TaxTalk – September 2022
The tax implications for employees can be complex when their company relocates. Here’s our guide.
When companies decide to relocate part of the business overseas, it’s important to plan for how the move will impact the exiting workforce. Chances are some employees will move abroad with the company. Others may be made redundant.
Relocating employees overseas
You may decide to transfer certain key employees overseas to set up the business and train local staff. If so, you will need to consider immigration regulations, host country employment law, the work and living conditions of the host country and the cost of living.
What are the UK payroll reporting requirements?
UK reporting requirements depend on:
- The employee’s UK tax residence status under the Statutory Residence Test
- Whether they will continue to be employed by the UK entity
- Whether they will continue to perform UK duties.
If the employee remains a UK tax resident, their employment income will still be subject to UK PAYE. Relief may be available to avoid double withholding. This applies if the employee is deemed to be treaty non-resident, based on the tax treaty between the UK and the host country, or if there is a tax withholding requirement in the host country.
Where the individual remains employed by the UK entity, any substantive duties they perform in the UK are taxable in the UK. Substantive is any duty that is not merely incidental to their role. An example of non-substantive duty would be to attend a conference. UK National Insurance may still apply if there is a social security agreement between the UK and the host country.
But if the individual ceases their UK employment, there may be tax relief available on their UK substantive duties. This is subject to the employment income section of the tax treaty between the UK and the host country. If the employee is eligible for treaty exemption, the UK entity does not need to report them on the UK payroll, provided there is a short-term business visitor (STBV) agreement with HMRC and details of UK visitors are submitted to HMRC in the annual report.
In cases where the employee receives bonus and equity income, a portion of that income may continue to be taxable in the UK. This applies if they worked in the UK during the bonus performance period or the share vesting period. UK taxable bonus or equity income must be reported on the UK payroll, even if the employee is non-resident and has no UK duties.
How are relocation expenses treated in the UK?
You may decide to provide or reimburse relocation expenses. These might include the transportation of personal belongings, flights and visas for the employee and their family.
If the employee will become a non-UK tax resident when they leave the UK, expenses incurred are not usually reportable in the UK. Instead, the benefits provided may be taxable in the host country.
Where they remain a UK tax resident, the benefits will continue to be taxable in the UK. But there may be tax relief available on certain qualifying relocation expenses up to £8,000.
Letting employees go
For employees leaving the company or being made redundant, from a payroll perspective, you must include the date of leaving on the Full Payment Submission (FPS) when the final payment is made to the employee.
You also need to give the employee a Form P45, which contains details of pay and tax from the start of the tax year to the date the employment terminated. The employee will keep one part (1A) of the form for their records and will give the other parts (2 and 3) to the new employer.
Employees are eligible for statutory redundancy pay if they have been working for you for two years or more. The statutory amount is currently capped at £17,130. But as an employer, you may decide to pay more than that.
The UK tax treatment of termination payments depends on whether they are contractual.
What kinds of income are taxed as normal earnings?
Payments that are reward for services are taxed as normal earnings and are subject to PAYE and Class 1 National Insurance, similar to normal salary. Examples are:
- contractual termination pay
- non-contractual, but the payment is reasonably expected
- garden leave
- restrictive covenant
- post-employment notice pay.
When is income taxed as compensation for loss of office?
Income taxed as compensation for loss of office is also known as an ‘ex gratia payment’. Certain payments are fully exempt from tax. For example:
- Payment made on death/injury/disability of the employee
- Payment made into a registered pension scheme
- Payment relating to outplacement counselling or a retraining course
- Legal fees, provided they are referred to in the settlement agreement and the payment is made directly by the employer to the employee’s solicitor.
For other ex gratia payments, including statutory redundancy pay, the first £30,000 is exempt from tax and the excess is subject to PAYE and Class 1A employer National Insurance under PAYE.
When are exit payments deductible for corporation tax purposes?
Termination payments which are taxed as normal earnings from the employment will be deducted for corporation tax purposes by the employer when arriving at taxable profits, in the same way as any other salary payment.
Statutory redundancy pay is specifically allowed as a deduction from trade profits. You will also be allowed a deduction in arriving at taxable profits, in respect of termination payments, which meet the normal test for allowable expenses i.e. wholly and exclusively for the purposes of the trade.
If you are permanently ceasing the trade, the ex-gratia payments are unlikely to meet the wholly and exclusively test. But a deduction limited to three times the amount of statutory redundancy paid to the employee is specifically allowed.
If you would like more guidance on issues raised in this article, please contact Catherine Heyes.
