Navigating UK PAYE obligations for overseas companies

Further to our article on UK employees working overseas: UK employers with overseas employees we are seeing an increasing number of enquiries from overseas companies who want to employ UK based workers and who require assistance with their UK PAYE obligations. We also receive many enquiries from UK resident individuals employed by foreign companies, who are worried that they may end up paying tax on their salary in two different countries.  In this article, Samantha Stent, Associate Partner, shares a real-life example of a German company (GCo) who employs B, an individual resident in the UK.

 Issues for GCo, the overseas employer

To pay over the tax and National Insurance due to HMRC, we advised that GCo would need to set up a UK payroll if it is deemed to have a Permanent Establishment (“PE”) in the UK.   Under UK law, a PE can be created by either:

• a fixed place of business in the UK; or
• someone acting on behalf of the overseas company that has authority to do business on its behalf (eg a director who is negotiating and signing sales contracts on behalf of the company).

Increasingly, employees’ own homes are being considered as fixed places of business and so many overseas companies are setting up UK payrolls to ensure that they are not inadvertently exposing themselves to potential PAYE penalties and interest where they have staff who work from home in the UK.

We advised the company (GCo) that would also need to consider whether to set up and operate an auto-enrolment pension scheme.  This will need to be set up within 6 weeks of employing the first UK member of staff in order to be able to take advantage of the 3 month ‘postponement’ option which gives employers longer to meet their legal duties and start paying contributions.

If the employer does not have a PE in the UK then they are not obliged to deduct tax and Class 1 National Insurance from the wages they pay to UK resident employees.  Whilst this might sound like wonderful news for the workers concerned, in practice it can be a real headache as responsibility for this then falls to the employee.

HMRC offer “direct collection” schemes that employees can use to operate PAYE on their own salary, but these can be difficult to set up and even more difficult to operate, particularly for employees with little or no financial expertise.  Furthermore, if the employee gets it wrong or is late making a payment, they are then exposed to potential penalties or interest. These “direct collection” schemes are not enforceable by HMRC and it is not surprising therefore that employees often choose not to use them but instead register with HMRC under Self-Assessment and pay tax on their earnings that way.

Because of this, many overseas employers choose to set up UK payrolls even where there is no strict requirement to do so in order to prevent the tax compliance burden being passed to their employees.

Scrutton Bland can typically set up a PAYE scheme within 15 working days and can also help employers outside of the UK to fulfil their auto-enrolment pension obligations (even where the overseas company does not have a UK bank account).

Double taxation issues for B, a UK resident

 UK residents working for foreign companies may be concerned about potential double taxation ie paying taxes on their salary in both the UK and their home country. However, treaty relief from double taxation is usually available.

According to the terms of most of the UK’s double tax treaties, wages paid by an overseas employer to someone resident in the UK will be fully taxable in the UK.  However, if some of the duties of the employment are carried out overseas, some of the salary may also be taxed in the overseas country.

In B’s case, if she occasionally goes to her employer’s Head Office to attend meetings, any tax payable by her in Germany in respect of those workdays should be available for offset against the UK tax payable in respect of the same income.  Whilst there should not ultimately be any double taxation, this can cause cash flow issues and adds a further layer of complexity to B’s tax affairs.

How Scrutton Bland can help

When it comes to employing someone in another country, it is highly recommended that companies seek advice from experienced tax professionals.  Scrutton Bland can provide employers with tailored guidance and help them navigate the intricacies of UK employment tax law.  We can ensure that companies are fully compliant with their UK PAYE obligations, are minimising their tax burdens and avoiding potential penalties. Scrutton Bland is a member firm of Nexia (a leading, global network of independent accounting and consulting firms) which allows us to access advice from around the globe to support our clients.

By partnering with an accountancy firm which has international connections and is also well-versed in the international aspects of employment law, companies who are employing workers overseas can focus on their core operations while leaving the tax complexities to the experts.

Scrutton Bland can also help individuals who are working for an employer that is based in a different country; we can ensure that they are paying the correct amount of tax in each jurisdiction and assist with the preparation of double tax relief claims.

If you would like to discuss any of the issues raised in this article, please contact samantha.stent@scruttonbland.co.uk.