There are many reasons why your business might have employees working overseas. For example seeking individuals with specialist knowledge, expanding your business overseas or gaining access to new perspectives and ideas. Although there are many benefits, you do need to plan carefully to ensure that you meet with your obligations as an employer both in the UK and overseas.
We are going to look at some of the implications of ‘Alberto Co’ sending their employees, José and Isobel, overseas to work in Utopia. Of course, every situation is different so while we cover some of the situations which may arise below, please get in contact if this is something you are looking to do.
Is there a UK tax charge on the employees?
There are a few factors which will determine whether José and Isobel is liable to UK tax on their remuneration.
The first of these is residence status, which is determined each year under the Statutory Residence Test (SRT).
José is resident in the UK, therefore, he will liable to tax on his worldwide income. His salary will be chargeable to UK tax regardless of where this is paid or where in the world José is working.
Isobel is non-UK resident and will only be subject to UK tax on her UK income. Therefore the tax position will depend on where she is physically carrying out her duties. If this is wholly overseas, she will not be liable to tax in the UK on her employment income even if this is paid by a UK employer.
Where are the duties carried out?
It’s not always as clear-cut as the above and Isobel may be non-resident, but spend some of her time working in the UK and some of her time working in Utopia.
In this case, Isobel’s remuneration must be split between the UK duties and the overseas duties, normally on a time spent basis. The UK element of her salary will be liable to UK tax, whilst the overseas element will not.
Agreement between the UK and Utopia
Alberto Co also needs to consider whether the terms of the Double Tax Agreement (DTA) between the UK and Utopia contain any specific rules which may affect the tax treatment in the UK. This could apply if José and Isobel work in a specific sector such as on an aircraft or ship, as a teacher, or for the government.
Is there a UK national insurance charge?
Of course, things are never simple. The rules for determining if there is a liability to UK NIC differ to those for income tax. As well as considering José’s and Isobel’s residence status, Alberto Co will also need to consider if they are gainfully employed in Great Britain, which will be based on where they carry out their duties and not where the contract is based.
The residence status does not affect the NIC, so we will consider Isobel’s position. Even if Isobel carries out her work wholly overseas for Alberto Co, a UK employer, whether or not she has a UK NIC liability will be affected by where in the world she is working.
If Utopia is within the EEA, Isobel’s NIC position will depend on how long she will be working in Utopia. If the secondment is to last less than two years, she will remain within the UK NIC charge and Isobel would not need to pay social security contributions in Utopia.
If the intention is for Isobel to work in Utopia for more than two years, she will instead be subject to Utopian social security contributions.
Countries with a reciprocal agreement (US, Canada, Japan etc):
Instead, let’s assume Utopia has a social security agreement with the UK. The exact terms of the agreement should be checked. Usually Isobel will remain within the UK NIC regime if the secondment is temporary.
Countries with no agreements:
If Utopia is not caught under the above, then Isobel will remain within UK NIC regime for 52 weeks. After this time she will be liable to social security contributions in Utopia.
What are my reporting requirements?
Alberto Co’s RTI reporting requirements will depend on its employees’ liability to tax and NIC.
Liable to tax and NIC
Alberto Co determines that José is liable to both UK tax and NIC meaning they should report his remuneration through PAYE as they do with ‘normal’ UK workers.
Liable to tax but not liable to NIC
José’s contract is extended; as a result he is no longer liable to UK NIC but is still chargeable to UK tax. Alberto Co must report his salary and deduct tax through PAYE, however, Alberto Co should operate NI category X which means no NIC will be deducted from José’s salary.
José may wish to make voluntary NIC payments direct to HMRC in order to maintain his entitlement to a UK State Pension.
Not liable to tax but liable to NIC
For Isobel, Alberto Co has determined that she must pay NIC but is not liable to UK tax. Alberto Co should complete form P85 which will ensure that no tax is deducted from Isobel’s salary.
The NT code should not be operated until it has been issued by HMRC. Tax, therefore, should be deducted as normal until this is received. Isobel can reclaim any tax deducted from HMRC.
Not liable to tax or NIC
Isobel’s contract is also extended, as a result, she is not liable to tax or NIC. As such, Isobel can be removed from Alberto Co’s FPS until she returns to the UK or a liability arises.
Is there any overseas tax/social security charge?
Identifying the UK tax treatment is only half the story, the employee and Alberto Co must also consider whether there is a charge abroad as well.
Advice should be sought from an expert in that country and we can refer you to a specialist if requested.
What other factors should be considered?
There are a number of other factors which Alberto Co should consider before employing individuals overseas, including:
• What currency will salary be agreed and paid in?
• Will the contract be drawn up under English or local law?
• How long will contract last?
• If seconding an employee, have they got the correct visas?
If you have employees working overseas and would like to take further advice, please do not hesitate to contact us.