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Mobile workers: employment tax considerations

This guide was last updated in May 2016.

This guide considers the UK income tax implications for employers when overseas employees come to work in the UK or UK employees go to work abroad. It also considers the social security implications for employees moving within the EU.

INBOUND EMPLOYEES – INCOME TAX

This section of the guide focuses on UK income tax liabilities for 'inbound' employees coming to the UK from overseas. It should be read in conjunction with the final section of this guide which considers the social security implications of UK assignments.

Residence status – why it matters

The first and most important question when an employee based outside the UK comes to the UK is whether that person will become UK resident for tax purposes. An employee's UK residence status is crucial because, broadly speaking, an individual who is UK resident will be liable for UK income tax on all his or her worldwide income whereas a non-resident will only be liable on earnings in respect of duties performed in the UK. In practice, this liability for non-residents can sometimes be avoided entirely on a short assignment.

An unexpected liability for UK tax could therefore prove very expensive for employers. As the highest rate of UK income tax is 45%, this can especially be the case if there is an 'equalisation' policy in place where the employee is effectively guaranteed net benefits equivalent to those in his home country. Even if the UK employer does not bear the costs of remunerating an inbound employee, whether directly or indirectly, it will invariably be responsible for ensuring that the correct tax is deducted and paid over to HM Revenue and Customs (HMRC). Funding allocated to the secondment may not cover unexpected excess tax liabilities.

Residence

A statutory test of tax residence was introduced with effect from 6 April 2013. The statutory residence test (SRT) is in three parts; the automatic overseas tests, the automatic UK tests and the sufficient ties test.  The basic rule is that an individual is resident in the UK for a tax year and at all times in that tax year (although the effect of this rule is relaxed under split year treatment), if he or she does not meet any of the automatic overseas tests and he or she either:

  • meets one of the automatic UK tests; or
  • meets the sufficient ties test.

If the individual is in the UK for 183 days during the tax year he or she will be automatically UK resident and all the other tests are irrelevant. Any day on which an individual is in the UK at midnight is counted as a day in the UK, except in certain cases when they are merely in transit in the UK.

The automatic overseas test – inbound employees

If the individual is not present in the UK for 183 days during the tax year, the automatic overseas tests need to be considered. The tests that are relevant to an individual coming to (as opposed to leaving) the UK are that

  • the individual was not resident in the UK in all of the previous three tax years and is present in the UK for fewer than 46 days in the current tax year;
  • the individual was resident in one or more of the previous three tax years and is present in the UK for fewer than 16 days in the current tax year;

If either of these conditions are satisfied, the individual will automatically be non-UK resident.

The automatic UK tests – inbound employees

If the individual is not in the UK for 183 days during the tax year and none of the automatic overseas tests are satisfied then if an individual meets any of the other automatic UK tests they will automatically be UK resident.  The conditions are:

  • the individual has a home in the UK for more than 90 days at which he is present on at least 30 days in the tax year, and for at least one period of 91 consecutive days he has either no home overseas or if he does he is present at each of his overseas homes on fewer than 30 days in the relevant tax year; or
  • he works full-time in the UK for at least 12 months (with no significant breaks) – note that full time has a specific meaning for these purposes, but broadly speaking means an average of 35 hours per week.

As mentioned above any day on which an individual is in the UK at midnight is counted as a day in the UK, except in certain cases when they are merely in transit in the UK.

The sufficient ties test – inbound employees

If it is not possible to determine whether an individual is resident by either of the sets of Automatic Tests, then it is necessary to consider the ties that an individual has to the UK.  The fewer ties an individual has with the UK, the more days he can spend here without becoming UK tax resident. 

There are four different scenarios which count as ties for this purpose.  These are:

  • Family – spouse/civil partner (unless separated) or minor children are UK resident;
  • Work – the individual undertakes work for more than three hours per day on 40 days or more in a  tax year;
  • Accommodation – a place to live is available for a continuous period of 91 days or more in a tax year and at least one night is spent there in that year, or at least 16 nights in the tax year are spent at the home of a close relative;
  • 90 day – the individual spent 90 days or more in the UK in either of the two previous tax years

The number of ties is compared with the number of days an individual spends in the UK to determine whether he is tax resident in the UK in any tax year as follows:

Days spent in the UK

Impact of ties on UK residence status

Fewer than 46 Days

Always non-resident

46 – 90 days

Resident if all 4 ties apply

91 - 120 days

Resident if 3 ties apply

121 – 182 days

Resident if 2 ties apply

183 days or more

Always resident

Exceptional circumstances

When considering whether an individual is UK resident or not when his total days in the UK in a tax year are less than 183, it is possible to disregard up to 60 days spent in the UK due to "exceptional circumstances" beyond the individual's control. Examples of exceptional circumstances include falling ill while in the UK and being unable to travel for a period, or the death of a spouse or civil partner whilst in the UK. Exceptional circumstances cannot reduce the number of days counted if the individual is present in the UK for 183 days or more.

Double tax treaties – inbound employees

Where the employee is treated as UK-resident by the SRT but is present in the UK for less than 183 days, it will sometimes be possible for any UK tax liability to be eliminated by the terms of the double tax treaty between the UK and the country where the employee originated.

However, this will not usually be possible where the UK business employs the person on assignment – so it is worth considering whether this should be avoided, bearing in mind the position in the other jurisdiction. Complex issues can also arise where the UK business could be said to be the 'economic employer', and especially where it effectively bears the cost of the remuneration package. It is always worth taking advice on structuring before putting any arrangements in place.

OUTBOUND EMPLOYEES – INCOME TAX

This section of the guide considers the issues in relation to 'outbound' employees going to work abroad from the UK. This should be read in conjunction with the final section of this guide, which covers the social security issues of international assignments.

The importance of 'breaking' UK residence

The first and most important question when an outbound employee leaves the UK is whether his UK residence has been 'broken'. An employee's UK residence status is crucial, because normally an individual who is UK resident will be liable to UK income tax on all his worldwide income whereas a non-resident will only be liable on earnings in respect of duties performed in the UK. Where an employee is leaving the UK the employer may believe that UK income tax liabilities have ceased on departure, only to later discover that this is not the case - potentially an expensive mistake.

Statutory residence test – outbound employees

As for inbound employees, the basic rule is that an individual is resident in the UK for a tax year, if he or she does not meet any of the automatic overseas tests and he or she either:

  • meets one of the automatic UK tests; or
  • meets the sufficient ties test.

If the individual is in the UK for 183 days during the tax year he or she will be automatically UK resident and all the other tests are irrelevant.

Any day on which an individual is in the UK at midnight is counted as a day in the UK, except in certain cases when they are merely in transit in the UK.

The automatic overseas test – outbound employees

If the individual is not present in the UK for 183 days during the tax year, the automatic overseas tests need to be considered. The tests that are relevant to an individual leaving (as opposed to coming to) the UK are that:

  • the individual works full-time overseas (with no significant breaks) and is present in the UK in the tax year for fewer than 91 days of which fewer than 31 are spent working for 3 hours or more; or
  • the individual was resident in 1 or more of the previous 3 tax years and is present in the UK for fewer than 16 days in the current tax year.

If either of these conditions are satisfied, the individual will automatically be non-UK resident.

UK home

If the individual is not in the UK for 183 days during the tax year and none of the automatic overseas tests are satisfied then the individual could be automatically UK resident if he or she has a home in the UK.  For this to be the case the individual must have a home in the UK for more than 90 days at which he or she is present on at least 30 days in the tax year and for at least one period of 91 consecutive days he or she must have either no home overseas or if he or she does, they are present at each of the overseas homes on fewer than 30 days in the relevant tax year.

The sufficient ties test – outbound employees

If it is not possible to determine whether an individual leaving the UK is resident by any of the above tests, then it is necessary to consider the ties that an individual has to the UK.  The fewer ties an individual has with the UK, the more days he can spend here without becoming UK tax resident. 

For those leaving the UK, there are 5 different scenarios which count as ties for this purpose.  These are:

  • Family – spouse/civil partner (unless separated) or minor children are UK resident;
  • Work – the individual undertakes work for more than three hours per day on 40 days or more in a  tax year;
  • Accommodation – a place to live is available for a continuous period of 91 days or more in a tax year and at least one night is spent there in that year, or at least 16 nights in the tax year are spent at the home of a close relative;
  • 90 day – the individual spent 90 days or more in the UK in either of the two previous tax years; and
  • Country – the individual spent more days in the UK than any other single country.

The number of ties is compared with the number of days an individual spends in the UK to determine whether he is tax resident in the UK in any tax year as follows:

Days spent in the UK

Impact of ties on UK residence status

Fewer than 16 days

Always non-resident

16 – 45 days

Resident if at least 4 ties apply

46 – 90 days

Resident if 3 ties apply

91 -120 days

Resident if 2 ties apply

121 – 182 days

Resident if 1 tie applies

183 days or more

Always resident

Exceptional circumstances

When considering whether an individual is UK resident or not when his total days in the UK in a tax year are less than 183, it is possible to disregard up to 60 days spent in the UK due to "exceptional circumstances" beyond the individual's control. Examples of exceptional circumstances include falling ill while in the UK and being unable to travel for a period, or the death of a spouse or civil partner whilst in the UK. Exceptional circumstances cannot reduce the number of days counted if the individual is present in the UK for 183 days or more.

SOCIAL SECURITY RULES FOR ASSIGNMENTS WITHIN THE EU

The rules governing liability to social security contributions for employees who are assigned in other countries are different to those which apply for income tax. It is entirely possible for an employee to be liable for UK national insurance contributions (NICs) when he has no UK tax liability, or vice versa.

For assignments within the EU, the NICs position is determined by a set of standard rules which override the domestic regimes of member states. It is important that businesses understand the impact of the rules as the costs of applying the wrong system can be significant – especially as social security costs in some member states are a great deal higher than others, which may cause difficulties with funding the shortfall. For example, employer's liability in the UK is currently 13.8% while it is almost 32% in Sweden.

The rules provide that:

  • employees on assignments of under two years will normally remain insured under their home system;
  • where the employment is such that the employee lives and works in one country but also works regularly in other countries, the rules allow continued insurance in the home country - but only if the employee carries out 'substantial' duties there. In practice, HMRC considers that if the employee spends less than 25% of his working time in the home country or earns less than 25% of his remuneration there, then he will probably not meet the 'substantial' test - so therefore he will be liable in the other state even if he does not live there. This test is primarily forward-looking, to the next 12 months, although HMRC states it may also look back.

Note that the above rules only apply to assignments to and from EU countries and certain other jurisdictions such as Switzerland, Iceland, Liechtenstein and Norway. In other cases it is necessary to consider the terms of any specific agreement with the country in question or, where there is none, to apply the UK's own domestic rules.

SHARE OPTIONS

New rules for the UK taxation of share options held by internationally mobile employees came into force in April 2015. Under the old regime, whether or not share options were subject to UK tax would depend upon whether the individual was UK resident at the time the option was granted. The new rules bring the UK system into line with those of many other countries and will apply UK tax to a proportion of the income earned as a result of the option. The proportion on which UK tax is paid will depend upon the amount of time from the grant to the exercise of the option that the individual is UK resident.