International Assignment Tax and NI Saving in the UK – Detached Duty Relief and 52 weeks National Insurance Exemption

Detached Duty or Temporary Workplace Relief

If you have international employees who move to the UK on a temporary assignment that this article maybe of interest  Many international companies are unaware that assignments less than 24 months can be construed as business travel hence may bring significant Tax and National Insurance (NI) Saving resulting in less costs to the employer and more cash in hand for the employee through Detached Duty Relief.

The conditions are:

1) Expenses incurred for the performance of the employment duties for no more than 24 months

2) Company Reimburse the Employee

3) Costs that are normally associated with travel. Employee has to submit receipts

To qualify for the relief an individual will also need to have an existing relationship with an employer in their home country, reinforcing the temporary nature of their employment in the UK.

Even if the employee stays more than 24 months the relief is only stopped at the point in time when the expectation changes so if the employee has been on assignment for 23 months and in the 24 month employer would like them to stay longer than the benefits of the relief only stops in the 24 month even though him or her may stay an additional say 12 months

National Insurance

A country which is outside of the EEA, or Switzerland, or with which the UK has an Reciprocal or Double Contribution Convention agreement – they’ll be exempt from paying UK NICs for the first 52 weeks of their employment here provided that the following conditions are met:

• they’re not ordinarily resident in the UK
• they normally work outside the UK for a foreign employer
• they’re sent to work in the UK for a time by that foreign employer
• when in the UK they continue to work for that employer

There will be no Employees or Employers National Insurance.

Lets’ take an example to understand the potential savings for one employee:

Ashwin an IT Consultant employed by Infotec India Private Limited is sent on a project to a clients Site in London for 18 months and is paid by Infotec UK Limited. Ashwin legal employee is Infotec India but the economic employer is Infotec UK

Just by changing the compensation structure Ashwin has saved a Whopping £11K in Tax and Employee NI and the Employer 9K. Total Saving 20K ! Infotech UK could achieve further savings by reducing the Gross pay as the employee Net Pay is already high due to the reduced tax and NI which still will be a win-win situation for the employer and employee. Multiply by say 10 employees – in year one year the Company could save more than 150K (including the possibility of reducing gross pay as employee receiving higher Net Pay)

Ashwin will need to keep receipts to justify the 15K expenses and submit them to his economic employer in the UK. From experience keeping control of 100 employee’s receipts can be an cumbersome.

Common Errors

1) Ashwin given UK employment contract with a fixed Gross Amount which indicates Ashwin is no longer an Indian Employee but a UK Employee hence unable to benefit from the Tax and NI Savings.

2) Incorrectly setting Compensation Structure or omitting expenses altogether as HR unaware.

3) Employers aware employees to be in the UK for more than 2 years either from the outset or during the project

4) Not maintaining proper records of receipts and letting it lapse. Extremely important receipts are kept to justify the expenditure

5) Increase Expenses to a higher level without knowing the employees level of expenditure.

6) Employees claiming Accommodation and Subsistence for whole family when the tax/NI breaks should only applies to the employee not family. This may need to pro-rated accordingly

7) Possibly creating a permanent establishment for the overseas Employer if the overall structure not managed correctly.

Ways of operating Detached Duty Relief

1) Pay on Actual Expenses. This maybe cumbersome. Can use Scale Rate Payments. Company will need an expense policy.

2) Round Sum Allowances. Permission will need to be sought from HMRC

3) Modified PAYE Scheme: Form of Tax Equalisation whereby the employer taxes care of the taxes and national insurance and tells the employee what Net Pay they will receive. Taxes are estimated and then any adjustments are dealt with at the financial year end or in the self assessment tax return.

While the tax saving may be great – Detached Duty relief has the big disadvantage of increased administration and this may well put off some employers from implementing such a scheme.

Short Term Business Visitors

Linked to the temporary workplace relief is Short Term Business Visitors.

For companies that have an increasing number of assignees on short term, they need to have an agreement in place with HMRC to prevent the blanket imposition for PAYE from day one for employees working in the UK less than 60 days providing the criteria under Double Tax Treaty is met.

Summary

Apart from UK, there may be expatriate tax and social security benefits in other countries which will impact margins favorably as well as create ongoing compliance issues. It is important decision makers at the outset carry out the due diligence and understand the income tax/expatriate tax/social security benefits as well as the corporate tax impact on each Group Company. Transfer Pricing will also be a consideration as well as immigration. A business plan should be formulated interlinking each area as they may well overlap. Otherwise, it will have a huge impact on the bottom line and the company risks non compliance which will can have its own consequences especially if the overseas company unknowingly creates a permanent establishment in the host country.