EPAPP/5 - Net of Foreign Tax Credit Relief

NET OF FOREIGN TAX CREDIT RELIEF

Relaxation on payments of PAYE

This arrangement only applies where an employer is 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 Employers Further Guide to PAYE and NICs (CWG2) advises employers to contact their Inland Revenue Office if they have to deduct foreign tax, as well as UK PAYE, from the earnings of employees sent to work abroad. Where they do so the Revenue considers the position, as set out in EP8198, and may authorise the employer to operate the arrangement set out in this appendix.

Where an 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 EP8204).

In many overseas contract situations, where an employee is abroad for less than 6 months no overseas tax is ultimately found to be due - usually because such individuals have personal protection under the terms of many Double Taxation Agreements.

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.

As a consequence, or because 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 then the employer is faced with 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 under his or her UK code using UK tax tables. Other PAYE requirements and all of those relating to National Insurance 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 an employees gross pay.

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


Employers responsibilities under this arrangement

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


  • request the name and NINO of each employee included in the arrangement
  • ask the employer to provide regular update of changes in the employees included, the frequency of these updates mustbe 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 due in the same pay period before the employer pays the PAYE to the Accounts Office. However credit can be given retrospectively in the same 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 entered at column 7 of the Deductions Working Sheet. This money should be paid to the Accounts Office in the normal way with all the NICs contributions 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 employees 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 must submit


  • a form P45 completed as if the code has been operated on the Week 1 or Month 1 basis, showing the net UK tax deducted
  • a report of the overseas tax deducted for which credit has been given against UK PAYE due.

At the end of the PAYE year

The action an employer operating this arrangement takes at the end of the PAYE year will depend on the method used to submit their Employers Annual Return.

Employers submitting their return on paper must


  • complete forms P35 and P14 to show net UK PAYE deducted for the year
  • make an additional entry in red ink on the bottom of the employees P14 to record the amount of foreign tax deducted and remitted to the overseas authority which was set off against UK PAYE deductions
  • provide evidence of payment of the foreign tax.

Employers submitting their return electronically must


  • show the net UK tax deducted for the year on forms P35 and P14 and at the same time
  • send to their Inland Revenue office a statement showing
  • the name and NINO of each employee included in the arrangement, and
  • the amount of foreign tax deducted and remitted to the overseas authority which was set off against that employees UK PAYE deductions due
  • provide evidence of payment of foreign tax

Action to be taken in offices

Arrangement agreed

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
  • file the papers relating to the arrangement in the employers file.

Notification of employees included in the arrangement

The employer must send details of their 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 taxpayers liability is reviewed at the end of the year.

In all cases on each taxpayer record


  • set POTA for that year, and
  • make an ENOTE to record the reason why POTA has been set.

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


  • make the following ENOTE 'Total tax to date (enter date of leaving or redeployment) is net of Foreign Tax Credit Relief'
  • update the current years record coding 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 that tax year. If you receive a request for a cumulative code or an in year repayment you should contact the Technical Advice and Guidance Team, Business Services, Employer Unit, Shipley for advice.


End of Year

Employers Section Action

Action at the end of the tax year will depend on the method used to submit the Employer's Annual Return.

Where the employer submits a paper return you must deal with the 'paper' forms P35/P14 in the normal way.

Where the employer submits a return online and sends details of the Foreign Tax Credit given with the evidence of foreign tax paid for each employee included in the arrangement


  • photocopy the details provided by the employer
  • file away the copies in the employers file
  • send the originals to the appropriate PAYE section.

PAYE Section Action

On receipt of either a P14 or details provided by the employer, for each taxpayer


  • make an ENOTE to record the foreign tax credit given by that employer in that year
  • review the taxpayer liability allowing the foreign tax credit.

Foreign Tax Refunded

It can happen that overseas authorities 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 taxpayers liability for that tax year must be reviewed to remove the foreign tax credit relief given.

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