British Expat Corporate Tax Guide

Sending employees on overseas assignments

One of the main issues which will affect how an individual is taxed on employment income in the UK after they leave, will be the length of their assignment. An employee who intends to remain outside of the UK for a complete tax year will become non-resident from the date of their departure until the date of their return. The Inland Revenue should issue an NT or No Tax code which will allow you to continue to make payments to the individual though a UK payroll without deducting tax.

If the individual returns before a complete tax year has elapsed, or has significant visits to the UK during their assignment, they will not have been deemed to break residency and will be remain taxable in the UK on worldwide employment income, subject to relief under double taxation agreements. If however, an individual leaves the UK and intends to return to the UK before a full tax year has elapsed, they will remain liable to UK tax on employment income and it will be necessary to continue to operate PAYE. In this situation it is often possible to apply for the anticipated foreign tax credit to be included in the tax code thus avoiding a simultaneous tax charge on the same income in both the UK and overseas country.

If you do not have an assignment policy, you may wish to decide whether the individual should be tax equalised, tax protected or treated as a local hire in the overseas country. Tax equalisation essentially means that an individual is limited to the tax they would have paid if they had stayed in the UK (ie excluding expatriate allowances etc). The company deducts this ‘hypothetical’ tax which is not paid over to the tax authority. All taxes in the overseas country are paid by the company to effectively guarantee an individuals net salary. A reconciliation is carried out at the end of the year to determing whether the amount deducted as hypothetical tax was correct or whether any balancing payments are required between the individual and the company. If the total tax paid is more than the hypothetical tax deducted, the individual has been protected from excess taxation by the company. If the hypothetical tax is more than the actual tax paid, the company keeps the windfall.

Tax protection is similar to tax equalisation with the exception that any windfalls described above are due to the individual and not the company.

If an individual is treated as a local hire in the overseas country and is responsible for paying their own tax, it is worth determining how the net income will be affected by different tax rates, cost of living etc. In addition, it is necessary to consider whether the company would protect the individual from paying more tax than he would have at home, in the case where an assignment is terminated early and the individual becomes potentially liable to double taxation.

On leaving the UK, an employee is obliged to complete a form P85 which is a departure questionnaire. This will enable the Inland Revenue to determine the individual’s residence status and if necessary will prompt the issue of an NT code. It is important that this form is completed correctly for both the individual and the company.

The requirement to continue to pay UK National Insurance will depend upon which country the assignee is going to, who the legal employer is and how long the assignees expects to be away.

In the majority of overseas assignments, individuals continue to be employed by the UK company and are seconded elsewhere. In this situation, the requirement to continue to pay Class 1 NIC for a period is as follows:

If an individual transfers to a European Economic Area country, they may continue to pay into the UK scheme if either the secondment is under 12 months at the outset (but this may be extended for a further 12 months if the assignment is extended), or under five years at the outset and the social security authorities in the host country agree. In both cases a form E101 should be obtained by the UK employer from the Contributions Agency International Services to certify continuing Class 1 liability. No liability should then arise in the host country.
If an individual transfers to another country with which the UK has a social security agreement, then it should generally not be necessary to pay contributions in both countries at the same time. The treatment will vary between countries, as some will deal only with reciprocation of benefits and not contributions. For the agreements that deal with contributions, the general rule is that contributions must continue in the UK for a defined period. This is normally one to two years, but can be as long as five (eg USA). When this period expires, contributions will cease in the UK and commence in the host country.
If an individual transfers to a country other than the above, both individual and employer are obliged to pay Class 1 NIC under UK law for a period of 52 weeks following the date of departure. At the end of the 52 week period, Class 1 contributions should cease. This could result in a UK and overseas liability during this period.
Whether or not an individual will need a work permit will depend upon the country to which they are going. The UK is a member of the European Economic Area (EEA) and as such, a UK national does not need a work permit to work in other EEA member states. They will however need a residence permit which is usually obtained following arrival at either the local government offices or police station. For other countries, they will need to obtain a work permit or work visa. In most cases, these are obtained by the employer in the host country. Most countries allow the spouse and children (under 18 years) to accompany a work permit holder.

Receiving employees from overseas

There are a wide range of issues which a company needs to consider when receiving an overseas assignee.

Whether or not an individual will need a work permit will depend upon the country from which they have been assigned. The UK is a member of the European Economic Area (EEA) and as such, an EEA national does not need a work permit to work in the UK. They will however need a residence permit which is usually obtained following arrival at either the local government offices or police station. From other countries, they will need to obtain a work permit or work visa. In most cases, these are obtained by the employer in the UK. Most countries allow the spouse and children (under 18 years) to accompany a work permit holder. The work permit must be obtained prior to the commencement of the assignment, otherwise an assignee can be refused entry into the UK.

Social security issues should also be considered at the outset.

In the majority of overseas assignments, individuals continue to be employed by the overseas company and are seconded to the UK. In this situation, the requirement to continue to pay Class 1 NIC for a period as follows:

If an individual transfers from a European Economic Area country, they may continue to pay into the home country scheme if either the secondment is under 12 months at the outset (but this may be extended for a further 12 months if the assignment is extended), or under 5 years at the outset and the social security authorities in the both countries agree. In both cases a form E101 should be obtained by the home country employer from the Contributions Agency International Services to certify continuing Class 1 liability. No liability should then arise in the UK.

If an individual transfers from another country with which the UK has a social security agreement, then it should generally not be necessary to pay contributions in both countries at the same time. The treatment will vary between countries, as some will deal only with reciprocation of benefits and not contributions. For the agreements that deal with contributions, the general rule is that contributions must continue in the home country for a defined period. This is normally one to two years, but can be as long as five (eg from the USA). When this period expires, contributions will cease in the home country and commence in the UK
If an individual transfers from a country other than the above, both individual and employer are generally obliged to pay social security in the home country for a period of 52 weeks following the date of departure. At the end of the 52 week period, Class 1 contributions in the UK should commence.
One of the most common aspects overlooked by companies is the requirement to operate PAYE, even in the case of assignees who remain on their home country payroll. In essence, a ‘dummy’ payroll is required in these circumstances such that monthly payments of tax and national insurance (if applicable) can be paid over to the Inland Revenue.

Where a company is paying for the UK tax liability on behalf of the individual, it is often possible to agree with the Inland Revenue that a modified form of PAYE is operated. If this is accepted, an estimate of the UK tax liability is calculated at the start of the year and 1/12 of the tax due is paid each month. Any balance outstanding at the end of the year is paid with the submission of the individual’s tax return.

If you do not have an assignment policy, you may wish to decide whether the individual should be tax equalised, tax protected or treated as a local hire in the UK. Tax equalisation essentially means that an individual is limited to the tax they would have paid if they had stayed at home (ie excluding expatriate allowances etc). The overseas company deducts this ‘hypothetical’ tax, which is not paid over to the tax authority. All taxes in the UK country are paid by the company to effectively guarantee an individual’s net salary. (note: these payments also constitute a taxable benefit). A reconciliation is carried out at the end of the year to determing whether the amount deducted as hypothetical tax was correct or whether any balancing payments are required between the individual and the company. If the total tax paid is more than the hypothetical tax deducted, the individual has been protected from excess taxation. If the hypothetical tax is more than the actual tax paid, the company keeps the windfall.

Tax protection is similar to tax equalisation with the general exception that any windfalls described above are due to the individual and not the company.

If an individual is treated as a local hire in the UK and is responsible for paying their own tax, it is worth determining how the net income will be affected by different tax rates and cost of living etc especially as the assignee may be unaware that they could be paying tax in more than one country simultaneously.

An individual is required to submit a completed form P86 when arriving in the UK, and the Inland Revenue will use the information submitted on this form to determine their residence status. This can have a serious impact on an individual’s tax position and will affect the company if an individual is tax equalised. We strongly recommend that such forms are reviewed by a professional adviser before they are submitted to the UK authorities.

On completion of an assignment, an individual must submit a completed form P85(S) to the Inland Revenue.