In this article, I explore an aspect of NIC for employees overseas that can lead to employer and employee overpayments where employees are living and working outside the UK but remain employed by a UK employer.
Given the announcements this weekend, it looks like the planned rises in NIC are going ahead, leaving both employers and employees paying more from April 6, 2022.
Therefore, this is a particularly good time for employers to review their processes in this area in more detail.
Substantial overpayment of NIC
A few years ago, I identified a case whereby an employer was operating NIC for an employee who had been living and working outside the UK for over 7 years. Whilst there was a No Tax (“NT”) code in place, NIC had not been stopped. After a further review, the employer identified an additional 12 cases where NIC was still being operated for employees working overseas or that was being operated for employees who had never worked in the UK but who were employed by the UK organisation.
Fortunately, it was (and still is) possible to go back up to 6 tax years to recover NIC overpayments from HMRC. In this case, the employer was able to recoup a staggering amount of employer and employee NIC, running not the hundreds of thousands.
Whilst this was a welcome windfall for both the employer and employees, some NIC’s paid were unrecoverable as they were withheld over a period exceeding 6 years (and, as above, you can only look back up to 6 tax years from the date you apply for a refund from HMRC). Furthermore, the process of reclaiming NIC in such cases from NIC can take some explaining and some time. In this case, it took nearly one year to obtain refunds from HMRC.
Why was NIC overpaid?
There were three main reasons for the overpayments in this case:
i. The UK employer had not realised that it did not need to operate NIC once the former UK based employees had been working overseas for more than 52 weeks. There is a specific provision in the UK regulations that normally allows the cessation of NIC in such cases provided that the relevant conditions are met and the employee is not being sent to work in an EU or EEA country or a country with which the UK has a reciprocal social security agreement. A list of the reciprocal agreement countries can be found at Reciprocal agreements - GOV.UK (www.gov.uk)
ii. With respect to employees who had never worked in the UK (the UK payroll was simply being used as an administrative tool to pay employees recruited to work overseas), the employer had not realised that it did not need to operate NIC at all. Despite the fact that individuals are employed and paid by a UK employer, no NIC is due where employees are neither resident, present nor working in the UK. In fact, in such cases, it is normally possible to pay such employees on a gross basis and outside of Real Time Information reporting process.
iii. Finally, as well as missing the two points above, the employer had no process in place to review and check the position. Therefore, NIC was operated as normal and it was only by chance that the substantial overpayment came to light.
What should employers do?
The case above is only one example where a simple oversight led to a large overpayment of NIC. This is not entirely surprising since the NIC rules for globally mobile employees and employees who work overseas for a UK employer are complex and even small errors can lead to substantial issues.
Given the high cost of NIC for employers and employees, I think it is a good time for employers to review the NIC position for their non-UK employees (including those that are still working overseas due to the pandemic).
For any future cases, as always, I think it is worth reviewing and conforming the position up-front, making sure everyone understands the position and then putting in place an appropriate process to ensure that NIC is stopped when the rules allow.
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com
In this article, I explore an aspect of NIC for employees overseas that can lead to employer and employee overpayments where employees are living and working outside the UK but remain employed by a UK employer.
Given the announcements this weekend, it looks like the planned rises in NIC are going ahead, leaving both employers and employees paying more from April 6, 2022.
Therefore, this is a particularly good time for employers to review their processes in this area in more detail.
Substantial overpayment of NIC
A few years ago, I identified a case whereby an employer was operating NIC for an employee who had been living and working outside the UK for over 7 years. Whilst there was a No Tax (“NT”) code in place, NIC had not been stopped. After a further review, the employer identified an additional 12 cases where NIC was still being operated for employees working overseas or that was being operated for employees who had never worked in the UK but who were employed by the UK organisation.
Fortunately, it was (and still is) possible to go back up to 6 tax years to recover NIC overpayments from HMRC. In this case, the employer was able to recoup a staggering amount of employer and employee NIC, running not the hundreds of thousands.
Whilst this was a welcome windfall for both the employer and employees, some NIC’s paid were unrecoverable as they were withheld over a period exceeding 6 years (and, as above, you can only look back up to 6 tax years from the date you apply for a refund from HMRC). Furthermore, the process of reclaiming NIC in such cases from NIC can take some explaining and some time. In this case, it took nearly one year to obtain refunds from HMRC.
Why was NIC overpaid?
There were three main reasons for the overpayments in this case:
i. The UK employer had not realised that it did not need to operate NIC once the former UK based employees had been working overseas for more than 52 weeks. There is a specific provision in the UK regulations that normally allows the cessation of NIC in such cases provided that the relevant conditions are met and the employee is not being sent to work in an EU or EEA country or a country with which the UK has a reciprocal social security agreement. A list of the reciprocal agreement countries can be found at Reciprocal agreements - GOV.UK (www.gov.uk)
ii. With respect to employees who had never worked in the UK (the UK payroll was simply being used as an administrative tool to pay employees recruited to work overseas), the employer had not realised that it did not need to operate NIC at all. Despite the fact that individuals are employed and paid by a UK employer, no NIC is due where employees are neither resident, present nor working in the UK. In fact, in such cases, it is normally possible to pay such employees on a gross basis and outside of Real Time Information reporting process.
iii. Finally, as well as missing the two points above, the employer had no process in place to review and check the position. Therefore, NIC was operated as normal and it was only by chance that the substantial overpayment came to light.
What should employers do?
The case above is only one example where a simple oversight led to a large overpayment of NIC. This is not entirely surprising since the NIC rules for globally mobile employees and employees who work overseas for a UK employer are complex and even small errors can lead to substantial issues.
Given the high cost of NIC for employers and employees, I think it is a good time for employers to review the NIC position for their non-UK employees (including those that are still working overseas due to the pandemic).
For any future cases, as always, I think it is worth reviewing and conforming the position up-front, making sure everyone understands the position and then putting in place an appropriate process to ensure that NIC is stopped when the rules allow.
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com