View the related Tax Guidance about Global mobility
Homeworking
HomeworkingIntroductionThe developments in information technology and communications have seen an increasing popularity in employees working from home. There are a number of tax consequences associated with home working which are outlined below..In 2022, the OTS undertook a review into hybrid and distance working. This constituted a policy paper in July 2022 and accompanying call for evidence in August 2022. The scope of this work was wide ranging, including:•implications of cross border working•permanent workplace rules•accommodation travel and expensesThe subsequent Hybrid and distance working report: exploring the tax implications of changing working practices was published by the OTS in December 2022. It recognised that home and hybrid working arrangements are here to stay. Whilst many employers favoured extending the tax relief system to allow for travel between home and work, the potential costs of such a move was also acknowledged. More realistic may be the support for further potential HMRC easements and de minimis exemptions in cross-border situations, both from the employee tax and social security standpoint, and any employer ‘permanent establishment’ concerns. The Government’s response to the report is awaited.What is homeworking?There is no statutory definition of what constitutes a home worker, nor a single collective set of principles which guide what can and cannot be claimed as a tax deduction. Instead, an individual has to identify allowable expenditure using the various general and specific rules around expenses.There are some specific exemptions which are addressed further below. Where none of these apply, the general rules for expenses
Foreign self-employment
Foreign self-employmentTrading in another jurisdiction involves many issues, only some of which involve taxation. Advice should be taken, not only in relation to tax but on the wider business implications. For an overview of the points to consider for certain jurisdictions see Tolley's Global Mobility: Personal Taxes. For example Tolley's Global Mobility: Personal Taxes, IR2.8. which covers the Republic of Ireland.This note deals in broad outline with the tax issues facing a self-employed person who is trading overseas. It then considers some issues that are specific to partners.The tax regime in the overseas country is also very important. Its specific rules, and the ways in which the two systems interact should both be explored before decisions are taken. This note does not discuss any tax issues that might arise in other jurisdictions.Is there an overseas operation?A sole trader or partnership that is based in the UK and merely sells goods or services to customers overseas is not normally subject to foreign taxes on profits. To be taxable there must generally have a permanent establishment. Different rules may apply for VAT, see below.A permanent establishment is usually either a fixed place of business in the overseas country, or a ‘dependent agent’. A dependent agent is one who habitually exercises authority to do business on behalf of the UK enterprise. The meaning of permanent establishment is discussed in detail in the Permanent establishment guidance note.If the UK business has premises overseas that are used only to store or display goods, or
Outbound employees ― payroll issues
Outbound employees ― payroll issuesKey points•the default position for individuals leaving employment under the RTI regime is to include their date of leaving in the FPS submission and provide the employee with a form P45•for employees leaving their UK employment to start overseas work under a new employment con-tract with an overseas entity, or for individuals transferring to a new payroll scheme within the UK, they should be marked as leavers in the same way as the basic position.•where an employee will remain on UK payroll but is expected to perform all of their employment duties overseas, a No Tax (NT) code can be applied for from HMRC in order to exempt their earnings from PAYE•where an employee will continue to have some UK employment duties but will otherwise be expected to be non-resident in the UK, a s 690 arrangement can be agreed with HMRC in order to restrict PAYE to portion of their earnings in line with an estimated percentage of UK employment duties•where some of the individual’s employment duties will be performed overseas and some in the UK but the individual is likely to remain UK tax resident, it may be appropriate to apply for an Appendix 5 arrangement with HMRC whereby foreign taxes paid can be claimed as a credit in a real time basis on monthly UK payroll•national insurance is not subject to the same rules as income tax and social security should only be paid in one
Tax equalisation
Tax equalisationIntroductionTax equalisation is widely used by multi-national companies or group moving employees from one country to another. It is not a statutory concept but is an arrangement between an employer and employee.The idea behind tax equalisation is that an employee accepting an assignment somewhere other than in his home country should neither be better off nor worse off from a tax perspective as the result of the move. The individual will continue to be subject to an equivalent level of tax as if he had remained in his home country. The system can apply to those leaving the UK and to those coming to the UK.A similar system can cover social security contributions, though this is relatively rare as many expatriates remain in their home country social security regimes and are exempt in the host state, in which case there is no need to equalise the net earnings arising from applying the two countries’ contribution rates. Further, a higher level of contributions will generally generate a higher entitlement to state benefits such as a pension in retirement and the employer may be less inclined to protect an employee against higher costs if higher benefits are received in consequence.The main advantage of tax equalisation as a tool in facilitating international assignments is that the risk of higher rates of tax and, sometimes, social security contributions in the country of assignment is carried by the employer rather than the employee. This removes an important potential source of financial anxiety that
Pre-departure planning from an employer’s perspective
Pre-departure planning from an employer’s perspectiveKey points•NT code or s 690 directive should be considered where the employee will remain on UK payroll, depending on whether duties are expected to continue in the UK•tax equalisation may be considered in order to ensure an employee is no better or worse off from a tax perspective as a result of their duties overseas•security must be considered when planning a move and should review both the costs of such contributions along with the benefits received•should be given to the tax implications of an employee’s move in order to maximise any tax reliefs and/or concessions availableIntroductionPractical issues for payroll operation when employees are leaving the UK are covered in the Outbound employees ― payroll issues and other legislative points in the Reporting requirements on leaving the UK guidance notes.This section considers opportunities for UK employers to improve the tax consequences for themselves or their employees when the latter are about to depart for overseas employment.Ensure that all agreements made between employer and employee are set out in writing in an employment contract or assignment letter. That should include stating the obvious, such as whether the employee is actually employed by the UK entity or the overseas entity or both.Planning opportunities occur particularly where the same employer, or at least another group company, will continue to be the employer of the overseas individual. Nevertheless, some steps will be applicable even if the employee leaves to work for an unrelated overseas
Employment-related securities: internationally mobile employees
Employment-related securities: internationally mobile employeesGeneral principlesWhere a UK resident employee acquires or is granted the right to acquire employment-related securities (ERS), the employee is subject to certain UK tax and regulatory requirements which apply no matter where the issuer of those ERS or the employer is located.For tax, the basic principle is that the employee is charged to income tax on the value received. The situation becomes more complex where that employee is internationally mobile and the relevant rules are outlined below.Where an event occurs in connection with the acquisition, holding or disposal of ERS, and is chargeable to UK income tax, there is a requirement to report details to HMRC. HMRC can require any ‘responsible person’ (as defined in ITEPA 2003, s 421L(3)) to report. Broadly a responsible person may be the employer, the host employer, or the issuer of the securities (special provisions apply to continental shelf workers). In practice, typically the employer or issuer of the securities (eg the holding company of a group) will make the report. For details of the online ERS reporting requirements, see the Online reporting for share schemes guidance note.Chargeable events in relation to ERS may also give rise to a liability to NIC. Although the NIC rules are quite different to the income tax rules (see the ‘National Insurance’ section below), both kinds of liability should always be considered.TaxationThe income tax treatment of shares and similar securities acquired by reason of employment (ERS) where the employee in question is not
NIC on cash earnings ― overview
NIC on cash earnings ― overviewUK National Insurance applies to a variety of different sorts of income. The history and introduction of NIC system is covered in Simon’s Taxes E8.101. NIC is split into different classes depending on the type of income. See the Overview of NIC Classes, rates and thresholds for more on the different classes and rates.This guidance note concentrates on NIC relating to employment income in the UK. As with tax, it is important to understand whether an individual is an employee or self-employed for NIC purposes. See the Categorisation of earners for NIC purposes guidance note and Simon’s Taxes E8.201.For NIC and self-employment, see the Class 4 national insurance contributions guidance note. For international aspects of NIC, see the Global mobility ― overview guidance note.NIC for employeesClass 1 NIC is payable on an employee’s earnings. Earnings are defined as ‘any remuneration or profit derived from an employment’. See Simon’s Taxes E8.232 for more on the interpretation of what is earnings for NIC.Class 1 NIC has two parts:•primary Class 1 NIC. This is the liability of the employee and also referred to as employee NIC•secondary Class 1 NIC. This is the liability of the employer and also referred to as employer NICThe basis of calculation of NIC due on a payment to an employee is based on the concept of ‘earnings periods’. SI 2001/1004, regs 2–9 set out the rules for employees paid at different intervals, namely:•employees who are paid at regular intervals
Tax on cash earnings ― overview
Tax on cash earnings ― overviewWhat income is subject to tax via PAYE?Income tax is applied via PAYE to income which counts as ‘employment income’. This note sets out the basic definitions of what is employment income, who it applies to and when. It also sets out the rates of income tax.Who does tax via PAYE apply to?Tax via PAYE applies to employees and office holders in their earnings from that employment or office. Wherever the term ‘employee’ is used throughout the employment taxes module, this will include office holders unless specifically stated otherwise. The definition of an office holder is not simple, but broadly an office is ‘any position which has an existence independent of the person who holds it’. It applies to all statutory directorships. For other cases, consideration should be given on a case by case basis. See Simon’s Taxes E4.201–E4.204 for more. The definition of an office holder should therefore be regarded as including a limited company director, a point which was underlined in the 2023 First-tier Tribunal (FTT) case of Purple Sunset. Here, an employer was liable to pay penalties for failure to meet their RTI obligations (the returns should have included both PAYE tax and NIC due, see the Real time information guidance note). The company was unsuccessful in its defence arguments, that the director had already paid the tax due via their own personal self assessment tax return, and that PAYE tax and NIC rules did not apply because the director held
Location of employer and effect on liability
Location of employer and effect on liabilityTaxation of UK employmentNon-resident employees’ UK-based earnings are taxed under ITEPA 2003, s 27. Employees who are not resident in the UK are only chargeable to UK tax on general earnings for duties performed in the UK. For this purpose, the critical test is the place of performance of the duties, not the location / residence of the employer.An employee who is resident in the UK is taxed on their general earnings for the tax year under ITEPA 2003, s 15 other than in the two following situations:•where a UK resident employee is able to claim overseas workday relief, earnings attributable to overseas duties will be taxable under ITEPA 2003, s 26 to the extent that they are remitted to the UK. The earnings attributable to UK workdays continue to be subject to tax under ITEPA 2003, s 15.•where a non-UK domiciled employee has chargeable overseas earnings, they are taxed under ITEPA 2003, s 22 to the extent that the earnings are remitted to the UK ― see the Remittance basis ― overview with employment focus guidance noteWhere earnings need to be apportioned to decide the extent of earnings attributable to UK duties, the apportionment must be on a just and reasonable basis. If the tax year is a split year, ITEPA 2003, s 26 applies only to foreign earnings attributable to UK workdays.Where an individual is paid in the UK for all duties, irrespective of where carried out, the income
Global mobility ― overview
Global mobility ― overviewIn today’s global economy, it is common to have individuals relocating overseas to work in another country, either indefinitely to take-up a new employment, on a temporary secondment (sometimes referred to as an ‘assignment’) or to undertake a business visit. Global mobility generally refers to the employer and employee tax and social security implications associated with such relocations. Normally, global mobility requires a review of the tax and social security position across two or more countries, including how the rules across the countries concerned interact.An employer’s tax, social security and payroll obligations are, to a large extent, normally dependent on an employee’s personal tax and social security position. Therefore, understanding the employee’s personal tax compliance position (eg their residence status and, where they are subject to tax) in both the home and host locations is an essential part of determining the employer’s employment tax compliance position. For a guide as to what needs to be considered when drafting a general policy for internationally mobile workers see Tolley’s Practice Management Tools, M1 onwards.The OTS is undertaking a review into hybrid and distance working and has issued a policy paper in July 2022 and accompanying call for evidence in August 2022. The scope of this work is wide ranging, including:•implications of cross border working•permanent workplace rules•accommodation travel and expensesThis work has the potential to affect international employment tax widely, and the module will be updated as the work moves forwards.Key principles and conceptsResidence and Domicile
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