What happens if your business needs to recruit staff living and working for you overseas, or relocate part of your workforce to foreign countries due to business demands, or to encourage staff retention?
Despite, or perhaps because of, the economic turmoil of the last three years, we have experienced a significant increase in enquiries from businesses seeking advice regarding their responsibilities if they employ a workforce overseas, either by direct recruitment, or relocation of existing UK staff to overseas jurisdictions.
PAYE
A common mistake, especially where existing employees are relocated, is to assume that PAYE is operated from the UK, as that is the source of the wages. Confusingly, it is actually the case that PAYE may need to be operated in part for UK employees relocating, but not at all for new recruitments living and working entirely overseas.
Taxation
Where an employee performs all of their duties overseas, their salaries are not taxable in the UK. For UK individuals transferred overseas, an NT (‘No Tax’) code must be applied for from HMRC. As the name suggests, this means that PAYE will not be deducted from their earnings.
The tax liability will instead be collected under local law. Most, if not all, EEA countries and G20 countries, as well as many others, will require a payroll scheme to be registered and operated where the duties are being performed, with tax being paid to the relevant authority in local currency.
National Insurance (social security)
Social security is more complicated. Where there is a social security treaty between the UK and the relevant country, then for employees being relocated abroad, they may continue to pay national insurance (NIC) through a UK payroll, rather than local social security, usually for a maximum of two years. Evidence may be required by production to the local tax authority of an official document from HMRC.
Where an employee is being relocated, and there is no social security agreement in place, then it is mandatory to deduct NIC via UK payroll for 52 weeks, even if social security is also paid locally.
Where new employees are recruited in overseas territories, and they have not worked in the UK previously, social security will simply be paid locally, with no requirement for UK reporting.
Hybrid working
The most difficult area is where work is performed in both the UK and overseas. Whilst there is a limited exemption for ‘incidental duties’, it may be the case that tax will be payable in more than one country. To prevent double taxation on the same earnings, it may be possible, with prior written agreement from HMRC, to only tax the UK element of hours worked, via the company payroll, or get credit for tax already deducted on the same amounts through a foreign scheme. Again, the charge to NIC is based on a different concept and separate consideration will be required on a case by case basis.
Other considerations
There are non-tax issues the employer must consider, such as local employment law, holiday entitlement, right to work, pension contributions, attachment to earnings orders and student loan deductions, to name just a few. The employer must also review whether a permanent establishment has been created in the foreign country, and if separate corporate reporting will be required.
Case study example
UK Company Limited employs two skilled individuals, and due to increased business demands in Europe, they are asked to relocate to the continent. One is British and the other happens to be a national of the country in question. The assignment is expected to last two years. Both will pay their tax abroad, and a payroll will need to be operated under local rules. However, the British employee would rather pay UK NIC, but the local national chooses to pay social security in his home country, as he will one day return. Under joint UK/EU rules, this is allowed.
The same company is also to relocate a third British employee to an African country. There are no joint agreements in place, and it will be necessary to pay National Insurance in the UK for a period of twelve months, even if there is an equivalent social security charge locally.
Where we can help
Hazlewoods extensive network of international accountants and tax advisers through our membership of HLBi means we can provide advice in all the above matters, be it UK or overseas payroll responsibilities.
Please contact Glenn Collingbourne, Tax Director, for expert advice for your business.