UK employers with overseas employees

Remote working, international recruitment and skills shortages mean many UK businesses now employ people who live overseas. While this offers access to a wider talent pool, it can also create tax, payroll, social security and legal obligations in more than one country.

The important point isn’t simply where the employer is based. It also depends on where the employee lives, where they physically work and which country’s rules apply.

Sam Stent, Tax Advisory Partner explores the key issues UK employers should review before an overseas working arrangement begins.

Do UK employers need to operate PAYE for overseas employees?

Whether a UK employer needs to operate PAYE for an overseas employee depends on several factors, including where the employee is tax resident, where they physically carry out their work and whether they perform any duties in the UK.

For example, an employee living permanently in France who carries out all their work there may be paid differently from an employee who spends several weeks each year working in the UK.

If an employee is not resident in the UK, generally no PAYE income tax deductions are due unless the employee performs some of their duties in the UK.

If there is no PAYE obligation, it is possible to pay a non-resident employee on a gross basis via a UK payroll.

If the employee in question has previously been resident in the UK, a Form P85 will need to be submitted to HMRC so that an NT (“No Tax”) PAYE code can be issued (NB an NT tax code will only be issued by HMRC if the employee’s UK tax affairs are up to date).

But even where UK PAYE doesn’t apply, the employer may still have payroll obligations overseas.

If the overseas employee is performing all their duties of employment outside the UK, it is highly likely that they will be subject to tax in the country where they are based.

In certain situations, a UK employer is liable to deduct foreign tax from salary payments and pay this over to the overseas authority.  Local advice will therefore be required in most cases to confirm whether the employer has an obligation to withhold foreign tax.

And even if local advice suggests that there is no legal requirement to do so, a UK employer may still choose to register for payroll taxes in the employee’s home country on a voluntary basis to ensure all of its overseas tax withholding obligations are fulfilled and also to simplify tax reporting for the individual employee.

If no overseas withholding tax is applied and employees are paid via a UK payroll on a gross basis, the employee will need to settle any taxes due in their country of residence by filing a tax return in that country.

Setting up an overseas payroll for a UK company is also something with which our fellow GGI colleagues around the globe can assist with.

Do overseas workers pay National Insurance in the UK?

The position for National Insurance Contributions (NIC) for overseas employees does not automatically follow the PAYE income tax treatment.

Unlike PAYE, National Insurance is determined by social security rules rather than income tax rules. This means an employee may have no UK PAYE liability but still need to pay UK National Insurance, or vice versa.

Normally an employee’s earnings are either completely within the UK NIC regime or completely in the other country’s social security regime; and, unlike PAYE, it is not normally possible to apportion earnings so that UK NICs apply only to UK duties.

In some cases, it may be possible to make an application for a certificate of continuing liability.  These certificates, also known as A1 certificates, are designed to avoid employees making social security contributions in countries where they are only present for a short time or in countries where they only carry out a small amount of their duties.

If an A1 certificate is in place, it means that contributions can continue to be made in the country that the employee has left temporarily and no contributions need to be made in the local country.

However, it is important to note that in most cases A1 certificates can only cover a maximum period of two years. After that, social security contributions need to be paid in the country in which the employee is working.

Could an overseas employee create a permanent establishment?

An overseas employee’s precise role and responsibilities often need to be managed carefully in the country where they are based.

Corporation tax registration may be required if it’s deemed that the presence of the employee leads to the creation of a ‘permanent establishment’ for the employer in that jurisdiction.

Other practical considerations for UK employers

Employment Law – Regardless of whether a UK employment contract is in place, an overseas employee may acquire local employment rights if they work in another jurisdiction – these can include minimum rates of pay, annual leave and rights on termination of employment.

Data protection – Additional protections may be required if data is transferred from outside the UK and employers should consider whether any work undertaken by an overseas employee could lead to a breach of any data protection law. Changes may also be required to internal GDPR policies and procedures.

Health & Safety – Employers continue to owe their employees a duty of care to provide a safe place of work even where the employee is working abroad. Employers will therefore need to comply with both UK and local health and safety laws and should ideally carry out risk assessments regarding the employee’s overseas working environment.

Insurance – Employers should check that employees working overseas are covered by their insurance policies.

Currency – Fluctuations in currency can affect a foreign employee’s net pay, so some cross-border employers implement a currency exchange agreement to offset these fluctuations.

What UK employers should check before hiring overseas:

✔ Where will the employee physically work?

✔ Will they perform any duties in the UK?

✔ Does UK PAYE apply?

✔ Is an overseas payroll registration needed?

✔ Which country’s National Insurance/social security rules apply?

✔ Could their role create permanent establishment risk?

✔ Are local employment rights triggered?

✔ Does insurance cover overseas employees?

✔ Will the arrangement remain temporary?

We’re here to help

Every overseas employment arrangement is different, so taking advice before an employee starts work is the best way to avoid unexpected tax, payroll and compliance issues later.

If you have overseas employees and would like to discuss managing PAYE, NIC, or payroll get in contact with Sam or one of the team by emailing hello@scruttonbland.co.uk or call 0330 058 6559