The expansion of international businesses usually results in people being recruited from overseas territories or sending UK, employers to operate outside the UK. This implements a large amount of HR complications and challenges for businesses new to this operation.

With different tax legislations and laws overseas it becomes a challenge even paying employees as keeping compliant is key when taxes and social security is involved.

Three steps for employing successfully overseas:

• Evaluate the tax withholding and tax position
• Review the social security
• Govern where and how the pay should be delivered

It is common for employers to jump to the last step which can cause financial consequences for both the employee and employer.

Usually, it is best to get specialist advice from financial professionals. The below guide will give you an overall understanding of the key issues, rather than guidance for any particular situation.

Tax withholding

It is fairly straightforward being a UK resident employee regarding the tax and social security position if working solely in the UK – as NIC and PAYE are due on any employment related earnings.

Therefore, if you are expanding overseas it is likely you must pay employees who are operating outside the UK.

If a UK company has an employee that is recruited overseas is, with a UK contract of employment, UK tax obligations are the first thing to be considered.  

An employee recruited overseas that isn’t a UK residence, usually, no PAYE must be paid unless there are duties performed in the UK that are more than related to their overseas work. ‘Incidental duties’ are subordinate or ancillary to overseas work, for example training in the UK.

With no PAYE obligations it is possible to pay non-resident employees that’s on a gross basis via a UK payroll.

You do not have to apply to HMRC to pay employees without PAYE withholding if they’re:

• working completely outside the UK (apart from incidental duties)
• they’re not and haven’t  been a resident in the UK and
• do have no intention to come and work in the UK

This may seem quite simple – employ a non-UK individual, give them a UK employment contract and pay them a gross basis via the UK payroll.

However, if the employee is also carrying out tasks in another country they could be subjected to that countries tax.

A UK company without an established corporate option, for example, a limited or branch in the desired overseas country there’s usually no withholding obligation in that territory (although this can vary) advice Paul Managing Director from PWD Roofing & Construction has extensive experience in hiring employees overseas.

If there is no withholding required overseas, employees can be paid via the UK payroll on a gross basis and are allowed to pay taxes in that overseas country by completing a tax return for that country. This must be taken with care due to the employee’s not unwittingly creating a corporate presence within the UK company.

A UK company that has deliberately set up a corporate branch overseas or created a corporate presence, it will be probable you would have tax withholiding to do for the employee.

Under these circumstances, the most applicable resolution is to open a payroll in the overseas placement and pay the employee through the non-UK payroll. Therefore means that you can guarantee the tax withholding obligations are relevant for overseas implications.

The employee’s duties in the UK are practically identical to those overseas, where there could be a PAYE obligation as well as tax withholding overseas. In result of this is can lead to ‘double withholding’ of tax and therefore could cause cash flow problems for employees.

A seconded UK employee should be subjected to PAYE  and depend on:

• Dependant on if they are a residence in the UK when moving to work overseas
• If they are still employed by the UK company whilst working overseas

The new HMRC UK statutory residence test is used to determine UK residence status for seconded employees.

An employee that is still a UK resident while working overseas will still be due to pay PAYE on their income, regardless of if their paid from outside the UK. Avoiding PAYE would be for the employee to become employed overseas and get paid from out the UK. They would still have a UK personal tax liability which they would have to settle by filling out a UK tax return.

An employee that is required to withholding overseas but stays on the UK payroll you can apply to HMRC for the overseas tax to be counterbalanced by PAYE every month so the employee won’t suffer form double withholding.

If an employee remains on the UK payroll but changes to a non-resident in the UK after departing, you can request to HMRC for a NT code so if there’s any payment made from the UK payroll it can be made on a gross basis without any PAYE.  

In the short term, international secondments for employees are continued through the employment via the UK company and UK payroll, due to:  

• there may be no entity overseas to employ the secondee
• an overseas employment may be required so pension contributions can be continued
• the employee may have financial commitments in the UK and want payment in GBP

Tax withholding is also due overseas, the case is, the company will have to open a ‘shadow payroll’ to enable the payment of withholding for the tax authorities overseas, although no income actually paid via the overseas payroll.

It is expected that an employment overseas should be over three years, the usual method is to employ the individual via a corporate entity overseas. This approach is beneficial because the tax withholding is only due in one set location dependant that the employee is only working in that location.

The most common expectations is that by paying an employee from one country means that there’s no withholding requirement in the other country. However, it’s not necessarily always the case, as the withholding obligation is controlled by the employee’s tax position and not the location where their being paid.

Social Security

A common error the occurs in international payroll is that social security is only applied in the same country as tax withholding. Social security rules are very different from most countries tax, and compliant within the EU and the UK and other certain countries.

For emigrant employees, there are a few factors that the security position will depend on:

• the specific country to which the individual has been seconded
• whether the employee will be employed in the UK or the overseas territory
• the duration of the secondment

The social security position can be very varied from the UK tax position. Employees who must pay overseas contributions may therefore want to think about making voluntary contributions towards the UK system so they can preserve contributions record for purposes such as state pension purposes.

Special Thanks to Nicole Payne from Churchill Knight & Associates Ltd