Using real-life scenarios here we share our top tips to consider when setting up payroll for expatriates, and what you need to do to stay tax compliant at home and overseas.

Operating payroll and understanding the reporting obligations for expatriates is a complex, but vital challenge for any international business. HMRC frequently audit and inspect an employer for PAYE and National Insurance Contributions (NIC), with substantial penalties if errors are found.

Sufficient planning and managing costs in real time is key to ensure that correct declarations and payments are made to HMRC to avoid an audit or penalties. Furthermore, cost planning opportunities can be flagged early to help mitigate the impact of expatriate costs on the business, including remuneration costs, relocation packages and expenses, as well as additional tax and NIC costs. Accurate and timely payroll information can help your organisation anticipate and manage these costs, as well as avoid unexpected surprises. It also makes your employee’s tax return process much clearer, avoiding unnecessary confusion and stress.

Below we’ve shared our top tips to consider when setting up payroll for expatriates and what you need to do to stay tax compliant at home and overseas, through real-life scenarios.

Scenario one – Moving abroad for work and Detached Duty Relief

An employee relocates to the UK from Germany to work for the UK branch of the German parent company for a two-year assignment. This is the first time they are sending an employee to work in the UK. The company has agreed to pay for the employees rent while they are in the UK.

What are the tax and social security responsibilities?

As the employee has been posted to the UK from Germany, they will be subject to German social security because the secondment is anticipated to last only 24 months and has not replaced another worker. An A1 certificate needs to be applied for in the home country (Germany). This would confirm the continuation of German social security and stop the need for UK NIC for both employee and employer. A shadow payroll in Germany would need to be run to account for the social security there, as well as a UK payroll.

Although social security continues to be paid in the home country, the tax liability would be due in the country of work. The rent would usually be an additional taxable benefit to the employee; however, as the secondment is only for 24 months, HMRC allows relief from Income Tax on reasonable expenses incurred in the performance of employment duties, which would include the rent here, as it’s for a flat near to the UK office so reasonable for the circumstances. This means that neither the employer nor employee pay any tax on this benefit. This is called Detached Duty Relief.

Scenario two – The US travelling executive, COLA and Overseas Workday Relief

A US employee is sent to the UK for three years. Although she works predominantly in the UK, she also has responsibilities, and makes occasional visits to, other European countries for about 10% of her working time.

The company pays her salary, a Cost-Of-Living Allowance (COLA) and the cost of rented accommodation, which is shared by her partner, who has also come to the UK. The employee receives her basic pay in the US and is not remitting this to the UK. Instead, she is receiving and living off her COLA in the UK.

What are the tax implications and NIC responsibilities?

As the assignment is temporary, a Certificate of Coverage needs to be applied for, which can last a maximum of five years. This exempts the employee from UK NIC, and social security would be paid in the home country.

Tax is due in the UK on the basic pay and COLA. For the 10% of time the employee works outside of the UK, a Section 690 application can be filed by the employer. This exempts the employee from paying tax on 10% of her basic pay received in the US, but her COLA remains taxable in full as it is remitted to the UK. This is referred to as Overseas Workday Relief and can apply for up to three years.

Scenario three – Short-term business visitors to the UK

A US employee is sent to the UK for three weeks to share the new company sale programme with the UK team. During this period, he visits various UK sites, before returning to the US. While working in the UK, the US company continues to pay him.

What are the tax implications and NIC responsibilities?

Strict PAYE obligations exist for employers to withhold PAYE for anyone who perform duties in the UK. However, the UK company can apply to HMRC for a Short-Term Business Visitors agreement to enable PAYE obligations to be relaxed if the situation meets certain conditions. The employer is responsible for reviewing each case separately to assess whether they can relax their PAYE obligations or not.

In this scenario, the employer does have an agreement in place with HMRC, and the employee can continue to be paid from the US entity for a period of less than 60 days with no formal reporting needed to HMRC.

Scenario four – Working from home overseas

An individual originally from Sweden has been living and working in the UK for the last five years, working for a UK based company. After reflecting on her life during the COVID-19 restrictions, she decides to relocate back to Sweden, but retain her UK job while working from home in Sweden.

What are the tax implications and NIC responsibilities?

This is an increasingly common scenario employers are facing post-pandemic, as the accelerated adoption of remote working makes it a more practical scenario for employees and employers alike. However, the tax, social security, and payroll obligations of remote working crossing international boundaries can be complex and remain largely misunderstood.

Click here to read: Working from home overseas – the tax, social security and payroll considerations.

Other considerations – tax equalisation

Where employers have seconded employees, they may wish to offer tax equalisation or cover the cost of overseas taxes completely. This is where an individual would be in the same tax position as they would have been if they remained in their home jurisdiction.

In recognition of the complexities of such payroll arrangements HMRC allow employers to run a modified payroll for their tax equalised employees allowing them to capture tax savings through payroll. In this situation, a payroll would continue to be run in the home country and the tax offset against the UK liability, with the employer covering the remaining cost or in some cases receiving any saving.

Where a company wishes to cover all the tax completely, the liability costs, salary and allowances are grossed up and an additional element added to the payroll where the employer bears these costs.

What should you do?

Paying expatriates effectively is a very complex affair as the above examples have shown. It’s vital that employers plan the tax and social security position before the employee moves, whether it has been initiated by the employer or (more increasingly) the employee. Even after the move has occurred, it’s important to watch out for legislative changes in the UK or other countries, as arrangements may need to be amended.

Transparency by both the employer and employee is also key. It needs to be clear to both parties who in the employer group is responsible for paying the employee, what remuneration and benefits are included, and that this is understood and agreed by the employee. Foreign exchange rates can often lead to unintended shortfalls on one side, and a clear policy needs to be in place regarding this. Irregular payments such as bonuses or share scheme payments may also throw up complications, which need to be treated correctly in the payroll.

Due to the varying agreements between nations, there are many different reporting obligations surrounding tax, social security and pensions for expatriates. It’s therefore always important to have specialists working with you to plan effectively and ensure the correct compliance. Our global mobility experts can work with the employer and, where needed, the employee, to ensure that everything works smoothly.