Employees working overseas claiming foreign tax credit are potentially impacted by HMRC change to ‘real time’ PAYE codes!
A new approach to issuing PAYE tax codes based on real time information, in line with Making Tax Digital, was introduced by HMRC from 1 June 2017. The purpose of this was to enable HMRC to collect any underpayments of tax they calculate to be due on an actual basis in the current tax year. Therefore, any suspected underpayment of tax for 2017/18 would be collected by way on an adjustment to the PAYE tax code for 2017/18.
Various sources of data are being used by HMRC to enable this process including the payroll submission data. HMRC are comparing the UK tax reported with the UK tax they calculate to be due for the current tax year to date (2017/18) based on the gross taxable earnings reported.
Where HMRC’s calculation does not agree with the tax reported, they are issuing a revised tax code to collect this “underpaid” tax which normally results in a K code being sent to the employee automatically.
A significant consequence of this new system, which was not identified by HMRC is that their automatic calculations do not take in to account foreign tax being claimed under an Appendix 5 Net of Tax Credit Arrangement. Under these arrangements an employee’s UK PAYE is reduced accordingly by the foreign taxes paid allowing for double tax relief through the payroll.
As a result employees under this type of arrangements may now have automatically been issued with a revised tax code, which will affect their net pay to collect what HMRC believe are underpayments of UK tax equivalent to the foreign tax credit claimed to date from April 2017.
We are currently in discussions with HMRC’s Appendix 5 Net of Tax Credit team, however at this time it appears this could have long term implications for employees involved in Appendix 5 arrangements who require in year tax code changes.
We would advise Employers who operate a net of tax credit arrangement to contact their employees to notify them of this change. All individuals who work overseas who have a foreign tax credit should review all tax codes received from HMRC to ensure they are correct.