Guide to payroll compliance for UK employers with employees working overseas

Any UK employer looking to place their employees overseas will have a variety of aspects to consider, ranging from recruitment and immigration challenges to corporate tax filing requirements or VAT matters.

This is the case whether the employee(s) are seconded to work overseas on a short-term basis or if they are relocating permanently. They may instead be employee(s) that live in the UK but travel regularly overseas for work purposes, or even employee(s) that have chosen to take advantage of an opportunity to work remotely outside of the UK.

Whatever the working arrangements, there will also be statutory employment compliance obligations to address, both in the UK and, often, overseas too.

This insight aims to provides a high-level overview of the more common compliance and payroll aspects that UK employers may face when their employees work overseas.

For employers who are already familiar with the UK system, it should serve as a useful reminder that, as well as having to consider corresponding employment compliance obligations overseas, there are a variety of practical, alternative payroll arrangements that can be utilised in the UK to help ease the administrative burden and optimise cash flow.

This overview does not consider other taxes or comment on immigration issues. It is also not intended to be a substitute for comprehensive, professional advice and should not be relied upon as such.

What is the Payroll Requirements To Report Overseas?

As a UK based employer, you are required to operate a payroll in the UK so employee(s) wage tax (income tax) and social security contributions (National Insurance Contributions – NIC) are withheld at source via payroll operating ‘Pay As You Earn’ – PAYE, and paid to the UK tax authority (HMRC).

In most cases, you will already be withholding the appropriate deductions from your employee(s) and the process will be familiar to both the employee(s) and to you as the employer.

However, wage taxes and social security contributions are generally paid in the country in which the employee(s) are working, so there may well be an obligation for compliance and payroll reporting in the overseas jurisdiction if there are employee(s) working overseas.

Whether or not a compliance and payroll reporting obligation is created overseas will need to be assessed on a country-by-country basis. Not all jurisdictions will require a payroll to be put in place, whilst other jurisdictions may expect this to be in place from the employee(s) first working day in that jurisdiction.

The specific circumstances of the employer and the employee(s) will determine what payroll compliance obligations exist. Although not an exhaustive list, these circumstances, can include:

• whether the UK employer has a Permanent Establishment (PE) overseas
• what work the employee(s) are doing for the UK employer
• how long the employee(s) are based in the overseas jurisdiction
• whether they regularly travel back and forth from the UK
• does the UK have a Double Taxation Agreement (DTA) or a social security reciprocal agreement, or equivalent, with the overseas jurisdiction.

It is therefore imperative for you as a UK employer to assess your overseas payroll compliance obligations to ensure the correct wage tax and social security contributions (as well as any mandatory local deductions) are paid to the correct authority to prevent any penalties being sought by the overseas jurisdiction.

Moreover, dependent on the overseas payroll compliance obligations, it is equally as important to understand how these new requirements will impact your existing UK payroll compliance obligations.

It could be the case that income tax and social security contributions (employee and employer) become due overseas whilst there is a continuing withholding obligation in the UK, which can be costly and inconvenient for the employee(s) and the employer. In such circumstances, it is necessary to consider what alternative payroll arrangements can be utilised to alleviate this burden.

What are the Alternative Payroll Arrangements for employees working abroad?

Employee(s) that are working on a full-time basis overseas for a sufficient period, so they become not resident in the UK, may benefit from applying for a No Tax (NT code) from HMRC. As the name suggests, a successful NT code application will mean no income tax is withheld via the UK payroll, which is helpful if the employee(s) must pay tax overseas.

Alternatively, if the employee(s) is sent to work overseas and is not resident in the UK (or is considered to be not resident in line with an applicable DTA) but still expects to spend some time working in the UK, then a Section 690 direction is more appropriate, as a successful application will mean income tax withholding in the UK is reduced in line with the amount of time the employee(s) spend working in the UK.

In terms of social security contributions, depending on the overseas jurisdiction and the circumstances of the employee(s) it is possible to obtain a Certificate of Coverage (CoC) to keep the employee(s) in just one social security system and prevent both the employee(s) and the employer suffering double social charges, which can be expensive.

What are the Modified Payroll Arrangements for employees working abroad?

It can also be beneficial for you as a UK employer to consider putting in place a modified payroll arrangement with HMRC, depending on the specific circumstances.

There are several modified payroll arrangements that HMRC will allow eligible employers to administer, and each type of scheme has its own advantages, but the distinguishing feature with these arrangements is that they are more flexible than a standard domestic UK payroll. They recognise that employers with employee(s) working overseas offer unique challenges that are not well suited to a standard UK payroll.

One such modified payroll arrangement can allow the employee(s) UK income tax withholding to be reduced, each pay period, in line with foreign taxes withheld in another jurisdiction, so the employee(s) do not have to wait until the end of the tax year to make a claim for a foreign tax credit and receive a repayment from HMRC. There will still be a requirement to file a self-assessment tax return, but the employee(s) can effectively benefit from a claim for a foreign tax credit each pay period, which is helpful from a cash flow perspective.

Alternatively, another modified payroll arrangement is best suited for employee(s) sent overseas who are to be tax equalised (so they are no better or worse off for having come to the UK and their net pay remains consistent). The employer settles the tax due in the UK on behalf of the employee(s), but the arrangement can allow for payroll adjustments to claim eligible tax relief that can help to reduce the employers tax liability in the UK, which is very beneficial from a cash flow perspective.

The most appropriate modified payroll scheme for the UK employer will be dictated by the specific circumstances of the employer and the employee(s) but there can be various benefits as a result of operating a modified payroll, both for the employee(s) and the employer.

Summary

There are many important aspects for UK employers to address when you have employee(s) working overseas, whether this is part of a planned expansion overseas or if they just want to provide their employee(s) with an option to work remotely from outside of the UK.

The overseas (and the corresponding UK) payroll compliance and statutory employment requirements are one such important aspect of working overseas. This should be assessed on a country-by-country basis and there is a variety of payroll solutions and modified payroll schemes that can help to alleviate some of the complexity and provide real cost savings for the employer, which are recognised by HMRC as effective, alternative payroll solutions to often challenging cross border working arrangements.