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HMRC internal manual

PAYE Manual

From
HM Revenue & Customs
Updated
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PAYE operation: international employments: EP appendix 5: net of foreign tax credit relief

This subject is presented as follows

Relaxation on payments of PAYE

This arrangement only applies to employers who are required to deduct foreign tax in addition to UK PAYE from payments being made to employees sent to work abroad. Its aim is to give provisional relief for double taxation to employees who must pay both UK tax and foreign tax from the same payments of earnings.

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, and may authorise the employer to operate the arrangement set out in this appendix.

It is the Employer Technical Team (EP Appendix 5 Application), Customer Operations National Insurance Contributions and Employer Office, Waterside House CC, Sunderland Enterprise Park, Sunderland, Tyne and Wear, SR5 2TJ, who are responsible for authorising the employer to operate these arrangements.

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 so that they have continuing UK PAYE / NIC responsibilities as well as those arising in the overseas country.

It is in these specific circumstances or where the 183 days period is exceeded but the taxpayer remains UK resident, that we can sanction the relaxation of some PAYE requirements.

The relaxation only applies to UK PAYE that should be deducted from an employee’s pay using their UK tax code and UK tax tables. All other PAYE and National Insurance 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.

You should make it clear to the employer that the relaxation is only being made available here because of the taxing rights of the country concerned and otherwise two amounts of tax would be deducted from the employees gross pay.

It should not be used by the employer or agent for any other contract or situation without prior consultation with you. It is not available if an overseas deduction is borne by the employer.

Employers responsibilities under this arrangement

Where you agree the use of this arrangement you must write to the employer to

  • Request the name and NINO of each employee included in it
  • Ask the employer to provide a regular update of any changes in the number of employees included. The frequency of these updates must be agreed between you and the employer

Advise the employer that

  • For those employees on overseas work in (country name) PAYE / NIC due should be calculated in the normal way
  • They 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 deducted from wages by the amount of foreign tax deducted from gross wages in the same UK tax year
  • Foreign tax will normally be set off against UK PAYE in the same pay period before the employer pays it to the Accounts Office. However, credit can be given retrospectively in the same tax year where pay was double taxed
  • The credit available under this agreement is restricted to the amount of UK PAYE deductible from the employees wages (NICs deductions and contributions are not affected in any way)
  • Any net UK PAYE tax remaining due is to be returned on the employer’s RTI submissions. This net amount will form part of the employer’s regular payment and should be paid to the Accounts Office in the normal way 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 year
  • The employer and the employee must undertake to provide details of foreign tax that has been refunded

Employee redeployed, no longer overseas

For employees who cease to operate overseas but continue in the same employment in the UK or another location, the employer must

  • Submit details of pay and UK tax deducted up to the date of redeployment together with a report of foreign tax credited
  • Operate the employee’s existing code on the Week 1 or Month 1 basis

Employee leaves employment or dies

If an employee who has been given credit under this system leaves the employment, or dies, the employer should

  • Submit the final full payment submission 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 Taxable Pay subject to UK Tax and foreign tax
  • The Total Foreign Tax paid
  • The amount of UK PAYE that has been offset by the foreign tax

The employer should keep HMRC up to date with any changes to these arrangements, see ‘Notification of employees included in the arrangement’ below. So if any employee leaves or dies, this does not mean that we require an in year return immediately. As long as the details above are issued to an employee who leaves, the employer can tell HMRC at the next agreed update or at the year end.

If the employer decides to send HMRC an update when the employee leaves or dies they can do so. If they do, it should contain the information they have provided to the employee. There is no set format for this information and HMRC does not produce a return. It should be sent to the Edinburgh address quoted under the sub heading ‘At the end of the tax year’ below.

Action to be taken once the agreement is authorised

Following an agreement to the relaxation of PAYE in accordance with Appendix 5, you must take the following action

  • On the employers record, use EBS Function AMEND EMPLOYER NOTES to record that an arrangement under Appendix 5 has been agreed
  • The Employers Technical Team will update the database spreadsheet that records these schemes

Notification of employees included in the arrangement

The employer must send details of employees included in this arrangement and keep you up to date with changes to those details on a regular basis (at intervals agreed between you and the employer).

On receipt of these details, you must take the following action to ensure that the taxpayer’s liability is reviewed at the end of the year.

In all cases on each employee’s record

  • Enter a note on Contact History that the employee is included in an arrangement under Appendix 5
  • Set the inhibit automatic reconciliation signal on the PAYE Service record for CY and CY+1 (this should be set on the record for every year until the employment ceases)

For redeployments, leavers and deceased cases on receipt of the P45(1) or equivalent on each employee record

  • Enter the following note on Contact History ‘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

Note: A cumulative code for these cases cannot normally be restored in-year. If you receive a request for a cumulative code or an in-year repayment, you should tell the customer that this is not possible. If they press the matter you should contact Personal Tax Customer, Product & Process, PAYE Technical, Shipley for advice.

At the end of the tax year

The introduction of PAYE reporting in real time does not change the application of Appendix 5, where the employee is liable to pay foreign tax as well as UK PAYE.

Employers should have included any net UK tax deducted on their Full Payment Submissions throughout the year and any errors should have been corrected before the end of the tax year. If not corrected on the last FPS or by 19 April, the employer will have to submit an Earlier Year Update (EYU).

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 amount of income subjected to both PAYE and foreign tax
  • The total foreign tax deducted
  • The amount of foreign tax deducted and remitted to the overseas authority which was set off against that employees UK PAYE deductions due (foreign tax credit relief)

The employer should also provide evidence that the foreign tax has been paid.

This information should be sent in the first instance to

HMRC
PT Ops Bootle (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Appendix 5 HO Manager
Floor 11 West
The Triad
Stanley Road
Bootle
L75 1HW

Action at employer level

When the employer submits details of the foreign tax credit given with the evidence of foreign tax paid for each employee included in the arrangement, Bootle will follow their existing guidance and risk assess the cases by checking NPS and SA as appropriate.

Action at employee level

On receipt of details provided by the employer, for each employee you should

  • Make a note on Contact History to record the foreign tax credit given by that employer in that year
  • Proceed in accordance with the guidance at PAYE93038

(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)

Foreign tax refunded by the overseas authority

Exceptionally, the overseas authority may subsequently refund the foreign tax paid. If this happens

  • The employee or employer should tell you but you should also receive third party information
  • The employee’s liability for that tax year must be reviewed to remove the foreign tax credit relief given