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.