Deciphering PAYE complexities for staff with an international remit
Simon Parsons, director of payment, benefits & compliance strategies, SD Worx
Within global organisations, individuals are increasingly undertaking international activity. But ensuring they comply with national fiscal obligations in each of the countries in which they operate is a complex business. Some employees' requirements liki11 be covered perfectly adequately by existing payroll software or services, but others may require special handling.
In the case of UK payroll, there are a number of variants to normal Pay-As-You-Earn (PAYE) obligations as outlined below:
Section 690 international employment
If an employee works both in the UK and overseas, and certain UK non-residence criteria are met, they can apply to Her Majesty's Revenue & Customs HMRC) to operate PAYE only on the proportion of earnings that relates to their UK-based work. This situation covers all payments made by their UK employer, which includes termination payments and share-based remuneration.
HMRC issues a S.690 notice specifying the proportion, as a percentage value, that should be treated as UK income. The employee's earnings are split between the amount that is subject to UK PAYE and the amount that is not. Only the UK element is added to taxable gross pay and is subject to a standard UK tax calculation.
The 5.690 notice is often provided mid-way through the tax year, but it applies to (the full tax year. This means that employers may need to adjust payments for prior periods in that tax year. How they refund prior amounts of tax depends on whether the tax code is being operated on a. cumulative or non-cumulative basis.
If it is on a cumulative basis, it will be necessary to adjust the taxable gross year to date total and set the correct calculation proportion going forward in order to calculate tax refunds for overpayments due. For week one/month one cases, prior period overpayments must be calculated manually and updated to ensure records are accurate.
On an ongoing basis, if pay is split between taxable and non-taxable elements, the correct accumulation of both taxable gross and tax paid will take place. Please note that S.690 has no impact on how National insurance (Ni) is applied.
Appendix 4 — Short-term business visitors
Appendix 4 applies to short-term business visitors. By complying with the criteria set, employers can disregard PAYE for short-term business visitors to the UK. But this arrangement is only valid if individuals are:
- Resident in a country that has a double taxation agreement ‘with the UK;
- Coming to the UK to work for a UK company or UK branch of an overseas company, or are legally employed by a UK resident employer but are economically employed by a separate non-resident entity
- Expected to be in the UK for 183 (or less) days in any 12-month period.
With Appendix 4, it is not necessary to undertake in-year Full Payment Submission (FPS) reporting to HMRC. But at the end of the tax year; employers must report the taxable gross and any tax paid on due an FPS form.
If this scenario is applied to UK payroll, a new record must be set up for each tax year. The record needs to include the staff member's employment start date, which is marked as the first day in which they began working in the UK for that tax year, and a leave date of 5th April the last day of the tax year). No NI liability or secondary employer liability apply in relation to the Apprenticeship Levy.
To make use of it, employers must gain consent from HMRC and notify it of any subsequent changes in circumstance that would affect this status. UK PAYE is calculated on taxable gross earnings using the relevant tax code and tax basis.
Appendix 5: Net of foreign tax relief
Appendix 5 applies if an employer is required to deduct both foreign tax as well as UK PAYE
from the salaries of individuals with dual taxation obligations on their employment income. The Appendix provides provisional tax relief for double taxation.
The amount of tax to be paid is reduced by any foreign tax due on the same payment to a value no lower than zero. The FPS documentation that must be submitted regularly to HMRC details the full taxable pay and the reduced tax amount.
Appendix 6 & 7a: Tax equalisation
Tax equalisation generally describes the arrangement between an employer and their foreign employee who has come to the UK to work. Under the terms of the agreement, the staff member is entitled to specified net pay and the employer meets their UK tax liability. Employers should also ensure that their employee's UK affairs are handled by a professional adviser or specialist.
There are several ways that this situation can work: the first approach is to operate PAYE on a gross- up of cash earnings and non-cash benefits within payroll. Good software and service providers should provide you with options to undertake net-to-gross.
The second method involves informing payroll about the values that need to be overwritten and notified by a third party external to payroll such as an accountancy professional adviser.
Appendix 7b: Modified NI
Modified NI arrangements may apply for individuals who:
- Are employed by a UK employer or assigned to work abroad for a limited period, although for more than a complete tax year;
- Have an ongoing UK Class 1 NI liability while abroad;
- Earn above the upper earnings limit, other than at their start and leaking period;
- Are not liable to pay UK tax;
- Receive some earnings and benefits derived from employment by someone other than their UK employer.
Appendix 7b is operated in a similar fashion to Appendix 6 and 7a.
Exceptions
There are other non-standard arrangements for are not subject to UK PAYE or for other hybrid-type schemes that are often serviced by accountancy firms. These specialist PAYE operational requirements will not be covered by all payroll software and services. But, if and
when they apply, it is important to ensure that you are compliant both in terms of the calculation requirements and any associated HMRC reporting obligations.
Simon Parsons has contributed greatly to SD Worx's payroll expertise since 1984. Besides being influential in the development of the company's payroll services, he is also
involved in a number of HMRC and government consultative groups and committees.
A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters
of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also chair of both IReeN, the electronic exchange with government user network, and the BCS' (the Chartered Institute for IT) Payroll Group.
Deciphering PAYE complexities for staff with an international remit
Simon Parsons, director of payment, benefits & compliance strategies, SD Worx
Within global organisations, individuals are increasingly undertaking international activity. But ensuring they comply with national fiscal obligations in each of the countries in which they operate is a complex business. Some employees' requirements liki11 be covered perfectly adequately by existing payroll software or services, but others may require special handling.
In the case of UK payroll, there are a number of variants to normal Pay-As-You-Earn (PAYE) obligations as outlined below:
Section 690 international employment
If an employee works both in the UK and overseas, and certain UK non-residence criteria are met, they can apply to Her Majesty's Revenue & Customs HMRC) to operate PAYE only on the proportion of earnings that relates to their UK-based work. This situation covers all payments made by their UK employer, which includes termination payments and share-based remuneration.
HMRC issues a S.690 notice specifying the proportion, as a percentage value, that should be treated as UK income. The employee's earnings are split between the amount that is subject to UK PAYE and the amount that is not. Only the UK element is added to taxable gross pay and is subject to a standard UK tax calculation.
The 5.690 notice is often provided mid-way through the tax year, but it applies to (the full tax year. This means that employers may need to adjust payments for prior periods in that tax year. How they refund prior amounts of tax depends on whether the tax code is being operated on a. cumulative or non-cumulative basis.
If it is on a cumulative basis, it will be necessary to adjust the taxable gross year to date total and set the correct calculation proportion going forward in order to calculate tax refunds for overpayments due. For week one/month one cases, prior period overpayments must be calculated manually and updated to ensure records are accurate.
On an ongoing basis, if pay is split between taxable and non-taxable elements, the correct accumulation of both taxable gross and tax paid will take place. Please note that S.690 has no impact on how National insurance (Ni) is applied.
Appendix 4 — Short-term business visitors
Appendix 4 applies to short-term business visitors. By complying with the criteria set, employers can disregard PAYE for short-term business visitors to the UK. But this arrangement is only valid if individuals are:
- Resident in a country that has a double taxation agreement ‘with the UK;
- Coming to the UK to work for a UK company or UK branch of an overseas company, or are legally employed by a UK resident employer but are economically employed by a separate non-resident entity
- Expected to be in the UK for 183 (or less) days in any 12-month period.
With Appendix 4, it is not necessary to undertake in-year Full Payment Submission (FPS) reporting to HMRC. But at the end of the tax year; employers must report the taxable gross and any tax paid on due an FPS form.
If this scenario is applied to UK payroll, a new record must be set up for each tax year. The record needs to include the staff member's employment start date, which is marked as the first day in which they began working in the UK for that tax year, and a leave date of 5th April the last day of the tax year). No NI liability or secondary employer liability apply in relation to the Apprenticeship Levy.
To make use of it, employers must gain consent from HMRC and notify it of any subsequent changes in circumstance that would affect this status. UK PAYE is calculated on taxable gross earnings using the relevant tax code and tax basis.
Appendix 5: Net of foreign tax relief
Appendix 5 applies if an employer is required to deduct both foreign tax as well as UK PAYE
from the salaries of individuals with dual taxation obligations on their employment income. The Appendix provides provisional tax relief for double taxation.
The amount of tax to be paid is reduced by any foreign tax due on the same payment to a value no lower than zero. The FPS documentation that must be submitted regularly to HMRC details the full taxable pay and the reduced tax amount.
Appendix 6 & 7a: Tax equalisation
Tax equalisation generally describes the arrangement between an employer and their foreign employee who has come to the UK to work. Under the terms of the agreement, the staff member is entitled to specified net pay and the employer meets their UK tax liability. Employers should also ensure that their employee's UK affairs are handled by a professional adviser or specialist.
There are several ways that this situation can work: the first approach is to operate PAYE on a gross- up of cash earnings and non-cash benefits within payroll. Good software and service providers should provide you with options to undertake net-to-gross.
The second method involves informing payroll about the values that need to be overwritten and notified by a third party external to payroll such as an accountancy professional adviser.
Appendix 7b: Modified NI
Modified NI arrangements may apply for individuals who:
- Are employed by a UK employer or assigned to work abroad for a limited period, although for more than a complete tax year;
- Have an ongoing UK Class 1 NI liability while abroad;
- Earn above the upper earnings limit, other than at their start and leaking period;
- Are not liable to pay UK tax;
- Receive some earnings and benefits derived from employment by someone other than their UK employer.
Appendix 7b is operated in a similar fashion to Appendix 6 and 7a.
Exceptions
There are other non-standard arrangements for are not subject to UK PAYE or for other hybrid-type schemes that are often serviced by accountancy firms. These specialist PAYE operational requirements will not be covered by all payroll software and services. But, if and
when they apply, it is important to ensure that you are compliant both in terms of the calculation requirements and any associated HMRC reporting obligations.
Simon Parsons has contributed greatly to SD Worx's payroll expertise since 1984. Besides being influential in the development of the company's payroll services, he is also
involved in a number of HMRC and government consultative groups and committees.
A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters
of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also chair of both IReeN, the electronic exchange with government user network, and the BCS' (the Chartered Institute for IT) Payroll Group.
