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HMRC internal manual

PAYE Manual

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PAYE operation: international employments: EP appendix 7b: modified class 1 national insurance contributions (NICs) for employees assigned from the United Kingdom (UK) to work overseas

Application for modified NICs for expatriate employees from 6 April 20__

Employer name: ………………………………………………………………………………..
   
Employer address: ………………………………………………………………………………..
  ………………………………………………………………………………..
  …………………………………………………………………………………
Employer PAYE reference: …………………………………………………………………………………

Part 1 - Scope of agreement

1. This application applies only to those employees who
   
  1. Are employed by a UK employer and are assigned to work abroad for a period of limited duration, but for more than a complete tax year, and
  1. Have an ongoing liability to UK National Insurance contributions (NICs) whilst abroad; and
  1. Earn above the upper earnings limit (UEL) in every earnings period throughout the tax year. (I understand that it shall not invalidate this agreement if an employee earns less than the UEL in the pay period they join the company, or in the pay period in which they leave, if in all other pay periods during the year, the UEL is exceeded. However, in the case of employees with annual pay periods, covered by the agreement, their earnings must exceed the annual UEL); and
  1. Not liable to UK tax on their earnings from employment; and
  1. Receive some earnings and benefits derived from the employment from sources other than the UK employer.

Part 2 - Operation of agreement

2. We will calculate and pay Class 1 NICs on a best estimate of those elements of earnings that are subject to Class 1 NICs. At the beginning of each year, or if liability starts after the beginning of the year, in the month when NICs liability first occurs, we will prepare the best estimate. The best estimate will include all world-wide earnings paid from whatever source, including where relevant, annual salary, any cash bonus awards made to 5 April, and any non-cash benefits that attract Class 1 NICs liability.
   
3. We shall for every payment of estimated earnings calculated for each employee, complete and maintain a payroll record and include the details about the payment, the National Insurance category letter and NICs data items on a Full Payment Submission (FPS). The FPS must be submitted to Her Majesty’s Revenue and Customs (HMRC) on or before the payment of regular earnings by the UK employer or no later than the 19th of the month following the end of the tax month where all earnings are paid by the overseas employer.
4. We will undertake an in-year review during the period December to 5 April to take account of any material changes and in particular, will ensure that amounts that are earnings, as defined in sections 3 and 4 of the Social Security Contributions and Benefits Act 1992, which
  * Must be included in the computation of a person’s earnings when assessing Class 1 NICs, and
  * Are bonuses and / or NICs due on amounts which count as employment income in relation to employment-related securities to which sections 698 or 700 of the Income Tax (Earnings and Pensions) Act 2003 applies, for example, share related events
  are accounted for.
  We will update the Class 1 NICs payable immediately following the review, amend payroll records and
  * When completing the next FPS for submission to HMRC, adjust the year to date NICs data items to show the revised values to date, and
  * Adjust the next payment to HMRC if too much or too little NICs have been paid

Part 3 - Payment of Class 1 NICs to Her Majesty’s Revenue and Customs

5. We undertake to pay to HMRC each month, the Class 1 NICs due on 1/12th of the total estimated earnings for the tax year. These payments will be made each month by the 19 or 22 of the following month (depending upon our payment method).
   
6. If the NICs are paid in accordance with the terms of this agreement, late payment penalties under Schedule 56 of the Finance Act 2009, will not apply to payments under this arrangement. Schedule 56 penalties will be charged if the NICs due on the estimated earnings are not paid as specified in Parts 2 and 3 of this agreement.

Part 4 - Arrivals and departures

7. We will notify HMRC of our intention to include any new employees entering the agreement by providing details of the employees’ departures from the UK. Similarly we will notify HMRC of our intention to exclude an employee from the agreement by providing details of the employee’s return to the UK. We will make these notifications to HMRC in writing by the end of the relevant tax year.
   
8. We accept that in cases where an employee is repatriated to the UK before he / she has been overseas for a complete tax year and, as a result, his / her general earnings from the employment become chargeable to UK Income Tax, this agreement will no longer apply to that employee. In such cases, we will cease to use estimates in respect of all earnings paid and benefits received after the employee has returned to the UK, and use the statutory basis of calculating and returning both Class 1 and Class 1A NICs. We will carry out an exercise before the end of the tax year, to establish the correct amount of the earnings in the period covered by our earlier estimate.
  For these employees, we will include on a Full Payment Submission for every payment of earnings subject to Class 1 NICs paid after the employee returns to the UK and the NICs data items relating to each payment, on or before each payment is made to HMRC. For these same employees, no later than the 19th April following the end of the tax year we will
  * Record the correct earnings and NICs details for the period before the employee returned to the UK on that employee’s payroll records, and
  * Send a Full Payment Submission to HMRC to adjust the year to date NICs totals for each category letter to show the correct details for the year.
  Forms P60 will be given to the employees by 31 May after the end of each tax year.
  If the correct figures for Class 1 NICs exceed our earlier estimates, we will pay the balance to HMRC with our final payment for the year. Where Class 1A NICs becomes payable, we will make a P11D(b) return and pay Class 1A by 19 July following the end of the tax year.

Part 5 - Year end requirements

9. Forms P60 will be given to the employees by 31 May after the end of each tax year.
   
  Where an employee leaves the UK part way through a tax year, we will
  * Calculate Class 1A NICs payable to the date the employee left the UK
  * Send HMRC a P11D(b) by the 19 July following the end of the tax year, and (For 2012-13 and later years, this concession will be withdrawn and so the P11D(b) filing date will be 6 July)
  * Pay HMRC any Class 1A NICs due by 19 July following the end of the tax year

Part 6 - Interest

10. We accept that, due to the inherent nature of the modified arrangements, over and underpayments of Class 1 NICs may arise compared with the amount of Class 1 NICs that would otherwise have been due if normal NICs procedures had been applied. Provided that the procedures outlined in these arrangements are followed, interest will not be charged in accordance with the NICs regulations in respect of any residual Class 1 NICs liabilities as shown by the employer’s ‘NIC Settlement Return’ - See Part 8. However, it is accepted that interest will run on any part of the NICs due on the estimated earnings to have been paid under this agreement which (depending upon the method of payment) reaches HMRC after the 19 or 22 of April following the end of the tax year.
   
11. It is accepted that if the payment of Class 1 NICs, due on estimated earnings payable by 19 or 22 April, is paid late, HMRC will charge interest on amounts paid late.

Part 7 - Impact of HMRC dispensation

12. We accept that the terms of a dispensation will not apply to employees who do not have a ‘taxable employment’ as defined in Part 2 of the Income Taxes (Earnings and Pensions) Act 2003. Therefore, the ‘best estimate’ will reflect the total amount of earnings liable to Class 1 NICs taking into account any payments that can be disregarded from Class 1 earnings under the provisions of Regulation 25 and Schedule 3 of the Social Security (Contributions) Regulations 2001.
   

Part 8 - Class 1A NICs

13. With the exception of paragraph 12 of this agreement, we understand that any benefits provided to employees covered by this agreement will not fall to be chargeable to income tax under ITEPA as ‘general earnings’, therefore, liability for Class 1A NICs will not arise.
   

Part 9 - Payment of residual Class 1 NICs liability - NIC Settlement Return

14. No later than 31 March following the end of the tax year we will carry out an exercise to establish the correct amount of Class 1 NICs due on all the employee’s earnings, both from the UK and from abroad. We will calculate and pay to HMRC Class 1 NICs on the difference between the correct figures for the year and those figures that we submitted to HMRC on our full payment submissions. Payment of the Class 1 NICs will be made by 31 March following the end of the tax year concerned. Any additional Class 1 NICs payable will be shown on our ‘NIC Settlement Return’ (NSR).
   
15. We will set out in the NSR the correct Class 1 NICs due for the year for each employee covered by this agreement taking into account what has been paid previously under parts 3 and 7 of this agreement. We will send HMRC the NSR no later than 31 March following the end of the tax year in which earnings were paid.
16. We accept that where the additional Class 1 NICs found to be due are paid after 31 March following the end of the tax year, or errors in the NSR are discovered, interest and penalties will be charged in accordance with legislation.

Part 10 - Overpaid Class 1 NICs

17. We understand that, if we discover that Class 1 NICs have been overpaid in relation to the ‘best estimate’, we can complete the NSR to reflect any secondary (employers) Class 1 NICs overpaid. We can also claim a refund of any primary (employees) Class 1 NICs overpaid on the best estimate but only where
   
  1. The Class 1 NICs were paid by the employer and have not been recovered from the employee, or
  1. The Class 1 NICs are paid by the employer and recovered from the employee, and then only if the employee mandates the repayment to the employer in writing.
18. We understand that, to claim the overpayment, the NSR must be submitted together with an application for a refund. This will be passed to HMRC Payment Reconciliation in the National Insurance Contributions and Employer Office for processing. We understand that under this agreement, we cannot recover overpayments by deducting the amounts from future payments to HMRC or offsetting overpayments in respect of one employee against underpayments in respect of another employee.

Part 11 - Statement

19. 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 Class 1 NICs have arisen in respect of one or more employees and, in the opinion of HMRC, the Class 1 NICs ought to have been accounted for in the calculation of the estimated Class 1 NICs provided for under these arrangements
  * An employer fails to pay the Class 1 NICs on time and / or to ensure that returns are filed on time such that a liability arises to pay interest and / or penalties.
20. We accept that, if a decision is made by HMRC to cancel these arrangements, HMRC will require the strict operation of the payment of Class 1 NICs. Similarly, we reserve the right to cancel these arrangements and adopt the strict operation of Class 1 NICs.
21. We agree that a separate employer record will be opened with HMRC for this scheme in the name ‘[Company Name] (Appendix 7B)’ under which we shall submit the NSR.
22. Cancellation by either party will be confirmed by written notice and will be effective from the following 6 April, or such earlier date as is agreed by the parties. If a date cannot be agreed, cancellation will be effective on the earlier of the aforementioned 6 April or 3 months from the date when the written notice was given.

Application made by: 

Name: ……………………………………………………………………
   
Capacity: ……………………………………………………………………
Signature: ……………………………………………………………………
On behalf of (name of employer): ……………………………………………………………………
Date: ……………………………………………………………………

Application agreed on behalf of HM Revenue and Customs 

Name: …………………………………………………………………..
   
Signature: …………………………………………………………………..
Date: …………………………………………………………………..