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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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PAYE operation: international employments: overseas tax deductions from earnings taxed under PAYE

Subjects needing special care

Where an employee works overseas, a foreign Revenue Department may require their UK employer to deduct tax from the same earnings against which the employer has to operate PAYE. The CWG2 Employer Further Guide to PAYE and NICs, tells employers to get in touch with HMRC if this happens.

Operating PAYE in real time does not change the principles of the modified form of PAYE under Appendix 5 that is covered in this section and PAYE82001. So employers can continue to operate Net of Foreign Tax Credit Relief.

The remainder of this subject tells you what action to take and is presented as follows

 

Double taxation agreements

Double Taxation Agreements vary from country to country and there is further guidance on each agreement in the Double Taxation Relief Manual.

Denmark

There are special rules in the Double Taxation Agreement with Denmark. Instructions are given at PAYE81730 and PAYE81735 for offshore and onshore employment within Danish jurisdiction.

Offshore sectors of the continental shelf

Where you become aware of UK employees working in offshore sectors of the continental shelf of Belgium, West Germany, France or the Netherlands, or employees from any of these countries working in the UK sector, refer the case with a report of the facts to Personal Tax Customer, Product & Process (PTCPP), PAYE Technical, Shipley.

Double Taxation Agreements vary from country to country and there is further guidance on particular countries in the Double Taxation Relief Manual.

Foreign Revenue department tells employer to deduct tax

‘Advice to employer: no double taxation agreement’ and ‘Advice to employer: double taxation agreement’ below, tell you what facts you must consider and what advice to give to employers who are required by a foreign Revenue Department to deduct tax from their employees.

Consider each employee separately and refer to ‘Advice to employer: no double taxation agreement’ first.

Advice to employer: no double taxation agreement

Employees are immediately liable to any overseas taxes if there is no double taxation agreement but they should be due UK Tax Credit relief. You should

  • Ask the employer to find out why the foreign Revenue Department wants deductions made and to tell you
  • If you are satisfied that the overseas tax is correctly due, the employer can be authorised to operate Net of Foreign Tax Credit Relief. Follow the procedures at EP Appendix 5 (PAYE82001). In cases of doubt or difficulty refer to PTCPP, PAYE Technical, Shipley for advice

Advice to employer: double taxation agreement

Tell the employer that PAYE procedures must be geared to the overseas taxes the employee is liable to pay.

Liability depends on how long the employee works in the overseas country.

Period of overseas work to which a double taxation agreement applies is less than six months

Normally an employee is not liable to overseas tax on earnings already liable in the UK

  • Tell the employer to resist the imposition of overseas tax because the employee is not liable to pay it
  • If it is maintained that overseas tax is due and you are satisfied that this is correct, the employer can be authorised to operate Net of Foreign Tax Credit Relief. Follow the procedures at EP Appendix 5 (PAYE82001)
  • Cases of doubt or difficulty should be referred to PTCPP, PAYE Technical, Shipley. Obtain all the relevant facts before asking the PAYE Technical team for advice in these cases

More than six months but less than one year

Normally an employee is immediately liable to overseas tax, but with Double Taxation relief from UK tax on earnings overseas

  • If you are satisfied that the overseas tax is correctly due, the employer can be authorised to operate Net of Foreign Tax Credit Relief. Follow the procedures at EP Appendix 5 (PAYE82001). Cases of doubt or difficulty should be referred to PTCPP, PAYE Technical, Shipley for advice

More than one year

Usually only overseas tax is payable

  • Keep the employee as a live case with the employer
  • Tell the employer to operate code NT

Other cases

  • Where any period involves offshore or onshore work in Denmark, see PAYE81730 and PAYE81735 
  • Where any period involves offshore work in any other country, refer to PTCPP, PAYE Technical, Shipley for advice

What to do if there are points not covered

If there are points not covered under ‘Advice to employer: no double taxation agreement’ and ‘Advice to employer: double taxation agreement’ above, seek advice from

  • Business International, Tax Treaty Teams if the terms of a Double Taxation Agreement are at issue
  • PTCPP, PAYE Technical, Shipley if

    • There is conflict between the claims imposed on the employer of the overseas workforce by the overseas and UK tax authorities
    • Overseas tax is imposed on a UK employer after PAYE has operated for a past year.

Overseas client of UK employer responsible for UK employee’s foreign tax

Where a UK employer has employees working abroad, an overseas Revenue authority may impose responsibilities for foreign tax in relation to the employees’ salaries on the overseas client of the UK employer. If so, send full details to PTCPP, PAYE Technical, Shipley, with the employer’s accounts file.

UK employer proposes to pay overseas tax / gross wages

As an alternative to deducting both UK and foreign tax from an employee’s wages, the employer may propose paying

  • Overseas tax

And

  • Gross wages

With

  • The overseas tax payment repaid to the employer as Double Taxation relief

If this happens, take the following action

  • Tell the employer that

    • Payment of the overseas tax would be additional taxable earnings
    • Overseas tax is a personal liability and unless met from earnings liable to UK tax, there is no claim to Double Taxation relief
    • Double Taxation relief is due to the employee not the employer

If the point is pressed, send the following to PTCPP, PAYE Technical, Shipley, before you reply to the employer

  • All the relevant papers
  • A summary of the facts and action already taken

Employer not obliged to withhold foreign tax

Where foreign tax does not have to be deducted by the employer on payments to employees that are taxed through PAYE, but an employee is obliged to pay foreign tax direct to an overseas Revenue authority on those earnings, advance Double Taxation Relief can be given through the PAYE code.

Once you are satisfied that overseas tax is due, a provisional coding allowance should be given for the estimated DTR due in respect of the overseas tax paid `in year’. See PAYE10040.

Details and receipts confirming payment of the overseas tax should be requested after the end of the tax year to determine the actual DTR due.