Employing people overseas - tax and social security considerations
International business expansion normally means recruiting people in overseas territories or sending UK employees to work outside the UK. For HR departments this can present numerous challenges, especially where businesses are operating internationally for the first time.
One of the key practical challenges is paying employees who are located overseas, whilst ensuring that the company remains compliant when it comes to tax and social security withholding.
The key steps for successfully employing people overseas are:
- review the tax and tax withholding position
- review the social security position and
- determine how and where pay should be delivered
Many employers jump straight to the final step, which can have financial consequences for the employer and the employee.
This area can be complex and normally requires specialist advice. The guidance below is a broad overview to help you understand the key issues, rather than specific advice for any particular situation.
The tax and social security position for a UK resident employee who works solely in the UK is straightforward - both PAYE and National Insurance Contributions (NIC) are due on any employment-related earnings.
However, if you are expanding overseas, the likelihood is that you will need to pay someone who is working outside the UK.
If a person recruited overseas is employed by a UK company, with a UK contract of employment, UK tax obligations should be considered in the first instance.
If an employee recruited overseas is not resident in the UK, generally no PAYE is due unless the non-resident employee performs duties in the UK which are more than incidental to their overseas work. ‘Incidental duties’ are subordinate or ancillary to overseas work, such as training in the UK or general meetings.
If there is no PAYE obligation, it is possible to pay non-resident employees on a gross basis via a UK payroll.
There is no need to apply to HMRC to pay such employees without PAYE withholding if they are:
- working wholly outside the UK (apart from incidental duties)
- are not and have never been resident in the UK and
- do not intend to come and work in the UK.
At this point, it all seems quite straightforward – recruit the non-UK individual, provide them with a UK employment contract and pay them on a gross basis via the UK payroll.
However, if an employee is performing duties in another country it is likely that they will be subject to tax in that country.
If a UK company does not have a corporate presence, such as a limited company or branch, in an overseas territory there will usually be no withholding obligation in the overseas territory (although the specific rules within a territory should always be reviewed).
Where no withholding is required overseas, employees can be paid via the UK payroll on a gross basis and can settle any taxes due in the overseas country by filing a tax return in that country. However, care does need to be taken that the employee’s activities do not unwittingly create a deemed corporate presence for the UK company.
If a UK company has specifically set up a corporate entity overseas or has a deemed corporate presence (as defined under the local tax legislation or the relevant double tax treaty with the UK) overseas, it is likely that tax withholding will be required for the employee.
In these circumstances, the most appropriate solution is normally to set up a payroll in the overseas territory and pay the employee via the non-UK payroll. This means that you can ensure that the relevant tax withholding obligations overseas are fulfilled.
If the employee’s duties in the UK are more than incidental to the overseas duties there may be a PAYE obligation as well as a tax withholding obligation overseas. This can lead to ‘double withholding’ of tax and this situation would need to be managed carefully as it can lead to cash flow issues for employees.
Employees seconded overseas
Whether a seconded UK employee will be subject to PAYE will depend on:
- whether they remain resident in the UK when they go to work overseas and
- whether they will remain employed by the UK company while working overseas.
UK residence status for seconded employees is determined using the new HMRC UK statutory residence test.
If an employee remains UK resident while working overseas, PAYE is due on their income, even if they are paid from outside the UK. The only way to avoid a PAYE obligation would be for the employee to be employed by the overseas entity and paid from outside the UK. The employee would still have a personal UK tax liability which they would need to settle by filing a UK tax return.
Where an employee is subject to withholding overseas but remains on the UK payroll it is possible to apply to HMRC for the overseas tax to be offset against PAYE each month so that the employee does not suffer double withholding.
Where an employee will remain on the UK payroll and becomes non-resident in the UK following their departure, a request can be made to HMRC for a NT code so any payments made from the UK payroll can be made on a gross basis with no PAYE.
For employees on short term international secondments most companies continue the employment via the UK company and UK payroll, because:
- 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
Where overseas tax withholding is also due, here this is the case, the company will need to set up a ‘shadow payroll’ to facilitate the payment of withholding to the tax authorities overseas, although no income is physically paid from the overseas payroll.
Where an employment overseas is expected to be more than three years, the normal approach is to employ the individual via a corporate entity overseas (where this is possible). The benefit of this approach is that tax withholding (and social security) is due in one location only provided that the employ only works in that location.
One of the most common pitfalls is the assumption that by paying an employee from one country then there will be no withholding requirement in the other country. This is not always the case, as the withholding obligation is determined by the employee’s tax position and not by the location from where they are paid.
One of the common errors made in international payroll is that social security is simply applied in the same country as the tax withholding. The rules for social security are completely separate from tax in most countries, and subject to agreements within the EU and between the UK and certain other countries.
For expatriate employees, the social 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 completely different to the UK tax position. For example, a UK employee who is sent to Australia to work for three years will still be required to operate employer and employee NIC for the first 52 weeks of the assignment, even where the employee breaks residence for PAYE purposes.
Employees who need to make overseas contributions may want to consider making voluntary contributions to the UK system in order to preserve their contributions record for state pension purposes.