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Tax and relocation

Mark Collins
Partner

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T: 0845 057 0700
F: 01293 532695

David Heaton
Partner

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Martin Benson
Partner

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One question which many people ask when relocating an employee either domestically or abroad is, “Are there any tax consequences?” In some cases the answer may be "no” but the answer will usually be “yes”. This article’s aim is to demystify the UK payroll requirements for employees being sent abroad by a UK employer and to clarify the position of individuals being sent to work in the UK on a temporary basis.

The first thing to remember is that tax requirements and payroll requirements are not necessarily the same thing. It is entirely possible to have a legal requirement to withhold tax via a UK payroll even if no tax is actually due at all!

  • Individuals leaving the UK

    For a departing individual, the ongoing UK tax and payroll tax withholding requirements depend on a number of things such as whether the individual is going to be absent from the UK for a period spanning a complete UK tax year, and whether they will continue to be employed by the UK company.

    If the individual is to be out of the UK for less than two years but will remain on a UK contract, the employer needs to ascertain whether the period of absence will cover a complete UK tax year in order to determine whether their income for the period falls outside the scope of UK PAYE withholding. If, for example, the assignment overseas spans 15 months from March 2011 to June 2012, the whole of the 2011/12 UK tax year will be spent abroad and this is sufficient for the individual to become non-resident for UK tax purposes from the date of departure to the date of return – the implication being that PAYE withholding is not required for that period.

    If, in our example, the assignment stretched from June 2012 to September 2013, which is still a period of 15 months but does not now include a complete UK tax year, there would be a continuing PAYE withholding requirement in respect of the individual’s income as they would remain tax-resident in the UK throughout.

    The choice of start date for an assignment overseas can therefore have a considerable impact on the tax position of an individual leaving the UK to work.

    If the individual is leaving permanently then provided they remain outside the UK for at least one complete UK tax year then they are likely to be treated as non-resident from the date of departure and hence not subject to UK taxes on the overseas income.

    Employers of individuals leaving the UK for an assignment abroad will need to consider whether it is appropriate to apply for an NT tax code to be issued by HMRC. This is the tax code which allows the employer to deduct no income tax from an individual on their payroll. The nearest equivalent for National Insurance is known as Table X but care should be taken here. If the assignee is leaving for an assignment in another European country or a country such as the USA with which the UK has a social security agreement, then UK contributions are likely to be due throughout the assignment. This applies to both employer and employee contributions. In such situations an A1 form or 'certificate of coverage' should be applied for from the National Insurance Contributions Office, and a copy kept in case it needs to be provided to the authorities as evidence of a contribution liability.

  • Individuals arriving in the UK

    Where an individual is sent to work in the UK the tax withholding requirements again depend on the degree to which the employment is being carried out in the UK. Employers need not be too concerned about individuals spending fewer than 30 days in the UK per tax year as HMRC do not require such people to be put on a UK payroll. Individuals present in the UK for fewer than 183 days in a rolling 12 month period may be able to be excluded from UK PAYE withholding if a specific agreement is in place with HMRC.

    If the UK assignment is to last for a period of less than 24 months a number of deductions can be available against UK tax if the assignment is structured correctly. It can be possible for the arriving employee to be provided with accommodation plus associated costs and reasonable food, and to have the employer bearing the cost of commuting, without it constituting a taxable benefit in kind on the part of the employee. Because these reliefs are very valuable care has to be taken to ensure that clear evidence is available to support the length of the assignment being less than 2 years. The reliefs cease to be available from the point at which it is known that the assignment will exceed this length. HM Revenue & Customs are likely to take close interest in any employer whose employees routinely claim these deductions and yet remain in the UK beyond the 24 month mark!

    Employees assigned to the UK for up to 3 years can potentially claim relief for workdays spent overseas but in order for this relief to be available their income from the employment should be paid and retained offshore in the same proportion as the proportion of the working days in the tax year spent overseas.

    As with leavers, care needs to be taken with the tax code to be used for arriving assignees. While a form P45 or P46 would be used by a UK to UK employment move, indicating which tax code should be operated, arriving assignees from abroad will not have a P45 and form P46 is not used for them. Instead, form P46(expat) should be completed and submitted to HMRC. This will not only tell the employer the tax code to use but it will also generate a self-assessment reference number (UTR), and a temporary National Insurance number which can be used on statutory forms where such a number is required.

  • Modified payrolls

    Expatriate income packages may be extremely complicated, especially where different currencies are involved, there are overseas workdays deductions each month or the employer has a policy of tax equalising assignees – broadly, paying overseas taxes for them while they are on assignment abroad. Strictly speaking, the UK payroll has to be accurate each month to avoid possible accusations of a failure to operate PAYE withholding correctly. This can be nigh on impossible for the host employers of expatriates and so HMRC has come up with a payroll specifically for expatriates. This works in a slightly different way from a normal payroll and HMRC accept that the figures used may not be entirely correct month on month. This type of payroll can be very useful for keeping a company’s expatriate population separate from the other employees, and they are very popular among employers of expatriate assignees.

  • Benefits in kind and dispensations

    Many employers have a 'dispensation', an agreement with HMRC that certain expenses need not be shown on the statutory return of expenses and benefits form P11D for a given tax year. There is no reason why this should not apply to arriving expatriates but the wording of the dispensation should be checked. The common categories of individual to whom a dispensation applies are employees and directors of the company. However, an assignee from an overseas group company is probably neither of these things, not being a UK employee! It may be worth checking the applicability of the company dispensation to ensure that all visiting employees are covered by its terms – and if the dispensation hasn’t been given an airing for a few years it would probably be worth checking what it covers as well as who, to ensure it remains relevant to the company.

  • Statutory residence test

    Finally, the UK government is currently consulting with the tax profession and other interested parties in respect of the introduction of a statutory test to determine tax residency status. The aim is for new legislation to be introduced in Finance Bill 2012 to take effect from 6 April 2012. The consultation document can be found at http://www.hm-treasury.gov.uk/d/consult_condoc_statutory_residence.pdf and the consultation period closes on 9 September 2011. The impact of the proposed changes could be considerable for some arriving and departing assignees and so we suggest you look at it to give you advance warning of what could be in store from the start of the next tax year.