If you have globally mobile employees or non-resident directors who are subject to PAYE, there may be instances where it is appropriate for PAYE to be operated on a reduced basis.
For many in HR and payroll, it can sometimes prove difficult to work out when PAYE can be reduced and exactly how to implement a reduction via payroll.
To help with this, GPA tax expert Lee McIntyre-Hamilton explains below when it may be appropriate to operate PAYE on a reduced basis and how this may be achieved compliantly.
When is income tax limited to UK duties?
In some instances, globally mobile employees are only subject to UK income tax on income earned in respect of their UK duties.
This can arise where the employee or director is non-resident in the UK but performs UK taxable duties or where a non-domiciled employee is resident in the UK but is entitled to UK tax relief in respect of their non-UK duties (see below).
Examples where you may see this include:
* Short-term business visitors who are resident in a country with which the UK does not have a double tax treaty. Why? Where there is no double tax treaty, this means any duties performed in the UK will often automatically be subject to UK income tax and such employees will not be eligible for inclusion in a short-term business visitors agreement. My October 25 article Short-term business visitors: a global payroll perspective explores this in greater depth.
* Non-resident directors of UK Companies who perform duties (e.g. attendance at board meetings) under their directorship in the UK. Irrespective of which countries such directors are resident in (and whether there is an applicable double tax treaty), such duties are almost always subject to UK income tax.
* Secondees to the UK who are UK resident but are non-domiciled. Subject to certain conditions, such employees are often entitled to claim UK tax relief in respect of days that they work outside of the UK. This relief normally applies for the first three tax years in which the employee is resident in the UK (including part years of residence).
* Secondees to an overseas location who return to the UK as a non-UK resident to perform duties in the UK that are not considered incidental. Where the individual’s employer is based in the UK then UK income tax would normally be due on income earned in respect of any such duties in the UK.
* Globally remote workers who are resident in an overseas country but who work part of their time in the UK, as well as from the overseas country in which they are living.
This list is not exhaustive and if you are unsure as to whether UK tax may be limited to the UK duties of an employee, you may wish to seek the input of a tax advisor.
What does this mean for employees?
Ideally, the PAYE position would automatically follow the income tax position (i.e. where income tax was due on UK duties only, then PAYE would be required on UK duties only). However, as most in payroll will know, life is seldom that simple when it comes to globally mobile employees.
Unfortunately, the default position for PAYE is that, if there is a PAYE obligation then PAYE is required on all income from that employment (i.e. whether that income is earned in respect of UK duties or not).
Left like this, it would mean that employees would often be left in a disadvantaged cash-flow position.
Take an employee who is resident in France and non-resident in the UK. Let’s say the employee performs 30 per cent of their duties in the UK. In this case, their UK employer would be required to operate PAYE on all the employee’s employment income. The employee would then have to file a UK tax return to report the fact that they are non-resident and performed only 30 per cent of their duties in the UK. Only after filing a UK tax return (normally many months later) would they then receive a refund in respect of PAYE withheld from the remaining 70 per cent of their income.
Clearly, this situation presents a severe cash-flow disadvantage for the employee and, if they are also being subject to withholding in their country of residence, may leave them with little or no net income.
What can employers do?
Fortunately, where employees are only subject to tax in respect of their UK duties (i.e. they fall into one of the categories listed above or similar), employers may apply to HMRC to operate PAYE on a reduced basis.
The application to reduce PAYE in these circumstances is known as a “Section 690 Direction”. This term comes from the legislation which enables the application – Section 690 of the Income Tax Earnings and Pensions Act (“ITEPA”) 2003.
In the application for a Section 690 Direction, employers should set out the basis on which the direction should apply (i.e. explaining why the employee is limited to income tax on their UK duties) and should also provide an estimate of the percentage of income that should be subject to PAYE. This estimate should normally mirror the expected percentage of duties that the employee will perform in the UK.
For example, if a non-resident employee earns £50,000 per annum and expects to perform 20 per cent of their duties in the UK, then an application would be made on this basis. Once the direction is issued by HMRC, PAYE would only be required on £10,000 of the employee’s employment income. The remaining £40,000 would be paid gross to the employee (subject to any NIC and other non-PAYE deductions).
Note that any attempt to reduce PAYE without a direction (even if the application is pending) will be considered a compliance failure and may attract penalties and interest.
Additional employee compliance
The employee would be required to file a UK tax return to report the actual UK duties and pay any additional tax due (or claim a refund). For example, if the employee in the example above only performed 10 per cent of their duties in the UK (rather than the 20 per cent in the application), they would be entitled to a refund of the PAYE operated on £5,000 of their income.
Applying to HMRC
Applications for a Section 690 direction may be made via this HMRC link. However, care should be taken to make sure that the employee is eligible for such a pro-ration since, if they are not, they may face a significant future tax bill and the employer may be subject to penalties and interest in respect of any PAYE underpayment. In some cases, there are also additional considerations and conditions, particularly in the case of resident but non-domiciled employees in the UK. Professional tax advice is strongly recommended before making an application for these reasons.
Employers should note that the direction does not apply to NIC and where NIC is due in the UK, it should be operated on all employment income as normal.
Concluding remarks
Reducing PAYE where applicable can be an important device for employers to ease cash flow issues for employees. However, applications should be after careful consideration of the relevant rules and will normally require the input of your employment tax advisor.
Disclaimer:
The information included in this article is guidance only for educational purposes and is provided with the understanding that the Global Payroll Association or any other party are not herein engaged in rendering tax or other professional advice. Therefore, guidance within this article should not be relied upon for taking any particular course of action and should not be used as a substitute for obtaining professional advice where this is required.
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
If you have globally mobile employees or non-resident directors who are subject to PAYE, there may be instances where it is appropriate for PAYE to be operated on a reduced basis.
For many in HR and payroll, it can sometimes prove difficult to work out when PAYE can be reduced and exactly how to implement a reduction via payroll.
To help with this, GPA tax expert Lee McIntyre-Hamilton explains below when it may be appropriate to operate PAYE on a reduced basis and how this may be achieved compliantly.
When is income tax limited to UK duties?
In some instances, globally mobile employees are only subject to UK income tax on income earned in respect of their UK duties.
This can arise where the employee or director is non-resident in the UK but performs UK taxable duties or where a non-domiciled employee is resident in the UK but is entitled to UK tax relief in respect of their non-UK duties (see below).
Examples where you may see this include:
* Short-term business visitors who are resident in a country with which the UK does not have a double tax treaty. Why? Where there is no double tax treaty, this means any duties performed in the UK will often automatically be subject to UK income tax and such employees will not be eligible for inclusion in a short-term business visitors agreement. My October 25 article Short-term business visitors: a global payroll perspective explores this in greater depth.
* Non-resident directors of UK Companies who perform duties (e.g. attendance at board meetings) under their directorship in the UK. Irrespective of which countries such directors are resident in (and whether there is an applicable double tax treaty), such duties are almost always subject to UK income tax.
* Secondees to the UK who are UK resident but are non-domiciled. Subject to certain conditions, such employees are often entitled to claim UK tax relief in respect of days that they work outside of the UK. This relief normally applies for the first three tax years in which the employee is resident in the UK (including part years of residence).
* Secondees to an overseas location who return to the UK as a non-UK resident to perform duties in the UK that are not considered incidental. Where the individual’s employer is based in the UK then UK income tax would normally be due on income earned in respect of any such duties in the UK.
* Globally remote workers who are resident in an overseas country but who work part of their time in the UK, as well as from the overseas country in which they are living.
This list is not exhaustive and if you are unsure as to whether UK tax may be limited to the UK duties of an employee, you may wish to seek the input of a tax advisor.
What does this mean for employees?
Ideally, the PAYE position would automatically follow the income tax position (i.e. where income tax was due on UK duties only, then PAYE would be required on UK duties only). However, as most in payroll will know, life is seldom that simple when it comes to globally mobile employees.
Unfortunately, the default position for PAYE is that, if there is a PAYE obligation then PAYE is required on all income from that employment (i.e. whether that income is earned in respect of UK duties or not).
Left like this, it would mean that employees would often be left in a disadvantaged cash-flow position.
Take an employee who is resident in France and non-resident in the UK. Let’s say the employee performs 30 per cent of their duties in the UK. In this case, their UK employer would be required to operate PAYE on all the employee’s employment income. The employee would then have to file a UK tax return to report the fact that they are non-resident and performed only 30 per cent of their duties in the UK. Only after filing a UK tax return (normally many months later) would they then receive a refund in respect of PAYE withheld from the remaining 70 per cent of their income.
Clearly, this situation presents a severe cash-flow disadvantage for the employee and, if they are also being subject to withholding in their country of residence, may leave them with little or no net income.
What can employers do?
Fortunately, where employees are only subject to tax in respect of their UK duties (i.e. they fall into one of the categories listed above or similar), employers may apply to HMRC to operate PAYE on a reduced basis.
The application to reduce PAYE in these circumstances is known as a “Section 690 Direction”. This term comes from the legislation which enables the application – Section 690 of the Income Tax Earnings and Pensions Act (“ITEPA”) 2003.
In the application for a Section 690 Direction, employers should set out the basis on which the direction should apply (i.e. explaining why the employee is limited to income tax on their UK duties) and should also provide an estimate of the percentage of income that should be subject to PAYE. This estimate should normally mirror the expected percentage of duties that the employee will perform in the UK.
For example, if a non-resident employee earns £50,000 per annum and expects to perform 20 per cent of their duties in the UK, then an application would be made on this basis. Once the direction is issued by HMRC, PAYE would only be required on £10,000 of the employee’s employment income. The remaining £40,000 would be paid gross to the employee (subject to any NIC and other non-PAYE deductions).
Note that any attempt to reduce PAYE without a direction (even if the application is pending) will be considered a compliance failure and may attract penalties and interest.
Additional employee compliance
The employee would be required to file a UK tax return to report the actual UK duties and pay any additional tax due (or claim a refund). For example, if the employee in the example above only performed 10 per cent of their duties in the UK (rather than the 20 per cent in the application), they would be entitled to a refund of the PAYE operated on £5,000 of their income.
Applying to HMRC
Applications for a Section 690 direction may be made via this HMRC link. However, care should be taken to make sure that the employee is eligible for such a pro-ration since, if they are not, they may face a significant future tax bill and the employer may be subject to penalties and interest in respect of any PAYE underpayment. In some cases, there are also additional considerations and conditions, particularly in the case of resident but non-domiciled employees in the UK. Professional tax advice is strongly recommended before making an application for these reasons.
Employers should note that the direction does not apply to NIC and where NIC is due in the UK, it should be operated on all employment income as normal.
Concluding remarks
Reducing PAYE where applicable can be an important device for employers to ease cash flow issues for employees. However, applications should be after careful consideration of the relevant rules and will normally require the input of your employment tax advisor.
Disclaimer:
The information included in this article is guidance only for educational purposes and is provided with the understanding that the Global Payroll Association or any other party are not herein engaged in rendering tax or other professional advice. Therefore, guidance within this article should not be relied upon for taking any particular course of action and should not be used as a substitute for obtaining professional advice where this is required.
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