International Employees and UK PAYE complexities
Increasingly within global organisations we see that individuals have increasing international activity throughout a business’ empire with differing national fiscal obligations. Impact on employees and compliance with a variety of national fiscal government obligations brings into play significant complexities. Some will be available within Payroll Software or service, whereas others, a little more obscure, may require special handling. For UK Payroll, there are a variety of variants (to the normal) Pay As You Earn (PAYE) obligations.
Section 690 International Employments
Where an employee works both in the UK and overseas, and certain UK non-residence criteria are met, an employee can apply to UK HM Revenue & Customs (HMRC) to operate PAYE only on the proportion of the earnings that relates to their UK work. This applies to all payments made by the UK employer (including termination payments and share based remuneration). HMRC issue a S.690 notice specifying the proportion (as a percentage value) that is to be treated as UK Income.
The employee’s earnings are split between the amount subject to UK PAYE and amount which is not. Only the UK part is added to taxable gross pay, and be subject to the standard UK tax calculation.
Often the S.690 notice is provided midway through the tax year; however, it applies to the full tax year. Therefore, an employer may need to adjust payments for prior periods affected in that tax year. How an employer refunds prior amounts of tax is dependent on whether the tax code is being operated on a cumulative or non-cumulative basis. For those on a cumulative tax basis, then by adjusting the taxable gross year to date total and setting the correct calculation proportion going forward will take care of any tax refunds for overpayments due. For week 1 / month 1 cases, then prior period overpayments would require manual calculation and update to bring records back into the correct position.
Ongoing where the amount of pay is split between taxable and non-taxable, then the correct accumulation of both taxable gross and tax paid will occur. Please note that S.690 has no impact on the National Insurance application.
Appendix 4 – Short Term Business Visitors
For Short Term Business Visitors then HMRC operate Appendix 4. By complying with set criteria, an employer can disregard PAYE for short term business visitors to the UK. This arrangement can only be applied where the individual meets the following:
- Resident in a country that has a Double Taxation Agreement with the UK
- Is coming to the UK to work for the UK company or a UK branch of an overseas company, or is legally employed by a UK resident employer, but considered to be economically employed by a separate non-resident entity
- Expected to be in the UK for 183 (or less) days in any twelve-month period
With Appendix 4 there is no in-year Full Payment Submission (FPS) reporting to HMRC, however, at tax year end, the employer must report the taxable gross and any tax paid on an FPS. When this is applied to a UK payroll, then a new record is required for each tax year with the employment start date marked as the first day they started working in the UK for that tax year, and a leave date of 5th April (the last day of the tax year). No National Insurance liability or secondary employer liability apply for Apprenticeship levy.
Appendix 5: Net of foreign tax relief
Net of foreign tax relief applies where an employer is required to deduct both foreign tax as well as UK PAYE from salaries of individuals who have dual taxation obligations on their employment income by providing provisional tax relief for double taxation. Employers must contact HMRC to obtain agreement to operate Appendix 5 and notify any subsequent changes in circumstance that would affect the status. The UK PAYE is calculated on the taxable gross earnings using the relevant tax code and tax basis, and then that amount of tax due is reduced by any foreign tax due on the same payment to a value no lower than zero. The regular FPS submission to HMRC reports the full taxable pay and the reduced tax amount.
Appendix 6 & 7a: Tax Equalisation
Tax equalisation generally describes arrangement between and employer and their foreign national employees who has come to the UK to work. Under the terms of the agreement, the employee is entitled to a specified Net Pay. The employer agreed to meet the UK tax liability and ensure that their employees UK affairs are handled by a professional adviser or specialist.
There are several ways to operate: the first method is to operate PAYE on a gross-up of cash earnings and non-cash benefits within the payroll (good software and service offer options to undertake net to gross); and the second for the payroll to be informed of the values to be overwritten and notified by a third-party external to the payroll (such as accountancy professional adviser).
Appendix 7b: Modified NI
Modified NI arrangements may apply for those:
- Employed by a UK employer or assigned to work abroad for a period of limited duration, but for more than a complete tax year
- Have an ongoing UK Class 1 National Insurance liability whilst abroad
- Other than in the start and leaving period, earn above the upper earnings limit (UEL)
- Not be liable to UK Tax
- Receive some earnings and benefits derived from the employment other than the UK employer
Operation is similar to Appendix 6 and 7a (such as predetermined values).
And the rest…
Along with these official HMRC methods of operating UK PAYE and fulfilling RTI filing obligations, with an increasing mobile workforce coming into the UK or working overseas, then there are other non-standard arrangements required for those who are not subject to UK PAYE, or for other hybrid types schemes often serviced via accountancy firms.
These specialist PAYE operational requirements will not be present in all payroll software and service, if and when they apply it is important to ensure that your provision is both compliant with the calculation requirements, and any associated HMRC reporting obligations.