PAYE82001 - PAYE operation: international employments: EP appendix 5: net of foreign tax credit relief
This subject is presented as follows
Employer required to deduct foreign tax
Double taxation
Employers responsibilities under this arrangement
HMRC action once the Appendix 5 is authorised
At the end of the tax year
Employer required to deduct foreign tax
The CWG2 Employer Further Guide to PAYE and NICs, advises employers to contact HMRC if they have to do this. If they do, HMRC considers the position as set out in PAYE81715.
HMRC, Employer Complex Casework (Appendix 5), BX9 1BX are responsible for authorising the employer to operate an Appendix 5 arrangement.
Appendix 5 arrangements:
- Only apply to UK employers who are required to deduct foreign tax from payments being made to employees sent to work abroad whilst continuing to deduct UK PAYE from an employee's pay using their UK tax code and UK tax tables
- Allow provisional relief for double taxation for employees who must pay both UK tax (by a PAYE deduction) and foreign tax from the same payment of earnings
- Should not be followed by the employer or agent for any other contract(s) or employees not notified to HMRC without prior application and authorisation.
All PAYE and NIC reporting requirements must still be fulfilled by the employer. There can be no question of abandoning PAYE/NIC altogether for the duration of the overseas contract.
Double taxation
If the employee has to pay foreign tax direct to an overseas Revenue authority on payments taxed through PAYE, advance DTR can be given through the PAYE code (see PAYE81715).
In many overseas contract situations, where an employee is abroad for less than 6 months no overseas tax is ultimately found to be due. This is because the employee will usually have personal protection under the terms of many Double Taxation Agreements (DTA).
However, it cannot be assumed that DTA protection is available on the basis that the employee works in an overseas country for less than 183 days. The relevant DTA and the other authority should be consulted. In particular, the 183 day protection, may not be available where:
- The employee works for a resident of the overseas country who functions as their employer
Or - Their contractual employer has an identifiable `permanent establishment' in the overseas country
Or - The DTA says so.
If these circumstances apply, or where no DTA exists, overseas tax is due from day 1. The overseas country may also impose withholding at source obligations on the employer even though the UK employer is still required to operate PAYE/NIC on payments made to the employee.
It is in these specific circumstances or where the 183 days period is exceeded but the taxpayer remains UK resident, that HMRC may then authorise an Appendix 5 arrangement.
Note: If foreign tax is paid by the employer on the employee's behalf, HMRC would not authorise an Appendix 5 arrangement. Payment in this manner could also constitute a pecuniary liability.
Employers responsibilities under this arrangement
The employer must only give credit by this method for foreign tax actually payable on and deducted from the employee's wages and paid to the overseas authority. Credit is given by reducing the amount of UK PAYE due from wages by the amount of foreign tax deducted in the same tax period:
- The credit is restricted to the amount of UK PAYE tax due from the employee’s wages (NICs deductions and contributions are not affected in any way)
- Any net UK PAYE tax balance remaining due should be reported and paid to HMRC by the normal payment date with all the NICs due
- Any UK PAYE refunds due during the year because of a change of code number must be restricted to the net UK PAYE deducted from the employee during the tax year
- The employer and/or the employee must advise HMRC where any foreign tax has been refunded.
If an employer advises that foreign tax is paid by the employer on the employee’s behalf, HMRC would not authorise Appendix 5 if an application is made. Payment in this manner could also constitute a pecuniary liability.
Employee redeployed, no longer overseas
For employees who cease to work overseas but continue in the same employment in the UK or another location, the employer must:
- Ensure details of pay and UK tax deducted up to the date of redeployment together with the foreign tax credit are reported
- Operate the employee’s existing code on the Week 1 or Month 1 basis.
Employee leaves employment or dies
Employers should take the following action where an employee leaves the employment or dies
- Submit a final FPS for the employee showing the date of leaving or death as appropriate and showing the code as if it had been operated on a Week 1 / Month 1 basis
- Any P45 issued to a leaver should be completed as if the tax code has been operated on the Week 1 or Month 1 basis, showing the net UK tax deducted. This is to ensure that any new employer does not operate it on a cumulative basis
A statement of the overseas tax deducted, for which credit has been given against UK PAYE, should be issued to the departing employee and it should contain:
- The Total Taxable Pay to date
- The Total Foreign Tax deducted or paid
- The amount of UK PAYE that has been offset by the foreign tax.
HMRC action once Appendix 5 is authorised
Where Employer Technical team authorise an Appendix 5 they:
- Must confirm this in writing
- Request the name and NINO of each employee to be included in it (retrospective addition of employees cannot be authorised)
- Ask the employer to provide a quarterly tax year update of any changes in the number of employees included
- Use EBS Function AMEND EMPLOYER NOTES to record that an Appendix 5 arrangement has been agreed
- Record the employer's details on a database spreadsheet.
At the end of the tax year
At the end of the tax year the employer should send HMRC a statement showing:
- The name and NINO of each employee included in the arrangement
- The total payment which both PAYE and foreign tax was operated on
- The total foreign tax deducted which was set off against that employees UK PAYE deductions due (foreign tax credit relief)
- The amount of foreign tax paid to the overseas authority - the employer should also provide evidence the foreign tax has been paid.
This information should be sent to a separate Employer technical team that completes an end of year tax review. Their address is:
HMRC
Appendix 5 team
PAYE & Self Assessment
HMRC & Customs
BX9 1AS
This team takes the following actions in PAYE Service upon reviewing all employees in the arrangement:
- Enter a Contact History note; ‘employee is included in an Appendix 5 arrangement’
- Set the inhibit automatic reconciliation signal for CY and CY+1 (this should be set on the record for every year until the employment ceases)
- Set the PAYE direction indicator on the Employment details screen.
For redeployments, leavers and deceased cases on receipt of the P45(1) or equivalent on each employee record:
- Enter a Contact History note; 'Total tax to date (enter date of leaving or redeployment) is net of Foreign Tax Credit Relief'
- Update the current year’s record to add a Week 1 / Month 1 basis to the latest code on the record.
Errors
Employers should have included any net UK tax deducted on their employees Full Payment Submissions throughout the year and any errors should have been corrected before the end of the tax year.
If an error has not been corrected in the final FPS on or before 19 April, the employer must submit an Earlier Year Update (EYU). From April 2021 the Earlier Year Update (EYU) will no longer be a valid submission type. Employers should correct their payroll data for the 2020 to 2021 and future tax years by sending a further year to date Full Payment Submission (FPS).
Note: Employers should not use the FPS or EYU process to recover deductions of tax, where they discover the employee has overpaid foreign or UK tax.
Correction by FPS or submission of an EYU/Further year to date FPS is only in respect of actual errors made by the employer. For instance showing a tax deduction of £1000 as £100, when £1000 was the amount actually deducted from pay – the employer would amend to increase tax by £900.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)