Before sending employees abroad, employers should consider the tax and social security implications for the employee, as well as their own compliance obligations. This article sets out the key tax considerations for employees leaving the UK for overseas secondments, and those coming to the UK for temporary postings.
When sending employees overseas for a temporary purpose, employers are advised to agree up-front the basis of payment and the benefits on offer under the terms of a secondment agreement. Employers may wish to shelter the employee from any adverse tax effects of the posting and this can be achieved through tax equalisation or tax protection.
Tax equalisation is a method whereby the employer guarantees the employee’s net pay (usually equal to the amount received prior to departure) and then grosses-up that net pay at the prevailing tax rates in the country the employee is working in. A deduction for the home jurisdiction’s ‘hypothetical tax’ will be made, but will not be paid to the relevant revenue authorities and effectively represents the employee’s contribution to the employer’s tax costs.
An alternative option, tax protection, seeks to achieve a similar end goal. A key difference is that an employee remains liable for their own tax liabilities in their home country and host country, and after the year end the employee seeks a reimbursement from their employer of any tax shortfall suffered as a result of their overseas secondment.
For employees leaving the UK but being paid from the UK, a UK payroll will be required. However, if the employee ceases to be UK tax resident and will not have any UK workdays, an NT (no tax) code can be applied for. The employer can choose to operate either an expat-only payroll or to use the existing UK payroll.
If the employee ceases to be UK tax resident but has UK workdays, an agreement can be sought with HM Revenue & Customs (HMRC) to restrict PAYE to the expected annual percentage of duties to be performed in the UK (known as a Section 690 agreement). As the calculation is based on an estimated split, a UK tax return must be filed by the employee to confirm the exact split and the employee, rather than the employer, will be responsible for the corresponding tax payment or refund.
For inbound secondees, if an employee (but not a director) is arriving in the UK from a country with which the UK has a tax treaty, the employer can apply for a Short Term Business Visitor Agreement (STBVA), provided that the employee:
- Is in the UK for fewer than 60 days in the tax year (total days, not just workdays) and remains on a home country employment contract; or
- Spends fewer than 183 days in the UK, and does not become UK tax resident, remains on their home country contract and their costs of employment in the UK are not met by the UK employer.
For employees spending over 60 days in the UK and covered by the STBVA, a return will be due by 31 May following the end of the relevant tax year. The level of information required in the tax return depends on the length of time spent in the UK and is stipulated in the STBVA.
For employees (not directors) who cannot benefit from the arrangement (for example, those who are UK tax resident or are coming to the UK from a non-treaty country) but who spend no more than 30 days a year in the UK, a modified PAYE arrangement is available on application to HMRC. This allows the employer to submit a single annual return (due by 19 April following the end of the relevant tax year on 5 April) and no real time reporting is required.
If a payroll is required and the employee is to be on a tax-equalised basis, the PAYE on tax equalisation must be dealt with through a modified payroll with a separate PAYE reference and agreement from HMRC.
This agreement avoids the risk of late filing/incorrect reporting penalties where adjustments are made and also allows an extension until 31 January following the end of the relevant tax year of the P11D filing, which is usually 6 July following the end of the relevant tax year.
Employees coming to the UK who do not become UK tax resident may also benefit from a Section 690 agreement, although it may be the case that the employee is only taxed on UK workdays anyway and therefore the agreement is not necessary.
Where a payroll is required in both the UK and an overseas jurisdiction, it is essential that the two payroll departments are in communication with each other, especially if payment occurs in both jurisdictions. While this is more of an administrative matter, the tax consequences of a lack of communication can result in payrolls not picking up the full amount paid to the employee, which if discovered by the relevant tax authority may result in claims for the payment of underpaid taxes, interest and penalties, and a risk of greater scrutiny in the future.
Social security payments
The underlying principle of social security is that an individual pays contributions in the jurisdiction where they will receive a payment/benefit in return (usually in the form of a state pension). Hence the aim would be to pay social security in the jurisdiction where the employee is most likely to benefit, but also where the employment is based.
If the employee transfers their employment to an overseas employer, they will pay social security contributions in that country, whereas an employee staying on the same employment contract but working overseas will remain liable to their home country social security contributions, depending on where they are seconded and for how long.
The employer’s position follows that of the employee. If the employee can elect in which jurisdiction to make contributions, the employer is bound by their decision.
The UK has social security treaties with 20 countries, which can either ensure an employee’s continuing liability to or exclusion from UK social security contributions (National Insurance contributions) for between two and five years, depending on the relevant country. The UK is also part of the EEA social security agreement, which covers postings in other member states for up to five years.
While the social security position is determined by the underlying facts, to confirm the position and to provide evidence to the host country social security agency that the employee is still paying home country contributions (and is therefore exempt from host country contributions), a certificate of coverage or ’A1 certificate’ should be sought. These are issued by the country in which contributions will remain payable, so for a UK employee the application is to HMRC.
For employees remaining on a UK employment contract but working in a non-agreement or EEA state, UK National Insurance will remain payable for the first 52 weeks abroad. Similarly, employees coming to the UK on overseas employment contracts will be outside the scope of National Insurance contributions for the first 52 weeks in the UK.
If the employee is liable to UK contributions, a UK payroll will be required to operate National Insurance contributions, even if no PAYE is due. If this is the case, a return showing the full salary received (both in the UK and overseas) and the National Insurance contributions deducted must be submitted to HMRC by 31 March following the end of the relevant UK tax year. This is an employer return and covers all employees working outside the UK but who are continuing to pay National Insurance contributions.
Relocating employees can make an employer’s and employee’s tax and social security position more complicated, but with appropriate advice and planning the sometimes conflicting requirements of different jurisdictions can be managed to minimise any adverse impact on both parties.