Tax Rules for Foreign Employment in the UK: Part 2
By Terri Schofield, Last updated: 2023-01-18 (originally published on 2019-09-30)
Last week we explored how working internationally comes with restrictive and contemporaneous challenges that included the dreaded word: taxation. Any resident in the United Kingdom is subject to the taxation of their worldwide income and gains. We covered the topics of dual contracts, and residence and domicile. This week, we’ll launch into split year treatment, employee compliance obligations, and employment law. Ready?
Split year treatment
Under the statutory residence test, an individual is either UK resident or non-UK resident for the whole of a tax year.
However, there have been some breaks to lessen the harshness of this rule. If in a tax year, the employee either leaves the UK to live or work abroad, or comes from abroad to live and work in the UK, and certain conditions are met, the tax year will be “split” into two parts.
Here’s how it works:
UK part: in which the employee is charged to tax as a UK resident.
Overseas part: in which, the employee is charged to tax as a non-UK resident.
International employments and employer’s duties
A UK employer is under the usual statutory duties to operate PAYE on earnings paid to employees. However, the employer should seek a direction from HMRC to determine the portion of earnings subject to PAYE if the employee is:
•Not resident in the UK but liable to tax on UK source earnings.
•Likely to be entitled to split year treatment.
•Likely to be entitled to overseas workday relief under the new or transitional rules.
Most people working as an employee in the UK have a UK employer, or are attached to a business in the UK which is treated as their employer, who is then legally responsible for deducting Class 1 National Insurance from their pay. Where there is no business in the UK responsible for deducting National Insurance, the employee must pay their own Class 1 National Insurance to HMRC.
If you need to pay tax, you usually report your foreign income in a Self Assessment tax return.
Employee compliance obligations
Tax returns that are filed electronically are due by 31 January following the tax year-end, which is 5 April. Paper returns have an earlier deadline of 31 October following the tax year-end.
Employment income is subject to tax and social security withholding under the PAYE system. If an individual is taxable on employment income, the obligation to withhold rests with either the employer or, if the employer is not operating withholding, it rests with the ‘host’ employer. All employers are now required to report their payroll information to the UK Revenue authority in “real time”. Setting up a new payroll and a new employee to report in real-time can take some time. Therefore it is recommended that employers seek advice as soon as they intend to send an employee on secondment. For short term business visitors, it is recommended that employers obtain a “short term business visitors” agreement with the UK Revenue authority, in order for the payroll reporting obligations to be relaxed for such employees.
UK Employment Tribunals are increasingly willing to accept that individuals may claim UK statutory employment rights (such as the right not to be unfairly dismissed) where a sufficient connection with the UK can be shown. This could potentially apply to employees who are not UK nationals, or who do not work for a UK registered employer or who do not actually work in the UK. In addition, certain mandatory rules apply where a worker is posted from another EU country to the UK, meaning that the worker will be protected by minimum wage, working time and anti-discrimination legislation.
In essence, employers and employees that engage in employment relationships overseas, whether short term or long term, should ensure they have discussion with regard to taxation at the point of agreeing any engagement. Both parties should be clear on the rules of taxation that are applicable to their relationship. Transparency is key and a true assessment of the rules that are govern the taxation of exchanged earnings can only be made where parties offer full and frank disclosure about their liabilities.
Terri Schofield is a first year LLM with LPC student at BPP, Manchester. Alongside completing her post graduate studies, Terri works full time at DWF Law as an Employment Law Legal Adviser. Terri also sits as the UK Chair of DWF OutFront, their LGBT+ Network, where she is proactive in increasing visibility and sourcing opportunities for DWF’s LGBT+ employees.
This article does not constitute legal advice
The opinions expressed in the column above represent the author’s own.