Many organisations operate across multiple jurisdictions frequently have employees and directors working in the UK as ‘business visitors’. An increasing concentration by HM Revenue & Customs (HMRC) on the correct tax treatment of these individuals means that employers need to be more aware than ever about their tax withholding and reporting obligations.
Director or employee?
It is important to understand the capacity in which an individual visits the UK to work. Employees and directors are treated differently under UK tax rules. Each of these categories of business visitors is considered separately in this note.
Employees – the income tax position
Put at its simplest, any workday in the UK will create a liability to UK employment income tax, which must be paid to HMRC via the PAYE system where certain conditions are met. However, many employees coming to the UK will not face any such exposure because of the operation of double tax treaties between the UK and the individual’s home country. Where relevant conditions are met, the individual will remain taxable only in the home country.
Double tax treaty relief
Many employers already know about the relief available under double tax treaties. They may, though, wrongly assume that anyone coming to the UK for fewer than 183 days in a tax year will remain subject to tax only in the home country. Whilst this analysis will be correct in some cases, in others it may not hold true because interpretations by HMRC may have changed or because other conditions of the double tax treaty are not satisfied.
Understanding the pitfalls
Answering ‘yes’ to any of the following questions can indicate a liability to UK tax from the first workday in the UK:
• Is the employee coming to the UK from a non-treaty country?
• Does the employee work overseas for a branch of a UK company?
• Are the costs of the employee’s work in the UK borne by the UK entity?
• Is the employee ‘economically’ employed in the UK? In other words, will HMRC consider the individual to be under the direction or control of the UK entity regardless of any actual contract of employment with an overseas organisation?
Even if organisations can answer ‘no’ to all of the above, the strict position requiring PAYE withholding from arrival can be only be relaxed by having an agreement in place with HMRC.
Paying UK employment taxes
Where UK income tax arises for business visitors, employers must check to see if that tax should be paid to HMRC through PAYE. Employers can account for any PAYE through a special payment process that is applicable only for certain short term business visitors.
Directors – the income tax position
Where individuals perform duties in the UK as a director, such as attending board meetings, the position is different from that set out above. This applies to both executive and non-executive directors.
Receiving directors’ fees for duties performed whilst in the UK will usually result in an exposure to UK employment income tax.
One of the key challenges for some employers is determining in what capacity a senior employee, who is also a director of the company, attends business in the UK. In many cases, it may be as both an employee (see above) and a director.
Where income tax is due in relation to individuals performing duties as a director in the UK, it must be collected through the PAYE system.
National Insurance charges
Where no income tax arises in the UK, neither should NICs.
Where an individual is subject to employment income tax in the UK, it remains possible that a NIC will not arise because of specific exemptions, or, in the case of directors, a specific concession, applicable to the individual.
Different rules currently apply for visitors coming from other EEA countries (and Switzerland) and those coming from the ‘rest of the world’ countries. However, the rules for visitors coming from EEA countries may change following Brexit.
What should employers do?
The correct taxation of short term visitors is a ‘hot topic’ for HMRC and forms the basis of many challenges in PAYE reviews. Employers need to understand if income tax and NICs may or may not arise in relation to these individuals and how it should be collected and paid to HMRC.
If you would like more information, or require assistance, please speak to your usual Smith & Williamson contact or a member of our employment tax and incentives team.