Managing tax compliance for employees working in the UK

If you are an overseas company and send staff to work in the UK, or if you already have staff working in the UK, then you need to ensure that you are UK tax compliant.

When do UK tax obligations arise for employees?

It’s a common misconception that you must be a UK resident before UK tax obligations arise.

As a general rule, where an employee of an overseas company is physically working in the UK (for example, working remotely from a home in London), their earnings will be taxable in the UK. This can be the case even if they only work in the UK for short periods of time.

This remains unchanged even due to COVID-19 travel restrictions.

When do UK tax exemptions apply?

There are a couple of exemptions from UK tax, which are available when:

  • The employee’s UK workdays are incidental to the performance of overseas duties, or
  • Such workdays are exempt under a double taxation agreement (DTA)

What do employers need to do to stay tax compliant?

Employers in the UK usually need to operate Pay As You Earn (PAYE), which collects income tax and national insurance contributions on payments made to employees. Overseas employers will only be required to register and operate PAYE if the they have a “tax presence” in the UK, which means a place of business in the country (such as an office or branch).

Therefore, just because a company has employees working from home in the UK does not mean that company has a tax presence here.

For PAYE compliance purposes, it does not matter whether any UK corporation tax liability actually arises for the employer - however that is a separate issue that should be reviewed carefully and is not discussed further here.

What are the employee obligations?

If the employer has no UK tax presence, then the liability to tax and NIC may be transferred to the employees, who may themselves operate a PAYE direct payment scheme in respect of their own income.

Employees operating a direct payment scheme must adhere to the Real Time Information (RTI) reporting regime in the normal way, which is one reason why they may choose not to do so,

As an alternative, they may simply report their income under the self-assessment regime and pay their income tax in two instalments, during and after the end of the tax year. Where the employee is liable to UK national insurance contributions (NICs) a direct payment scheme is, however, unavoidable in relation to these liabilities (which are discussed further below).

National Insurance/social security contributions

Many employees being sent to work in the UK for limited periods will not be required to pay UK NIC, due to EU legislation or a reciprocal agreement (effectively a social security treaty) between countries.

In addition, many individuals assigned to work in the UK will not be subject to NIC for the first 52 weeks of their stay in the UK, which will cover the majority of short assignments.

The ‘52-week rule’ applies to employees from EU and non-reciprocal agreement countries. Certificates of coverage will remove the UK liability throughout the assignment in most other cases.

What about Double Taxation Agreements?

Employees may be able to obtain something known as a “treaty relief” from an income tax liability under a double taxation agreement, usually because the individual is held to be resident in that other country for tax purposes.

This happens where the UK and another country have agreed which one has primary taxation authority,, so in some cases the employee will not be taxed whilst working in the UK (if certain conditions are met).

The precise details of the relevant treaty should always be examined for a specific case, but normally relief is only available if the time spent in the UK is limited and the work is undertaken for an overseas employer.

Will overseas employees become UK resident due to COVID-19?

UK residence status is determined by the Statutory Residence Test (SRT), which broadly looks at an individual’s presence in the UK, as well as their connections (“ties”) with the UK.

When looking at an individual’s presence, some days can be disregarded under the exceptional circumstances rules, which applies when:

  • The individual is in the UK due to exceptional circumstances beyond their control
  • These circumstances prevent them from leaving
  • They intend to leave as soon as possible

A maximum of 60 days can be disregarded due to exceptional circumstances.

This limit has not been increased due to COVID-19. However, HMRC have noted in their guidance that “circumstances are considered exceptional where you find yourself advised by official government advice not to travel from the UK as a result of the virus”.

If an individual does become UK resident, then they may be liable to UK tax on their worldwide income, although further protection from UK tax may be available under the remittance basis of taxation for non-domiciled individuals, and/or treaty relief, if the individual remains tax resident in their home country.

How can we help?

For further advice or help with employment related queries, feel free to get in touch with David Portman (davidportman@lubbockfine.co.uk) or Phil Moss (philmoss@lubbockfine.co.uk).

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