Over the years, HMRC has introduced special payroll arrangements for cross-border workers that aim to simplify reporting and avoid double withholding. Here’s a summary.
UK domestic regulations require the employer to report employment earnings details to HMRC every time they pay an employee, on or before the day of the payment.
For employers with internationally mobile employees, payroll reporting in ‘real time’ often creates challenges. This is because there may not be sufficient time to gather all the travel and compensation data before the usual deadline. In many cases, there are payroll withholding requirements in both the home and host counties, which can lead to double withholding.
National Insurance (NIC)-only payroll
For non-resident assignees working overseas, their UK tax liability will normally cease. However, their employment income may continue to be subject to UK NICs for a certain period if they remain employed in the UK.
Individuals can apply to HMRC for an NT tax code, which will stop UK PAYE income tax withholding.
After the NT code is applied, only Class 1 National Insurance (both employer and employee) will be withheld via the payroll.
It’s important to remember that employers cannot apply for a tax code change on behalf of their employees. HMRC will only accept tax code applications from individuals or their tax agents.
Section 690
Internationally mobile employees are only taxable on income related to their UK duties in the following cases:
- if they are UK resident, non UK-domiciled, claiming the remittance basis of taxation and entitled to overseas workday relief (assuming foreign income is not remitted to the UK)
- if they are not resident in the UK
- if they are resident but ‘treaty non-resident’ in the UK, based on the terms of the tax treaty.
The default payroll treatment is to report 100% of employment earnings through the UK payroll and then claim tax relief and the subsequent refund via the tax return. It is much better from a cash flow perspective to apply for a Section 690 direction. This allows employers to report only the income related to UK duties in the first place, rather than having to wait until after the year end to claim refunds on the tax return. Once the Section 690 application is approved, UK PAYE is restricted based on the estimated percentage of UK duties. The actual UK taxable income is reconciled via the tax return.
Appendix 5
If foreign earnings are not exempt in the UK, UK PAYE is applicable on full earnings.
The Appendix 5 arrangement applies to employers who are required to withhold foreign tax as well as UK PAYE. It gives provisional relief for double taxation to employees who must pay both UK tax and foreign tax from the same payment of earnings. Under the arrangement, UK PAYE is calculated in the usual way and then reduced taking into account the estimated foreign tax credit. Again, actual taxable income and liabilities are reconciled via the tax return.
Appendix 6 (or ‘the modified payroll’)
Where employees working in the UK receive earnings covered by a tax equalisation agreement, the employer can apply for a modified payroll and pay HMRC the estimated PAYE in equal monthly instalments. Under the tax equalisation agreement, individuals are subject to a hypothetical tax usually based on their home country income and tax rates and the employer is responsible for actual taxes in both countries.
Since the employer is taking on a liability for the individual, UK tax payable is treated as additional taxable income which must be reported via PAYE. This is usually done by grossing up the earnings after deduction of hypothetical tax at UK prevailing rates.
Adjustments to the estimated income may be required during the tax year. This could be following a salary increase or a change in benefits. At the end of the tax year, usually on the March payroll, actual year-to-date income is reconciled through the payroll.
Under the Appendix 6 agreement, a UK tax return must be completed to determine the actual gross-up of net taxable earnings. The employer is responsible for making sure that individuals complete their tax return.
What is Appendix 8?
Employers apply to HMRC for an Appendix 8 agreement to report employees from non-treaty countries working temporarily for a UK entity, provided they are present in the UK for fewer than 60 days each per tax year. Under the agreement, employers can settle the taxes due in a single payment at year end, instead of including the visitors on the payroll every time they visit the UK.
The Appendix 8 agreement allows for PAYE to be paid and reported annually. Non-cash benefits are also reported on the Appendix 8 payroll. Unlike other special payroll arrangements, a tax return is not required unless individuals have other UK income or gains to report.