Most UK resident employers who assign employees to work overseas will have a foreign wage tax-withholding obligation (i.e. they run an international payroll alongside their UK payroll).
To avoid having to deduct both UK PAYE and foreign wage tax from their employee salaries many employers seek permission from HMRC to operate an Appendix 5 Net of Tax Credit Scheme.
Avoid Double Tax, but don’t get caught in the Net… of Tax Credit!
This scheme simplifies matters for both employees and employers and avoids employees having to suffer a deduction from their salary of both UK PAYE and the overseas wage tax. Nobody wants double taxation!
Although a Net of Tax Credit Scheme is a very effective and useful tool, there is a lot of expat payroll processing administration required to ensure the scheme works smoothly and to avoid employees getting subsequent demands for an apparent underpayment of UK tax.
The administrative steps required are set out by HMRC in supporting documentation when employers are issued with approval to operate the scheme. If employers do not follow these steps then employees will invariably get demands for underpaid tax, which the employer will be likely to have to deal with on their behalf.
Some of the key steps, which are essential to understand and undertake when operating a Net of Tax Credit Scheme are set out below:
- Employers should make sure on a monthly basis that they are filing the “net” UK tax figures. The foreign tax should be recorded separately on the Full Payment Submission.
- Employers must advise HMRC on a regular (minimum quarterly) basis which employees are part of a Net of Tax Credit Scheme.
- At the end of the UK tax year a schedule should be sent to HMRC by the employer showing, for each employee: how much of the income was double taxed, the total foreign tax paid, the total foreign tax that was set-off against PAYE and the net UK deducted.
- At the end of the UK tax year, either the P60 should show (in red text) the amounts of foreign tax paid and the amount offset against PAYE, or this information should be given to each employee on a separate schedule. Either way, the P60 should show net PAYE after foreign tax has been removed from it.
- Employers must be aware that under the scheme rules they are obliged to advise HMRC if they know that any employee has received a refund of foreign tax.
- Employees are also obliged to advise HMRC if they receive a refund of foreign tax.
There are also further fairly complex issues, which HMRC are now focusing on and these should be considered before the year-end is finalised. For example:
If an employee has been working both overseas and in the UK, any PAYE due on specific UK earnings remains payable to HMRC and cannot be used to obtain credit for the overseas tax. A calculation may be required to determine whether all the UK PAYE is available for credit or whether the offset should be restricted.
Overseas wage tax will often include a contribution towards the social security regime of that foreign jurisdiction. Any such payments must not be offset against PAYE.
If you require any support in applying for or managing your Net of Tax Credit Scheme then please do not hesitate to contact Catriona Ross (Catriona.Ross@aab.uk) or Carol Sim (Carol.Sim@aab.uk) or your usual AAB contact.