PAYE82002 - PAYE operation: international employments: EP appendix 6: modified PAYE in tax equalisation cases
Application for modified PAYE for tax equalised expatriate employees from 6 April 20
Tax equalisation generally describes an arrangement between an employer (see Note 1) and a foreign national employee who comes to the United Kingdom (UK) to work. Under the terms of an agreement, the employee (see Note 2) is entitled to specified net cash earnings and non-cash benefits. The employer undertakes to meet the UK Income Tax liability arising from the earnings and to ensure that the employee’s UK tax affairs will be handled by a professional adviser or by an in-house specialist experienced in tax equalisation issues.
For an employee to be included in an arrangement established under this application, the employer must equalise liability to UK Income Tax on all general earnings subject to the rules in part 2 Chapters 4 and 5 ITEPA applying to employees resident, or domiciled outside the UK.
An application indicates that the employer agrees to operate PAYE on a gross-up of cash earnings and non-cash benefits for all employees eligible to be included in this arrangement and has undertaken with the employees to pay any residual UK liability on earnings based on each employee’s self assessment. Employers should ensure that employees complete their self-assessment returns in accordance with the guidance in Help Sheet IR212.
Note 1: For the purposes of this application, ‘employer’ includes a ‘relevant person’ for whom an employee works in terms of section 689 Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
Note 2: For the purposes of this application, ‘employee’ includes an ‘office holder’.
Note 3: Where the employee is tax equalised on all general earnings but not on specific employment income, for example, on taxable share related events, or on restricted securities which are taxed both as general earnings on award and subsequently as specific employment income when restrictions are lifted, the employee may still be covered by the arrangement as long as all the other conditions are satisfied.
Note 4: Employers who payroll actual rather than estimated benefits in kind (excluding living accommodation, vouchers and credit cards, interest free and low interest (beneficial) loans) may register for the online Payrolling Benefits in Kind (PBIK) service. Where the PBIK service is used, forms P11D will not be required under paragraphs 15. and 16. below.
Employer name:
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Employer address:
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Employer PAYE reference:
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Calculation of estimated PAYE on tax equalised earnings
1. We will prepare a best estimate of all earnings including cash allowances and non-cash benefits for the year at the beginning of each year, grossed-up for tax purposes and calculate PAYE tax without restriction for the 50 per cent ‘overriding limit’. We will use the Scottish rates of income tax for employees who are Scottish taxpayers and the Welsh rates of income tax for employees who are Welsh taxpayers. The best estimate will include, where relevant, the annual salary, any cash bonus awards made to 5 April and non-cash benefits provided by a home country employer.
2. We will undertake an in-year review during the period December to April to take account of any material changes, and in particular, to ensure that
- Calendar or tax year end bonuses are accounted for
- Taxable share related events are accounted for
3. Where we do not equalise liability in respect of awards under 2(b) above
- PAYE must be applied in accordance with all relevant statutory provisions and regulations and
- In the case of notional payments, where an employee does not make good the due amount within the period of 90 days specified by section 222(1) (c) ITEPA 2003, we will include additional earnings in this arrangement equivalent to the due amount. These additional earnings will be grossed-up for tax purposes.
4. We will update the estimated PAYE calculation during the year to reflect arrivals and departures of employee's subject to this application.
5. We will exclude from the estimated PAYE tax calculation contributions we make (employer contributions) to a qualifying overseas pension scheme in respect of an employee who is a relevant migrant member of that scheme. Subject to the conditions specified in paragraph 51 of Schedule 36 to the Finance Act 2004, we will exclude employer contributions to an overseas pension scheme in relation to which the employee received corresponding relief in 2005-06. We will also exclude employer contributions to overseas schemes where the employee is entitled to relief from UK tax under the terms of a Double Taxation Agreement.
6. We will take into account employee contributions to the overseas pension schemes referred to in paragraph 5 where we know the amounts involved and are satisfied that each employee is entitled to relief for contributions as a relevant migrant member or with pre-commencement entitlement to corresponding relief or under the terms of a Double Taxation Agreement.
7. Where we give provisional relief for overseas workday relief based on each employee’s workday history or as anticipated by the employees where they join during the tax year, we will withdraw personal allowances, apply code 0T, S0T for Scottish taxpayers, C0T for Welsh taxpayers and notify HMRC accordingly. Any tax gross-up will be applied after the earnings have been apportioned between UK and non-UK duties. We will enter code 0T, S0T, C0T as applicable on the payroll record and Full Payment Submissions.
8. Where paragraph 7 does not apply, we will give personal allowances by applying the emergency code on a cumulative basis using the S prefix for Scottish taxpayers or the C prefix for Welsh taxpayers where applicable when calculating PAYE tax. We will enter that code on the payroll record and Full Payment Submissions.
9. We will take relief for foreign tax into account in respect of UK residents working abroad where an agreement has been reached with HM Revenue and Customs (HMRC) in accordance with the PAYE Manual EP Appendix 5. We note in particular the requirement that an overseas country imposes a withholding at source obligation on earnings that are subject to PAYE.
10. We will not apply PAYE to the earnings of a tax-equalised employee covered under separate arrangements in EP Appendix 4 of the PAYE Manual. Where it later appears that such earnings are not exempt from UK tax under the terms of the relevant Double Taxation Agreement, we will include the employee in this arrangement and notify HMRC accordingly.
11. We will send one FPS each month no later than the 19 of the month following the end of the tax month. The FPS will show the estimated earnings and income tax calculated in accordance with this agreement. The FPS will include an entry in the Late Reporting Reason field to prevent late filing warning letters. Enter A - Notional payment: Payment to Expat by third party or overseas employer. We undertake to pay 1/12th of the estimated PAYE for the tax year each month by the 19 or 22 of the following month (depending upon the payment method). Where the number of employees covered by this arrangement at any one time is five or fewer, we undertake to pay 3/12ths of the estimated PAYE tax on or before the 19 or 22 (depending upon the payment method) of July, October, January and April (‘the quarterly basis’). If the number of employees covered by this arrangement increases to more than 5 at any one time in the course of a year and is likely to remain at that higher level, we will make payments of estimated PAYE by the 19 or 22 of each month from the start of the following tax year. If the number of employees covered by this arrangement at any one time reduces to five or fewer in the course of a year and is likely to remain at that lower level, we will make payments of estimated PAYE on the quarterly basis from the start of the following tax year. Late payment penalties under schedule 56 of the Finance Act 2009 will not apply to payments under this arrangement providing that tax is paid at the agreed time. Schedule 56 penalties will be charged if the estimated tax is not paid as specified in this paragraph.
12. We agree that making an Earlier Year Update (EYU) is not appropriate for employees included in this arrangement. We also agree that it is not appropriate to make post year end amendments by way of a Full Payment Submission (FPS) showing revised ‘Year to Date’ payment data. If a self-assessment tax return is submitted with an incorrect PAYE tax figure, we undertake to ensure the return is amended, to reflect the correct figure, if we are within the amendment time limit (12 months from the original return deadline). If we need to amend the PAYE tax figure after the amendment limit we agree to
- Write to HMRC to make an overpayment relief claim
- Write to HMRC to make a disclosure of any further PAYE tax due
Arrivals and departures
13. We shall submit a Full Payment Submission which will confirm for each employee covered by this agreement.
That the employee is included in a EPM6 agreement.
A relevant starting date.
The length of time the seconded employee intends to work in the UK and if they intend to live here.
If they are from the European Economic area.
A leaving date - the actual leaving date may be entered on the final Full Payment Submission for the year where a month 12 reconciliation is undertaken. In these circumstances, the Irregular Employment Pattern Indicator should be set to keep the record open.
Year end requirements
14. Forms P60 will be given to the employees by 31 May after the end of each tax year. The figure of pay for each employee will comprise all cash payments and non-cash benefits in respect of which PAYE tax has been calculated after grossing-up. The figure of tax will be the total amount of PAYE tax paid under this arrangement in respect of the employee concerned.
15. We accept that due to the inherent nature of these modified arrangements, over and underpayments of tax may arise compared with the amount of tax that would otherwise have been due if normal PAYE procedures had been applied. Provided that the procedures as outlined in these arrangements are followed, interest will not be charged in accordance with the PAYE regulations in respect of any residual income tax liabilities as shown by the employees' tax returns. However, it is accepted that interest will run on any part of the estimated PAYE for a tax year due to have been paid under this agreement which (depending upon the payment method) reaches HMRC after 19 or 22 April, as appropriate, following the end of the tax year.
16. We shall submit in respect of each employee covered by these arrangements a form P11D, or an approved substitute, and associated form P11D(b) by 31 January following the end of the tax year. We acknowledge that where all statements are not submitted by 31 January following the end of the tax year, penalties under Section 98 TMA 1970 may arise. This is on the basis that the earnings in question ought to have been provided on forms P11D or approved substitutes before 7 July following the end of the tax year.
Submission of employee’s self assessment tax return and calculation of tax liability
17. We will have systems and procedures in place to ensure that each employee’s self assessment will include actual cash remuneration, all benefits and reimbursed expenses payments and other amounts chargeable to tax as employment income, grossed up on a current year basis. Each employee’s tax return will include a note in the notes section of the relevant Employment Page to the effect that the employee is tax equalised and Modified PAYE has been applied.
Payment of residual Income Tax liability
18. We will pay any additional tax found to be due under these arrangements following the submission of the employee’s tax return by 31 January following the end of the tax year. Alternatively, if a refund is due, the appropriate repayment claim mandated to us or (if different) to the employee’s contractual employer will be submitted. We understand that as a consequence of these arrangements there will be no requirement to make payments on account of tax liabilities. We acknowledge that a tax return for an employee covered by these arrangements should incorporate a claim to cancel payments on account. We further understand that HMRC should not issue Statements of Payments on Account to employees included under these arrangements.
19. We understand that for employees who receive overseas workday relief any overpayments of PAYE will not be treated as a remittance of foreign earnings where repayment is mandated to an employer in the UK.
National Insurance Contributions
20. These arrangements do not apply to National Insurance Contributions (NICs). In cases where the employee is liable for Class 1 NICs and taxable benefits are provided that attract Class 1A NICs, NICs must be accounted for in the normal way unless separate arrangements are agreed with HMRC as set out in EP Appendix 7A of the HMRC PAYE Manual.
Statement
21. We acknowledge that HMRC reserve the right to review / cancel these arrangements as a result of changes in the law or should operational difficulties arise or the arrangements are seen to be deficient, for example
- Where significant and / or regular underpayments of income tax on employment income have arisen in respect of employees’ self assessment returns and in the opinion of HMRC that tax ought to have been accounted for in the calculation of estimated PAYE provided for under these arrangements
- Where an employer fails to pay tax on time and / or to ensure that returns and P11Ds are filed on time such that a liability arises to pay interest and / or penalties.
We accept that as a result of a decision to cancel these arrangements, HMRC may require the strict operation of PAYE. Similarly, we reserve the right to cancel these arrangements and adopt the strict operation of PAYE. Cancellation by either party will be confirmed by written notice and will be effective from the following 6 April or an earlier date, as agreed by the parties. If a date cannot be agreed, cancellation will be effective on the earlier of the previously stated 6 April or 3 months from the date when the written notice was given.
Application made by:
Name:
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Capacity:
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Signature:
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On behalf of (name of employer):
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Date:
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Application agreed on behalf of HM Revenue and Customs
Name:
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Signature:
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Date:
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Return to: HMRC, Charities Savings & International 3, BX9 1AJ