You could be at risk of breaching PAYE regulations.
Although perhaps counter intuitive, the aftereffects of the pandemic and the UKs exit from the European Union appear to have encouraged global mobility, rather than stifled it. It seems that UK business of all sizes have found themselves seeking expertise from outside this ‘green and pleasant land’, particularly against the backdrop of remote working and a reduced need or desire for office space. This article deals with the challenges that UK payroll teams will have to deal with for overseas directors.
Overseas directors
Directors of UK companies occupy a special place in the work force, and the role of officer rather than employee causes additional challenges when it comes to payroll, taxation and national insurance. HMRC take the view that ‘shadow’ directors (directors in all but name only) and non-executive directors (board members that hold no operational responsibility) also fall within these provisions.
Residency
These rules focus on directors that are not UK tax resident. Tax residency is a complicated subject, determined by the Statutory Residence Test, but if an individual has not been UK tax resident for at least the previous three UK tax years and spends less than 46 midnights here per tax year, they will not be UK tax resident. This is often the case where overseas talent is recruited, on the understanding that they will perform most of their duties overseas, and only come to the UK for occasional board or team meetings.
Incidental duties and short-term business visitors
For non-resident employees, there are certain exemptions where visits to the UK are either less than 60 days, or if the visit is for work that is not “of similar importance” to the persons main role; in such scenarios reporting is simpler and possibly not taxable in the UK. However, these relaxations do not apply to directors, and therefore even if a work visit to the UK is for just one day, a PAYE responsibility arises.
What are the rules for tax?
The default position is that if any payment is made to a director, which consists of UK and non-UK duties, then the whole amount is taxable as PAYE. However, the company may apply for a direction from HMRC to tax only a proportion under UK payroll. This direction is commonly referred to as a ‘section 690 election’ and is made on an annual basis, although it is possible for elections to last longer. The proportion is agreed in advance and then applied throughout the tax year. This means that only UK duties are taxed, and non-UK duties are left out of PAYE.
What are the rules for national insurance (NIC)?
A helpful concession exists so that NIC is not chargeable if there are only a few visits to the UK each year for board meetings, and they are of short duration. Where this concession does not apply, if the director is resident in an EU country, or other jurisdiction where there is a reciprocal agreement, it may be possible to obtain relief from NIC in the UK, if a certificate of coverage is produced by the other tax authority. Otherwise NIC is usually chargeable on the full earnings, whether from UK or overseas duties.
Getting it right!
Given that under declarations of PAYE are subject to a tax geared penalty regime that can go back 20 years in the worst cases, it is important that employers identify risk areas. As directors tend to be amongst the highest paid, financial sanction is greater and they could suffer reputational damage as well.
At Hazlewoods we can steer you through this hazardous landscape and make sure you are fully compliant. Get in touch with our expert team for advice.
