COMPLIANCE
Hybrid working across borders – should the foreign earnings exemption be expanded?
Moniza Syeda BSc (Econ) Hons., ACA, PGCE(PCE) MCIPP, global mobility content manager, Tolley, considers the ways in which current outdated foreign earnings exemption rules could be changed to reflect modern working practices T he adoption of hybrid working within the UK and across international borders means that, in most cases, tax and social security laws no longer align with modern day working practices. There’s been some response in Europe to these new working practices. For (even if no foreign tax is actually paid) l worldwide income is within the band for basic rate income tax l no self-assessment return is submitted. Usually, a self-assessment return is
that take into account worldwide income for tax rates, and the relevant foreign income for exemption. There’s considerable complexity involved in this, as the employer may not be privy to all the information necessary to determine if all worldwide income falls within the basic rate band, on a real time information (RTI) basis. What happens if there’s no UK PAYE employer? The application of the exemption relies upon the tax being withheld at source through PAYE so that there’s no requirement to file a self-assessment return. But what if the remote worker is working in the UK for a foreign employer who has no presence in the UK? Some countries require that a foreign employer sets up an entity in the local jurisdiction if they intend to have an employee working there. France is an example on the continent of one such jurisdiction (see Tolley’s Global Mobility: Employment Taxes (Europe)) . Other places don’t require an entity but require foreign employers to undertake a special registration. Japan, for example, requires that the foreign employer be associated with an ‘establishment registered corporation’ in Japan (see Tolley’s Global Mobility: Employment Taxes (Worldwide excluding Europe) , here: http://ow.ly/ AEAN50MPgOy). In the UK, no such requirements are imposed upon foreign employers. They don’t need to open an entity simply because an employee is working here. Nor are they required to enter any kind of special registration. The long-established principle in Clark (Inspector of Taxes) v Oceanic Contractors Inc means there’s a territorial limitation to PAYE. While a branch, agency or representative office create a ‘tax presence’, the mere presence of an employee doesn’t.
required to claim the remittance basis of taxation to shelter offshore income from UK taxation. There are many rules around what counts as a remittance and how remittances are ordered, which can create complications in what’s otherwise a simple and intuitive idea. (ITA 2007, Sections 809B–809E, can be found here: http:// ow.ly/84Rb50MPgCZ). The foreign earnings exemption goes beyond simply putting someone on the remittance basis, because it allows the individual to remit foreign earned income of up to £10,000 to the UK without a charge to income tax occurring. Please see: http://ow.ly/hgbj50MPgF7. Interaction with payroll An individual who wishes to take advantage of the foreign earnings exemption must not file a self-assessment return. HM Revenue and Customs (HMRC) allocates a ‘no tax return’ pay as you earn (PAYE) reference to the employer for the qualifying low-earner UK-inbound expatriate. No self-assessment return filing notices are then issued to the employee whose records are held under this PAYE reference, provided the employer holds the information required to support the foreign earnings exemption claim. Any existing notices are cancelled on request. If an excessive amount of income tax is deducted under PAYE during the tax year, there’s no mechanism for reclaiming the over-payment. It’s therefore very important that the UK PAYE employer makes careful calculations to ensure the correct tax is withheld under PAYE. The employer must perform calculations
example, Spain has introduced a digital nomad visa, which allows remote workers to live in Spain for up to five years, with favourable Spanish tax rates being applied to their income. (Tolley’s Global Mobility: Employment Taxes (Europe) provides detail, here: http://ow.ly/lt5k50MPguU). The UK could adopt a similar approach, but it will require political will for a new immigration visa. So, instead of issuing a new digital visa, could the UK expand the scope of the existing foreign earnings exemption to better reflect remote working? The foreign earnings exemption Tucked away in a few sections of UK legislation is a little used foreign earnings exemption. It’s arguably not used very often because its conditions are so stringent that it only has very limited application. Perhaps a relaxation of the conditions and a broadening of the scope of this exemption might lend itself to being a useful way of tackling cross border remote working. Please see the Income Tax Act (ITA) 2007, Sections 828A-828D, here: http://ow.ly/pSrr50MPgAZ. The relief is aimed at the non-domiciled individuals working wholly or partly in the UK. It’s a simplification aimed at relatively low earners with offshore income. They can exempt from UK income tax their foreign income provided that: l foreign earned income is less than £10,000 l other foreign unearned income is less than £100 l foreign income is subject to foreign tax
| Professional in Payroll, Pensions and Reward | March 2023 | Issue 88 16
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