When Mr Saxena from Bommenahalli Village, Bidarahalli Hobli, Bangalore Rural, got Rs 16 lakh as per diem payments from a multinational company’s Indian branch, he didn’t pay any tax in India and also failed to report this in his Indian Income Tax Return. Subsequently, he received a tax notice asking for an explanation in this matter.
In the end, he won the case in ITAT Delhi, as the Income Tax Appellate Tribunal (ITAT) Delhi determined that if a non-resident salaried person receives 'per-diem' payments from their Indian employer while working abroad, those payments aren’t taxable under Article 16 of the India-UK Double Tax Avoidance Treaty (DTAA).
However, ITAT Delhi criticized him for not correctly reporting this in his UK tax return. This article covers what you should know about per diem payments in the UK.
Per diem is a Latin phrase meaning "per day" and refers to specific amounts given by an employer to the employee to cover living expenses and incidental costs while working outside their home base. In this case, the employee's home base was Bengaluru, but he was sent to work in the UK on an assignment.
Per diem payments are taxable in UK, but employees can claim tax relief up to a specified amount
All allowances, including ‘per diems’, are considered taxable income for anybody working in the UK . However, tax relief may be available up to specified limits, which can lower the taxable amount in the UK.
Joanne Webber, tax partner and global employer services lead, RSM UK, explained to ET Wealth Online: “The per diem is taxable in the UK whether paid by the UK office or the Indian office. The UK employer should take any payments in India into account through the UK payroll.”
Webber also pointed out that an individual can claim tax relief for actual expenses incurred while working at a temporary workplace for up to 24 months. Tax relief is available for accommodation, travel and subsistence costs.
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How can employees report per diem payments in UK tax return?
Webber says that generally, per diem payments should be reported as taxable income within the UK payroll and on the UK tax return.
Webber says: “The individual then makes a claim for relief for temporary workplace expenses through their UK tax return. In this scenario, you would see the gross income being reported with a separate deduction for the amount of tax relief being claimed.”
The UK tax authorities, known as His Majesty's Revenue and Customs, HMRC, have decided on specific taxable amounts that neither the employer nor the taxpayer need to report as taxable income.
According to Webber, these could be custom agreements made with trade unions and/or employers, or they might be HMRC’s benchmark scale rates. For instance, if someone is working away from their normal workplace for five hours or longer, they can use the benchmark scale rates.
| Journey Duration | Maximum tax-free allowance |
| 5 hours or more | £5 |
| 10 hours or more | £10 |
| Late evenings (work past 8pm) | £15 |
| 24-hour period | £25 |
Source: RSM UK
Webber says that these amounts (as mentioned in the table above) are intended to cover meal expenses, and the individual has to confirm that a meal was purchased during the trip (although the individual doesn’t need to provide receipts). Anything above that is taxable income.
According to Webber, if the individual has received payments that qualify under these amounts (or a specific amount agreed with HMRC by the employer), there is no need to report these on the individual’s UK tax returns.
Webber says: “Any additional amounts should be reported on the UK payroll.”
When it comes to the UK tax return, Webber says that this mainly reflects the numbers provided by the employer. So, if the employer has treated the payments (correctly or incorrectly) as non-taxable in the UK because they fall under the relief for temporary workplace expenses, those payments might not appear on the UK tax return.
What qualifies as per diem?
Any allowance is taxable income regardless of what it is called. Webber says that it is only if there is an agreement with HMRC over temporary workplace expenses, that a payment/allowance can be treated as tax free at the date of payment.
Webber says: “Where there is no agreement with HMRC, the amount should be taxed through the UK payroll and the individual makes a claim for relief (on specific temporary workplace expenses) through their tax return.”
Does Article 16 of the India-UK DTAA automatically give the UK the right to tax employment salary income earned by an employee while working in the UK?
Yes, unless article 16(2) of the India-UK DTAA applies.
Webber says that an individual will be taxed in the UK on any UK workday unless the UK-India double tax treaty states otherwise. Under article 16(2) of the Double Taxation Avoidance Agreement (DTAA), an individual working in the UK will be exempt from UK tax on those workdays if:
- they are present in the UK for less than 183 days during the UK tax year (6 April to 5 April);
- their salary is paid by or on behalf of non-UK resident employer; and
- their salary is not deductible in calculating the profits of an enterprise taxable in the UK.
Webber says: “Therefore, if an individual working for an Indian employer is present in the UK for less than a total of 183 days during the UK year, and their salary costs are not charged to a UK enterprise, that individual would not be subject to UK tax on those UK workdays.”
If an Indian employee working in the same company's UK branch gets per diem payments in the UK from the Indian branch, how is it taxable in India?
In case an Indian employee is deputed or assigned to the UK branch of the same employer and receives per-diem payments from the Indian branch during the period of UK assignment, the taxability in India would primarily depend on the employee’s residential status, the place where employment is exercised, the nature of the per-diem and the availability of treaty benefit under the India-UK DTAA.
In this case before ITAT Delhi, it is mentioned that the Indian employee is working in the UK branch of the same company and based on this, it is assumed that such an employee is a tax resident of the UK for that particular period.
According to Chartered Accountant Suresh Surana, when the employee qualifies as a tax resident of the UK under the India-UK DTAA, holds a valid UK Tax Residency Certificate, is non-resident in India, and the employment is exercised in the UK, the remuneration or per-diem relatable to such UK employment should be taxable in the UK and not in India, even if the payment is made by the Indian branch or routed through Indian payroll.
From a treaty perspective, Article 16 of the India-UK DTAA deals with dependent personal services which broadly provides that salaries, wages and other similar remuneration derived by a resident of one contracting state in respect of employment are taxable only in that state unless the employment is exercised in the other contracting state.
Surana says: “If the employment is exercised in the other state, the remuneration derived from such employment may be taxed in that other state, subject to the specific exception contained in Article 16(2).”
Surana says that as per Article 16(2) remuneration derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall not be taxed in that other state in case if:
- He is present in that other state for a period or periods not exceeding in the aggregate 183 days during the relevant fiscal year;
- The remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; and
- The remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other state.
- From an Indian ITR disclosure perspective, if the employee is a tax resident of the UK, then there is no disclosure required to be made in the Indian tax return for that year.
Therefore, according to Surana, the per-diem received during a UK assignment from the Indian branch should not be taxed in India where the employee is a UK treaty resident/non-resident in India, the employment is exercised in the UK, and the DTAA benefit under Article 16 is duly supported by documentation and there is no specific reporting requirement in the Indian ITR for that year.