An individual is subject to income tax if he is resident or carrying out employment duties in the UK. Just one day of work in the UK can result in a UK tax liability for the individual. It can also result in PAYE obligations for the employer.
An employer is required to consider the status of any individual performing work on their behalf. If the individual is regarded as an employee payments are required to be made under the pay as you earn regulations.
Only if all employees are paid below the national insurance threshold and do not have another job is registration not required.
If an individual has a contract with an overseas employer HMRC may not be able to enforce the operation of UK PAYE regulations. In order to be liable to operate a PAYE scheme an overseas employer must have a presence in the UK.
If the overseas employer does not have a presence in the UK the PAYE obligation may fall on the UK business for which the overseas employee works under ITEPA 2003, s689 or a UK intermediary who has made an arrangement with a UK business for the supply of an employee under ITEPA 2003 s.689(1B) and (1C).
If there is no employer that can be required to operate PAYE the individual will need to register for self assessment personally. HMRC may request that the tax due is paid via direct collection or via self assessment. Any NICs due will need to be paid direct to HMRC via direct collection or by the employer if they are within the EEA.
The general rule is that PAYE tax and NIC should be calculated and recorded in the same way as for any other employee.
There are exceptions to this that require different PAYE procedures:
1. The Employee is only on a short-term visit to the UK
If the employee will be in the UK for less than 183 days and will be able to claim relief under the appropriate double tax treaty it is possible to make payment without deduction of PAYE tax if either:
- the employee applies for and receives a NT no tax code or,
- the employer has an agreement with HMRC to operate the short term business visitor scheme.
2. The employee is not resident in the UK or entitled to overseas workday relief.
It should be noted that an employee shareholder’s right to claim automatically unfair dismissal (for example in relation to health and safety issues or whistleblowing) or under the Equality Act 2010 for unlawful discrimination remains unaffected by this new legislation
If the employee is not resident in the UK or is resident but not domiciled and entitled to overseas workday relief , and they work both in the UK and overseas, HMRC can issue a direction under ITEPA 2003, s690 advising how much of the payment of earnings should be subject to PAYE tax. An application for such a direction needs to be made by the employer.
If neither of these exceptions apply or no agreement has been reached with HMRC, PAYE tax must be calculated using the total amount paid.
HMRC have indicated that the failure to operate paye in situations where no short term business visitor agreement is in place will leave the employer subject to penalties under RTI. The informal relief operated by many employers is no longer accepted by HMRC.
Different NIC procedures are required when:
1. An employee is sent to work in the UK by an employer in the (EEA) or Switzerland and they have a valid A1 (formerly E101) certificate
2. The employee is sent to work temporarily in the UK by an employer in a country with which the UK has a reciprocal agreement or Double contribution convention
3. Where an employee is sent by their normal employer outside the EEA or NIC agreement countries they may be exempt from NICs for the first 52 weeks of work after arrival in the UK provided that:
- The employee is not ordinarily resident or working in the UK
- They have been sent to work here temporarily by an overseas employer
- The overseas employer has a place of business outside the UK
- The worker continues to be employed by the overseas employer.
Once the exemption certificate or period of 52 weeks finishes, NICs are deducted as usual and secondary contributions are payable by the employer.
New employee form shares
Under RTI additional information is required to be given with the first FPS where:
- Individuals work wholly or partly in the UK for a UK resident employer on assignment whilst remaining employed by an overseas employer
- Individuals assigned to work wholly or partly in the UK at a recognised branch of their overseas employers business
- Individuals included by an employer within a dedicated expatriate scheme
- Individuals included by an employer within an expatriate modified PAYE scheme.
HMRC have produced a New starter – Expat form to assist with gathering this additional information. The provision of the correct starter information is important as this advises HMRC of the individual’s presence in the UK and enables HMRC to include the individual within self assessment.
The declaration information must be retained for two years however documented.
Leaving the UK to work overseas
An employee may be sent to work overseas by their UK employer. If the employee remains under contract with the UK employer usual PAYE tax and NIC obligations would continue.
The operation of PAYE will vary depending on the residence status of the employee after leaving the UK.
Non resident employee
If the employee is regarded as working full time overseas and qualifies as non-resident under the Statutory Residence Test (SRT) an NT tax code may be issued by HMRC. Where an NT code is issued no PAYE tax should be deducted.
The NT code is either operated on a non cumulative basis which prevents any tax refund until the end of the tax year or alternatively the employer may run two separate PAYE records on the payroll for the employee. Two separate entries on the FPS would be required in respect of the same employee.
In some circumstances the employee will not be working overseas for sufficient time to acquire non residence status in the UK so they remain taxable on their earnings. The earnings may also be taxed in the country in which the employee is working. Where HMRC is satisfied that the terms of an appropriate double tax treaty gives taxing rights to the overseas country a net of foreign tax agreement can be arranged.
The aim of this agreement is to give provisional relief for double taxation to employees who must pay both UK tax and foreign tax from the same payment of earnings. Final calculations are made on a self assessment tax return together with the formal claim for double tax relief.
NICs would continue to be deducted for 52 weeks after departure unless the employee is working in the EEA or reciprocal agreement country.
If the employee is working in the EEA or a country with which the UK has a social security agreement the payment of UK social security would cease and liability would commence in the host country immediately unless an A1 or certificate of continuing liability is obtained. Once the certificates expire social security becomes payable overseas.
If the employment with the UK employer is terminated the PAYE tax and NIC obligations cease. The employer will though need to be aware of any post cessation payments that need to be reported.
Income to be included
The earnings to be included in the PAYE scheme are those paid within the UK and those paid overseas.
This will include the following types of income:
- Basic salary
- Cash allowances
- Non cash benefits in kind
- Expense payments
- Share based remuneration
- Tax payments.
Whether or not all expenses need to be included within the payroll will need to be considered. Paying actual expenses rather than round sum allowances will impact on the treatment.
Round sum allowances are generally included within the payroll unless it is agreed with HMRC that the amounts paid are intended to do no more that cover additional costs incurred in which case the amount can be included on form P11D. Reimbursed expenses are included on the form P11D.
In both cases the employee will need to make a claim for tax relief on business expenses unless a dispensation is in place. Non-cash benefits are not generally included in payroll but are reported after the end of the tax year on Form P11D.
Where an individual is working away from their permanent place of work on a temporary basis travel, accommodation and subsistence expenses may qualify as a business expense under the temporary workplace rules.
The extent of the information required often creates practical problems in obtaining the information necessary for the UK payroll. This is especially the case where remuneration is not paid by the UK employer.
It is often mistakenly believed that only income paid from the UK needs to be included in the UK payroll but this is not the case. Some amounts may not be taxable in the overseas country but for the purposes of UK taxation all amounts paid need to be considered under UK tax legislation. The tax status in one country does not impact on the other country.
Even if the information is easily available there may be a delay in obtaining the details making it difficult to meet the on or before requirement of RTI.
Where overseas employers are involved it may be worth considering a modified PAYE or modified NIC scheme.
Modified PAYE schemes
Also known as an EP appendix 6 agreement, a modified PAYE scheme can be used where the employee is tax equalised on all general earnings.
The term tax equalisation describes the agreement between employer and employee designed to ensure that the employee is no better or worse off than if they had stayed in their home country. The employee is paid agreed net cash earnings together with non-cash benefits. The employer undertakes to meet the host country tax liability arising from the earnings and to ensure that the employee’s home country tax affairs are handled by a professional advisor or in house specialist.
A modified PAYE scheme varies normal PAYE procedures in the following ways:
- Earnings and non-cash benefits are included on a best estimate basis.
- An in year review is undertaken between December and April each year
- Deductions are made for qualifying overseas pension contributions
- Provisional relief is given for overseas workday relief
- Residual over/ underpayments of tax will be collected via the employees self assessment tax return
- Forms P11D are submitted by 31 January following the end of the tax year.
Modified NIC Arrangements
There are two modified NIC arrangements:
- EP appendix 7a for expatriate employees subject to an EP appendix 6 agreement
- EP appendix 7b for UK workers assigned overseas who:
- are not liable to UK tax
- remain subject to UK NICs
- receive part of their earnings from a payroll abroad
These arrangements will be required where there is an employer in the UK liable for secondary UK NICs.
Class 1 NICs are calculated on the best estimate on all worldwide earnings paid from whatever source including non-cash earnings. An in year review is undertaken as with the appendix 6.
A NIC settlement return is made by 31 March following the end of the tax year.
If an employee is equalised on NICs the payment by the employer represents earnings and should be grossed up.
Tax equalisation is often achieved by the employee continuing to pay the tax that would have been due had they remained in their home country and the employer paying the tax due in both home and host countries. In this situation the amount of tax deducted from the employee’s earnings is known as hypo or hypothetical tax. The amount of hypo tax is estimated by the home country employer at the beginning of a year and withheld from the employee’s earnings. At the end of the year the actual amount of tax that would have been due is calculated and an adjusting payment is made between employee and employer.
This calculation is known as the tax equalisation calculation or TEC. The hypo tax is not paid over to HMRC but is retained by the employer to offset against the tax due.
The full amount of tax paid by the employer less the hypo tax retained from the employee is treated as earnings. As the employer is paying all tax due the additional earnings needs to be calculated on a gross up basis.
While it may appear to be an internal adjustment the TEC settlement will amend the hypo tax suffered by the employee. This needs to be considered when the Self Assessment tax return is prepared.
Overseas employee leaving the UK
When an assignment in the UK comes to an end the employer or host employer should issue a P45. The employer will though need to have a system in place to track any payments, for example bonuses or share options, paid after the employee has departed. Any amounts paid after leaving the UK may have continued UK tax liability.
Employee returning from overseas employment
Where an employee returns from an overseas assignment there will be an active PAYE record so no new employee form is required.
The employer should advise HMRC of their return so that any NT tax code can be reviewed and payroll arrangements altered if necessary. If the NT code is withdrawn either the new code is operated on a non cumulative basis which prevents any tax refund until the end of the tax year or alternatively the employer may run two separate PAYE records on the payroll for the employee. Two separate entries on the FPS would be required in respect of the same employee.