EPAPP6 - Modified PAYE in Tax Equalisation Cases

Application for Modified PAYE for Tax Equalised Expatriate Employees from 6 April 20__

Tax equalisation generally describes an arrangement between an employer (see Note 1) and a foreign national employee who comes to the United Kingdom (UK) to work. Under the terms of an agreement, the employee (see Note 2) is entitled to specified net cash earnings and non-cash benefits. The employer undertakes to meet the UK Income Tax liability arising from the earnings and to ensure that the employee’s UK tax affairs will be handled by a professional adviser or by an in-house specialist experienced in tax equalisation issues.

For an employee to be included in an arrangement established under this application, the employer must equalise liability to UK Income Tax on all general earnings subject to the rules in part 2 Chapter 5 ITEPA applying to employees resident, ordinarily resident or domiciled outside the UK.

An application indicates that the employer wishes to operate PAYE on a gross-up of cash earnings and non-cash benefits for all employees eligible to be included in this arrangement and has undertaken with the employees to pay any residual UK liability on earnings based on each employee’s self assessment. Employers should ensure that employees complete their self- assessment returns in accordance with the guidance in Help Sheet IR212.

Note 1: For the purposes of this application, “employer” includes a “relevant person” for whom an employee works in terms of section 689 Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

Note 2: For the purposes of this application, “employee” includes an “office holder”.

Employer Name: ……………………………………………………….

Employer Address: ………………………………………………………..

Employer PAYE Reference: ……………………………………………………..

Calculation of estimated PAYE on tax equalised earnings

1. We will prepare a best estimate of all earnings including cash allowances and non-cash benefits for the year at the beginning of each year, grossed-up for tax purposes and calculate PAYE tax without restriction for the 50% “overriding limit”. The best estimate will include, where relevant, the annual salary, any cash bonus awards made to 5th April and non-cash benefits provided by a home country employer.
2. We will undertake an in-year review during the period December to April to take account of any material changes, and in particular, to ensure that

3. Where we do not equalise liability in respect of awards under 2(b) above –

4. We will update the estimated PAYE calculation during the year to reflect arrivals and departures of employees subject to this application.
5. We will exclude from the estimated PAYE tax calculation contributions we make (employer contributions) to a qualifying overseas pension scheme in respect of an employee who is a relevant migrant member of that scheme. Subject to the conditions specified in paragraph 51 of Schedule 36 to the Finance Act 2004, we will exclude employer contributions to an overseas pension scheme in relation to which the employee received corresponding relief in 2005-06. We will also exclude employer contributions to overseas schemes where the employee is entitled to relief from UK tax under the terms of a Double Taxation Agreement.
6. We will take into account employee contributions to the overseas pension schemes referred to in paragraph 5 where we know the amounts involved and are satisfied that each employee is entitled to relief for contributions as a relevant migrant member or with pre-commencement entitlement to corresponding relief or under the terms of a Double Taxation Agreement.
7. We will give provisional relief for overseas workdays (apportionment of earnings between UK and non-UK duties for the purposes of sections 25 and 26 ITEPA 2003), based on each employee’s workday history or as anticipated by the employees where they join during the tax year. Any tax gross-up will be applied after the earnings have been apportioned between UK and non-UK duties.
8. We will give personal allowances by applying the emergency code on a cumulative basis when calculating PAYE tax. We will enter that code on each employee’s P11 Deductions Working Sheet or equivalent record.
9. We will take relief for foreign tax into account in respect of UK residents working abroad where an agreement has been reached with HM Revenue and Customs (HMRC) in accordance with the Employment Procedures manual Appendix 5. We note in particular the requirement that an overseas country imposes a withholding at source obligation on earnings that are subject to PAYE.
10. We will not apply PAYE to the earnings of a tax-equalised employee covered under separate arrangements in Appendix 4 of the Employment Procedures manual. Where it later appears that such earnings are not exempt from UK tax under the terms of the relevant Double Taxation Agreement, we will include the employee in this arrangement and notify HMRC accordingly.

Payment of estimated PAYE

11. We undertake to pay 1/12th of the estimated PAYE for the tax year each month by the 19th or 22nd of the following month (depending upon the payment method). Where the number of employees covered by this arrangement at any one time is five or fewer, we undertake to pay 3/12ths of the estimated PAYE tax on or before the 19th or 22nd (depending upon the payment method) of July, October, January and April (“the quarterly basis”). If the number of employees covered by this arrangement increases to more than 5 at any one time in the course of a year and is likely to remain at that higher level, we will make payments of estimated PAYE by the 19th or 22nd of each month from the start of the following tax year. If the number of employees covered by this arrangement at any one time reduces to five or fewer in the course of a year and is likely to remain at that lower level, we will make payments of estimated PAYE on the quarterly basis from the start of the following tax year.

Arrivals and departures

12. We will use our best endeavours to submit Form P86 to the relevant Expatriate Team within 30 days of each employee’s arrival in the UK. Each Form P86 will be noted in the space for additional information that the employee is tax equalised and Modified PAYE applies. We will use our best endeavours to submit Form P85 to the relevant Expatriate Team on each employee’s final departure from the UK.

Employer Annual Return

13. We will submit a completed Employer Annual Return (Form P35 and Forms P14) in accordance with the P11 Deductions Working Sheets or equivalent record and send it in time to reach HMRC by 19th May following the end of the tax year. Forms P60 will be given to the employees by 31st May after the end of each tax year. The figure of pay for each employee will comprise all cash payments and non-cash benefits in respect of which PAYE tax has been calculated before grossing-up. The figure of tax will be the total amount of PAYE tax paid under this arrangement in respect of the employee concerned.
14. We accept that due to the inherent nature of these modified arrangements, over- and underpayments of tax may arise compared with the amount of tax that would otherwise have been due if normal PAYE procedures had been applied. Provided that the procedures as outlined in these arrangements are followed, interest will not be charged in accordance with the PAYE regulations in respect of any residual income tax liabilities as shown by the employees' tax returns. However, it is accepted that interest will run on any part of the estimated PAYE for a tax year due to have been paid under this agreement which (depending upon the payment method) reaches HMRC after 19th or 22nd April, as appropriate, following the end of the tax year.
15. We shall submit in respect of each employee covered by these arrangements a form P11D, or an approved substitute, and associated form P11D(b) by 31st January following the end of the tax year. Where a dispensation has already been agreed for certain expense items for “local hire” employees, the relevant P11D / substitute will be prepared on the same basis provided the nature of the expense items are the same as those covered by the existing dispensation.

Submission of employee’s self assessment tax return and calculation of tax liability

16. We will have systems and procedures in place to ensure that each employee’s self assessment will include actual cash remuneration, all benefits and reimbursed expenses payments not covered by a dispensation and other amounts chargeable to tax as employment income, grossed up on a current year basis. Each employee’s tax return will include a note in the notes section of the relevant Employment Page to the effect that the employee is tax equalised and Modified PAYE has been applied.

Payment of residual Income Tax liability

17. We will pay any additional tax found to be due under these arrangements following the submission of the employee’s tax return by 31st January following the end of the tax year. Alternatively, if a refund is due, the appropriate repayment claim mandated to us or (if different) to the employee’s contractual employer will be submitted.

18. We understand that for employees who are not ordinarily resident in the UK, any overpayments of PAYE will not be treated as a remittance of foreign earnings where repayment is mandated to an employer in the UK.

National Insurance Contributions

19. These arrangements do not apply to National Insurance Contributions (NICs). In cases where the employee is liable for Class 1 NICs and taxable benefits are provided that attract Class 1A NICs, NICs must be accounted for in the normal way unless separate arrangements are agreed with HMRC as set out in Appendix 7A of the HMRC Employment Procedures manual.

Statement

20. 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 income tax on employment income have arisen in respect of employees’ self assessment returns and in the opinion of HMRC that tax ought to have been accounted for in the calculation of estimated PAYE provided for under these arrangements
• where an employer fails to pay tax on time and / or to ensure that returns and P11Ds are filed on time such that a liability arises to pay interest and / or penalties.

We accept that as a result of a decision to cancel these arrangements, HMRC may require the strict operation of PAYE. Similarly, we reserve the right to cancel these arrangements and adopt the strict operation of PAYE. Cancellation by either party will be confirmed by written notice and will be effective from the following 6 April or an earlier date, as agreed by the parties. If a date cannot be agreed, cancellation will be effective on the earlier of the previously stated 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: ……………………………………………..