Posting employees from one country to another can be an expensive business. Amongst the many costs are flight tickets, removal expenses, shipping, vaccination costs, visas, hotel accommodation during the transit, storage…and the list goes on.
Given this, most employers will choose to support their employees by funding or part funding relocations, particularly where the posting is at the employer’s request.
On top of paying the relocation costs, there can also be additional employer grossed-up tax and NIC costs.
However, employer tax costs can be minimised by using the available tax relief and ensuring that expenses are funded in the correct way.
Whilst many in payroll will have heard of the £8,000 relocation relief, sometimes the nuances and pitfalls are not apparent. So, we explore these below.
Which relocation expenses are “tax-free”?
“Qualifying costs” up to £8,000 are exempt from reporting, tax and NIC provided that the costs are incurred in connection with a change in the employee’s residence so that they can be near their new place of work.
The most common qualifying costs include:
* physical removal of belongings (of employee and their family or household) from the former residence and transportation to the new;
* insurance of belongings whilst in transit;
* temporary storage;
* travel and subsistence costs related to the relocation;
* relocation company’s management fee;
* temporary living costs; and
replacement of domestic goods where goods in the former residence are unsuitable for use at the new residence (e.g. because of differences in electrical circuitry).
Other less common qualifying expenses include the expenses associated with the disposal of the employee’s former residence or purchase of the new residence, abortive purchase costs and bridging loans associated with the purchase and sale of the employee’s residences.
Note that the costs must be either funded directly by the employer or should be reimbursed to the employee upon production of receipts. If you provide a round-sum relocation allowance to the employee, then this will be subject to PAYE and NIC as normal, although in the past HMRC has in some instances accepted relief on an allowance of up to £8,000 where it can be shown that it is directly related to qualifying expenses within the £8,000 and where supporting evidence (e.g. receipts) is retained.
What happens if you use a relocation agent?
Where you use the services of a relocation agent (i.e. to organise and manage the relocation), there is often one fee that incorporates the above costs. HMRC accepts that the fee will be exempt, provided that you do not exempt any items that are non-qualifying or which exceed the £8,000 allowance.
How can you maximise the relief?
The £8,000 limit was set in the ’90s and, unfortunately, has not been increased since. With today’s prices, often this amount will only cover airfares and subsistence costs. Therefore, to maximise the relief, employers could consider claiming exemption for the employee’s travel and subsistence costs under other provisions known as the “Home Leave rules” (applies to non-domiciled individuals) or “Detached Duty Relief” (applies for temporary secondments of 2 years or less) rules. Of course, these additional reliefs have their own conditions and so further guidance should be sought where you think they may be relevant.
One other point to think about is those individuals who become non-UK residents. Where individuals are moving outside the UK for work and become non-UK residents, then HMRC will generally accept that relocation costs (whether qualifying or not) as being non-taxable in the UK, provided they are related to taking up the new employment overseas and are paid post-departure. Be careful, however, there could still be a continuing charge to Class 1 employer and employee NIC, depending on the country to which the employee is seconded and the circumstances. Also, there may be a tax charge in the destination country and so this should be checked.
Common errors and pitfalls
Below are highlighted some of the common errors and pitfalls:
* Not including VAT when considering the £8,000 tax/NIC free limit. Relief only applies where qualifying relocation costs (including VAT) do not exceed £8,000.* Claiming accommodation costs that are not ‘temporary’. HMRC only accepts claims for temporary accommodation (e.g. where an employee stays in a hotel for a few weeks or a serviced apartment before they move into more permanent accommodation).
* Claiming for the purchase of household goods that are not ‘replacement’ items. Relief is only allowable where household items are purchased as replacement items due to the fact that items in the former residence will not work in the new residence. An example of this would be purchasing a new microwave oven where the microwave oven in the old residence will not work in the UK due to an incompatible electrical setup.
* Claiming where the employee is on a temporary assignment to the UK (2 years or less). HMRC do not normally consider temporary assignments as falling within the relocation relief rules (essentially because of the definitions around temporary/normal place of work in the legislation). However, some do take an alternate view in this regard.
* Not reporting relocation expenses correctly. There are some specific rules around how relocation expenses should be reporting. The reporting differs, depending on how the costs are covered. Further information on this is below.
Payroll reporting obligations
The table below sets out how you should report relocation expenses.
|
Conditions |
Employer reporting obligations |
PAYE/NIC position |
|
Qualifying costs up to £8,000 |
No reporting required |
No PAYE or NIC |
|
Qualifying costs over £8,000 |
Report on form P11D |
Class 1A NIC required on the amount above £8,000
No PAYE
|
|
Non-qualifying benefits that are arranged by the employer and paid directly to the supplier |
Report on form P11D |
Class 1A NIC required on the cost to the employer
No PAYE |
|
Non-qualifying benefits that employee arranges but where the employer pays supplier directly is |
Report on form P11D
Add the cost of the employee’s earnings and settle employer and employee Class 1 NIC. No PAYE required. |
Class 1 employer and employee NIC required via payroll
No PAYE. |
|
Non-qualifying expenses where the employer reimburses the employee’s costs
|
Add the cost of the employee’s earnings and settle employer and employee Class 1 NIC. PAYE is also required.
No P11D reporting. |
PAYE and Class 1 employer and employee NIC 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
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.
Posting employees from one country to another can be an expensive business. Amongst the many costs are flight tickets, removal expenses, shipping, vaccination costs, visas, hotel accommodation during the transit, storage…and the list goes on.
Given this, most employers will choose to support their employees by funding or part funding relocations, particularly where the posting is at the employer’s request.
On top of paying the relocation costs, there can also be additional employer grossed-up tax and NIC costs.
However, employer tax costs can be minimised by using the available tax relief and ensuring that expenses are funded in the correct way.
Whilst many in payroll will have heard of the £8,000 relocation relief, sometimes the nuances and pitfalls are not apparent. So, we explore these below.
Which relocation expenses are “tax-free”?
“Qualifying costs” up to £8,000 are exempt from reporting, tax and NIC provided that the costs are incurred in connection with a change in the employee’s residence so that they can be near their new place of work.
The most common qualifying costs include:
* physical removal of belongings (of employee and their family or household) from the former residence and transportation to the new;
* insurance of belongings whilst in transit;
* temporary storage;
* travel and subsistence costs related to the relocation;
* relocation company’s management fee;
* temporary living costs; and
replacement of domestic goods where goods in the former residence are unsuitable for use at the new residence (e.g. because of differences in electrical circuitry).
Other less common qualifying expenses include the expenses associated with the disposal of the employee’s former residence or purchase of the new residence, abortive purchase costs and bridging loans associated with the purchase and sale of the employee’s residences.
Note that the costs must be either funded directly by the employer or should be reimbursed to the employee upon production of receipts. If you provide a round-sum relocation allowance to the employee, then this will be subject to PAYE and NIC as normal, although in the past HMRC has in some instances accepted relief on an allowance of up to £8,000 where it can be shown that it is directly related to qualifying expenses within the £8,000 and where supporting evidence (e.g. receipts) is retained.
What happens if you use a relocation agent?
Where you use the services of a relocation agent (i.e. to organise and manage the relocation), there is often one fee that incorporates the above costs. HMRC accepts that the fee will be exempt, provided that you do not exempt any items that are non-qualifying or which exceed the £8,000 allowance.
How can you maximise the relief?
The £8,000 limit was set in the ’90s and, unfortunately, has not been increased since. With today’s prices, often this amount will only cover airfares and subsistence costs. Therefore, to maximise the relief, employers could consider claiming exemption for the employee’s travel and subsistence costs under other provisions known as the “Home Leave rules” (applies to non-domiciled individuals) or “Detached Duty Relief” (applies for temporary secondments of 2 years or less) rules. Of course, these additional reliefs have their own conditions and so further guidance should be sought where you think they may be relevant.
One other point to think about is those individuals who become non-UK residents. Where individuals are moving outside the UK for work and become non-UK residents, then HMRC will generally accept that relocation costs (whether qualifying or not) as being non-taxable in the UK, provided they are related to taking up the new employment overseas and are paid post-departure. Be careful, however, there could still be a continuing charge to Class 1 employer and employee NIC, depending on the country to which the employee is seconded and the circumstances. Also, there may be a tax charge in the destination country and so this should be checked.
Common errors and pitfalls
Below are highlighted some of the common errors and pitfalls:
* Not including VAT when considering the £8,000 tax/NIC free limit. Relief only applies where qualifying relocation costs (including VAT) do not exceed £8,000.* Claiming accommodation costs that are not ‘temporary’. HMRC only accepts claims for temporary accommodation (e.g. where an employee stays in a hotel for a few weeks or a serviced apartment before they move into more permanent accommodation).
* Claiming for the purchase of household goods that are not ‘replacement’ items. Relief is only allowable where household items are purchased as replacement items due to the fact that items in the former residence will not work in the new residence. An example of this would be purchasing a new microwave oven where the microwave oven in the old residence will not work in the UK due to an incompatible electrical setup.
* Claiming where the employee is on a temporary assignment to the UK (2 years or less). HMRC do not normally consider temporary assignments as falling within the relocation relief rules (essentially because of the definitions around temporary/normal place of work in the legislation). However, some do take an alternate view in this regard.
* Not reporting relocation expenses correctly. There are some specific rules around how relocation expenses should be reporting. The reporting differs, depending on how the costs are covered. Further information on this is below.
Payroll reporting obligations
The table below sets out how you should report relocation expenses.
|
Conditions |
Employer reporting obligations |
PAYE/NIC position |
|
Qualifying costs up to £8,000 |
No reporting required |
No PAYE or NIC |
|
Qualifying costs over £8,000 |
Report on form P11D |
Class 1A NIC required on the amount above £8,000
No PAYE
|
|
Non-qualifying benefits that are arranged by the employer and paid directly to the supplier |
Report on form P11D |
Class 1A NIC required on the cost to the employer
No PAYE |
|
Non-qualifying benefits that employee arranges but where the employer pays supplier directly is |
Report on form P11D
Add the cost of the employee’s earnings and settle employer and employee Class 1 NIC. No PAYE required. |
Class 1 employer and employee NIC required via payroll
No PAYE. |
|
Non-qualifying expenses where the employer reimburses the employee’s costs
|
Add the cost of the employee’s earnings and settle employer and employee Class 1 NIC. PAYE is also required.
No P11D reporting. |
PAYE and Class 1 employer and employee NIC 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
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.