By bennettbrooks Tax Director, Mary Tierney.
With the increase in the capability to work from home, many employees roles can now be carried out from any location around the world. Current experience is that we have an increasing number of clients who have employees living in many other countries.
Unfortunately, the UK and other worldwide tax regimes have not kept pace with the changes in working patterns and the simple recruitment of an overseas based employee, or the relocation for personal reasons of an existing employee overseas will have a number of tax implications for the employing company to negotiate.
The most obvious place to start is payroll, the company may want to keep the employee on the existing payroll, and this may be possible, but what about payroll deductions, tax and NIC. It does not help matters that the rules are different for tax and NIC.
For tax purposes and if the individual will be non UK tax resident, the simplest approach is to obtain an NT tax code, so that no UK tax is deducted from their salary. In many circumstances, this can be done and is obtained by completion of a form P85, bearing in mind that this should be done well in advance of the overseas move. However, we have to bear in mind that if any of the work is carried out whilst the individual is physically present in the UK, the starting point regardless of their residence position is likely to be that this income remains taxable in the UK – subject to any double tax agreement with the country of residence. In many cases, where there is no overseas company employing the individual, the double tax treaty will not assist. Subject to the time the individual spends in the UK, it may be necessary to enter into a formal arrangement with HMRC to apply tax to an appropriate % of earnings with the individual submitting a UK tax return at year end to “true up” the position.
If, however, there is a non UK employer, then the “short term business visitor” rules will need to be reviewed as these will govern the company’s tax PAYE obligations subject to the time the individual spends in the UK. In the spring 2023 budget the chancellor indicated that additional leeway would be introduced to these rules, but this is still awaited.
NIC is different and the general rule is that individuals pay social security contributions in the country in which they are working. If the time spent overseas is in Switzerland or an EEA country and is unlikely to extend beyond two years the company should be able to apply for a Portable Document A1 to give permission to keep the individual within UK NIC. Outside of the EEA reciprocal agreements may exist and need to be reviewed.
Determining the correct UK tax and NIC position can be challenging but can be resolved in a compliant manner.
There are two other risks to highlight. If a UK company employs an employee in another country, it is quite possible that the company of residence will have payroll deduction obligation and the employing company will need to set up an overseas payroll scheme. If overseas tax is due as well as UK tax due to time spent in the UK, an agreement can be reached with HMRC for what is known as an “appendix 5” arrangement to offset the overseas tax against the PAYE tax collected via payroll.
Finally, subject to the seniority of the employee and their role, there is also the possibility that their presence in a country other than the UK might be sufficient to create a branch or permanent establishment where they are residing resulting in corporate tax filing/payment requirements.
In short, advice should always be taken in the country that the employee resides in or is moving to, as it can be costly to overlook this. For example, if it transpires that overseas payroll deductions were due after the employee has left the company, this may end up being an absolute cost to the employing company.
If you have any queries relating to the content in Mary’s article, please contact us.
