Where an overseas employer sends staff to the UK to work, the rules are challenging, and even the country where the employer is resident can affect how UK payroll must be operated.
Since the pandemic and the UK’s exit from the EU, we have experienced a notable increase in “ex-pats” moving home, and perhaps surprisingly, an equal increase in the number of foreign-born highly skilled workers relocating here. In both cases, the workers are often continuing to be employed by overseas businesses.
The rules to ensure that the employer and the employee are both meeting their tax compliance responsibilities are varied and complicated, and professional advice should always be sought. The below provides a flavour of some of the considerations that apply where an overseas employer places an employee in the UK.
UK tax compliance
Usually, a UK resident is chargeable to tax on their world-wide income and gains, however there are some exceptions, and further, the tax and national insurance (NIC) treatment for employers operating PAYE does not necessarily follow the same rules.
Tax residency
The UK operates a prescriptive series of tests to determine tax residency, which is generally connected to how long that person is present, measured over each tax year ending 5 April. As stated above, usually, a tax resident individual is subject to tax on their world-wide income and gains, thereby bringing into charge employment income, regardless of the location of the employer.
Similar rules apply to NIC although the residency test is different.
In broad terms, if someone spends over six months per tax year in the UK, they will be resident for tax and NIC here, but it is possible for individuals present in the UK for less than six months to be resident also, and therefore the specific circumstances need to be checked person by person, year by year.
Tax treaties
The UK has signed many treaties with other countries to prevent double taxation on the same income and, because of that, a common mistake is to assume that if tax is paid overseas, then none is due in the UK, or that even if tax is due in the UK, then it is reduced by the tax already suffered in the other country.
In reality, both beliefs are often wrong, due to misunderstandings over the responsibility to operate payroll for work undertaken in the UK and whether there is a tax treaty or not.
Pay as you earn (PAYE) and NIC (social security)
Whilst there are a few exceptions, the basic rule, regardless of tax residency, is that if duties are performed in the UK, PAYE and NIC must be operated on all the employee’s earnings from employment. PAYE is the mechanism that allows the collection of tax and NIC by direct deduction from a worker’s pay.
If the overseas entity has a permanent establishment in the UK, such as an office, branch or other building used in its business, it will likely have to operate PAYE, as a UK based business would.
Just because there is no UK establishment, this does not mean that PAYE is not due. In the absence of a UK based employer, the employee may be personally responsible for the correct deduction of tax and NIC via a DPNI (direct payment) scheme. The rules are different depending on in which country the employer is basedw
Overseas workday relief (OWR)
OWR is a form of tax relief that allows non-domiciled UK resident employees to be excluded from UK taxation on earnings that relate to work undertaken outside the UK.
For example, an individual may have been transferred to the UK from a company in the employer’s group to work on a specific project for a limited duration. Where some of the work on that project takes place in the UK, and in other countries, only the UK duties are taxed here.
There are specific conditions to be able to qualify for relief.
Case study
Miguel moves to the UK, to work as a local buyer for his employer, whose head office is in the EU. NIC must be paid on his salary, but taking a strict interpretation of the rules, tax could be settled via a UK tax return, instead of via payroll.
Working with both employee and employer, it was agreed that it would be easier for both parties that PAYE and NIC is paid by deduction through payroll, meaning the employer has satisfied its responsibilities, and the employee can be confident his tax is paid in full each month.
Getting proper advice
The details for taxing individuals working from the UK by overseas employers are varied and difficult, and it is important to get advice for employees before their appointment here commences.
Hazlewoods have the expertise to provide such advice, and as members of HLBi, an international network of professional advisors, we can provide UK and worldwide tax and compliance advice.
Please contact Glenn Collingbourne, Tax Director, for expert advice for your business.