings fall within any other provision, the period counts as 'foreign service'.

Proportion of foreign service required to obtain full exception

Combine the periods within the duration of the employment that count as 'foreign service' by applying the definitions above and then give the full exception if any one of the requirements from the table below are met (see example EIM13970 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13970)).

For this purpose, treat successive employments with different members of the same group of companies as if they were a single continuing employment where the payment takes account of that service, see example EIM13975 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13975).

With effect from 6 April 2018, the exception from income tax is no longer available where certain criteria are met. EIM13680 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13680) lists these criteria and the circumstances in which the exception is no longer available.

EIM13692 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13692) explains how to treat termination payments that are no longer excepted from a charge to income tax for 'foreign service' because the employee, or former employee was UK resident for the tax year in which the employment was terminated.

Note: a taxpayer with some foreign service who does not meet the requirements in the table above may be able to claim a foreign service reduction instead, see EIM13700 (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13700).