Operating payroll for expatriates correctly can be a challenge particularly understanding your reporting obligations which is imperative for any international business. HMRC will frequently audit and inspect an employer for PAYE and National Insurance Contributions (NIC), with substantial penalties if reporting and payments are incorrect.
Sufficient planning and managing costs in real time can help identify cost planning opportunities and make sure that adequate, and correct, tax payments have been paid to avoid being audited by HMRC or receiving a penalty. Furthermore, cost planning opportunities can be flagged early to help you 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 you help your organisation to anticipate and best manage these costs for minimal impact on the business.
Maintaining an accurate and timely payroll will make the tax return process much easier for the employee and the employer; all the relevant and up to date tax information will be in one place.
What tax implications could your business encounter?
Scenario one – Moving abroad for work and Detached Duty Relief
An employee comes from Germany to the UK to work for the UK branch of the German parent company for a two year assignment. The company has agreed to pay for their rent while they are in the UK.
What are the tax and social security responsibilities here?
In this scenario due to the limited length of the assignment and the fact it is purely a secondment, the social security obligations would stay within Germany. An A1 certificate, (applicable in European Economic Area Countries only), would need to be applied for. This would confirm the continuation of German Social security and negate the need for UK NIC for both the employee and the employer. Due to the continuation of German Social Security, a shadow payroll in the home country would need to be run as well as a UK payroll.
Although National Insurance is continued in the home country, the tax liability would be due in the country of work, which in this scenario is the UK. Where the rent is concerned, although this would usually count as an additional taxable benefit to the employee, HMRC will allow relief from income tax on expenses incurred in the performance of employment duties, which includes housing costs, as seen here. This means that neither the company nor the employee will have to pay any tax on this remuneration. 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 a period of 3 years. Although they works predominantly in the UK, they also have responsibilities within Europe and make occasional visits to other European countries for work, about 10% of their working time.
The company pay their salary, a cost of living allowance (COLA) and cover the cost of the rented accommodation which is shared by their partner who has also come to the UK. The employee receives their basic pay in the US, but has chosen to receive their COLA in the UK.
What are the tax implications and NIC responsibilities here?
As the assignment is temporary, a Certificate of Coverage would need to be applied for (this is the US equivalent of an A1 Certificate). This would then exempt the employee for UK NIC, and Social Security would be paid in their home country.
In regards to tax, this would be due in the UK, including the pay that is received in the US. For the 10% of time the employee works outside of the UK, a Section 690 application can filed by the employer. This would exempt the employee from paying tax on 10% of their yearly salary although this would only include their pay received in the US as the COLA is remitted to the UK. This is referred to as ‘Overseas Workday Relief’.
Other considerations – tax equalisation
In scenarios like above, companies may wish to offer their employees tax equalisation or wish to cover the cost of taxes completely.
A tax equalisation scheme 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 the additional cost.
Where a company wishes to cover all of the tax completely, the liability costs, salary and allowances would have to be grossed up and an additional element added to the payroll where the employer bears these costs.
As you can see, paying expatriates effectively can be very complicated, which is why we're sharing our top tips to help with the process:
Be clear and transparent on the terms of an employee's remuneration package. Which company in the group is responsible for paying the employee and what remuneration is included? Will the package include bonuses, shares, housing and education reimbursements? What are your pension responsibilities?
Have a clear foreign exchange rate policy. Will you use a fixed rate or update this on a monthly basis? It is imperative that you set your parameters.
Plan ahead. Make sure the employee is on the payroll from the outset of the assignment as catching up with payroll is expensive and complicated. Check the right taxes are ready to be paid in the right location before the employee begins their assignment.
Look out for irregular payments such as bonuses and share scheme payments. Were they earned in the UK or elsewhere? You need to ensure that the correct amounts are put through the payroll.
Watch out for legislative changes both within the UK and an employee's home country. Does your package comply with the relevant regulations? Regular updates with your advisors is an important part of the process.
Communicate effectively with other departments. Ensure all parties; employee, HR, payroll and finance, both in the home country and UK, are working together. This is important to ensure a seamless payroll delivery.
Due to the varying agreements between nations, there are many different reporting obligations surrounding tax, national insurance, social security and pensions for expatriates. With this in mind, it is always worthwhile to speak to an advisor that can give you detailed advice on your specific scenario.
Do you need advice or assistance with your international payroll? Buzzacott’s Global Mobility Team offers joined-up solutions for tax and compliance risks and payroll solutions for individuals working abroad. We also offer HR services to support employees and their families through relocations.
To find out more information about international payroll, or any other issues relating to global mobility, please contact your usual Buzzacott contact, or the Global Mobility Team.
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Senior Payroll Manager
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