Employers assess tax risk as Middle East based staff return to work in the UK

As you may have noticed, the current instability in the Middle East is prompting some employees to return to the UK, in some cases at very short notice. For employers, the immediate focus is often on whether that return triggers UK tax residence. But even where it does not, there may still be UK tax and payroll implications simply because the employee is now working from the UK. As we’ll hear, that’s a point which can easily be overlooked, particularly where the return is expected to be temporary.

For HR teams, the key issue is that UK tax exposure is not driven by residence alone. In many cases, it is the physical location where the work is carried out that determines the position. That means an employee who remains non-UK resident may still create UK income tax obligations, and for UK employers, PAYE obligations will often arise simply because duties are being performed in the UK. The position can differ where the employer is overseas, and in some cases, exemptions may be available, but these are not automatic and often require action to be taken.

So the key question for employers is whether there can still be UK tax and payroll obligations even where an employee has not become UK resident, and if so, what drives that analysis in practice. Earlier I caught up with tax lawyer Chris Thomas and I put that question to him:

Chris Thomas: “So I think the really critical thing is to understand exactly where your employee is, tracking the location that they’re actually in, and making sure you’ve got clear lines of communication and in some ways this is a little bit like the situation we had during Covid where you’ve got employees who have relocated due to difficulties or personal reasons to a different country but, quite often, it turned out that only came to light sometime later. It’s really important for the employer’s perspective to have a clear line of visibility as to actually where those employees are, and be very clear that it’s your expectation that the employee needs to inform you of that because only then really that you can make that assessment as to, for example, when UK residence might be triggered or, indeed, it goes beyond UK residence because there can still be – and this is an important point – there can still be PAYE obligations even though an employee hasn’t resumed UK residence yet, really, by virtue of the fact that they’re working here and the difficulty there is that although if you were bringing someone in from overseas who, say, was employed by another group company, or was just seconded to you for a short period, you’d normally be able to rely on what we call short term business visitor arrangements where, effectively, usually you can avoid applying PAYE within certain sort of limits, but here, if you’ve got a UK employer, which will be the case often, the mere fact they’re working in the UK at all is going to trigger some level of PAYE obligation and there are then applications that need to be made to HMRC to determine exactly how much that needs to be to have PAYE applied to it. So really, you do need to know, and think about from the from day one, do we need to do anything here? Do we need to inform HMRC and you can only do that if you’ve got a clear understanding of where the employee is at any given time”

Joe Glavina: “How does that position differ depending on whether the employer is a UK entity or an overseas company?”

Chris Thomas: “The answer to that is, it depends. You certainly can’t assume there are no tax consequences because in some circumstances there will be. So as I think we said in the previous programme, where you’ve got a UK employer it is very likely that tax consequences will trigger from the mere fact that the employee is performing their duties now from the UK. If the employer is an overseas company it’s a bit different. So if we’re talking about multinational companies where the employer is for example based out in the Middle East, perhaps, but they’ve got an employee who has now relocated back to the UK, the basic principle from the personal taxation angle is the same in that because the employee is working in the UK there would, on the face of it, potentially be a tax liability but there are a couple of caveats to that. The first of those is that you might, as a foreign employer, be able to rely on the short-term business visitor exemption which would need to be applied for to HMRC, but if we’re talking about quite short trips and they don’t stay there very long, and then they go back again, you’d probably be able to exempt it. The other point is that, as a foreign employer, you may or may not actually have a presence in the UK for tax purposes and if you don’t, and assuming that the employee being in the UK doesn’t trigger one for you then you shouldn’t have a PAYE obligation, and there are certain steps the employee might then need to take to deal directly with HMRC to report any UK tax. So there are still some complications there but you, as employer, may not have an obligation yourself.”

Joe Glavina: “And is the key point here, Chris, that it’s where the work is physically carried out that drives the tax position, and what does that mean in practice for employers?”

Chris Thomas: “It certainly can do, yes. The general principle is really that it’s physical location that’s the key – it’s where the individual is actually performing the work. So let’s say I’m resident in UAE, for example, but I’ve now come back to the UK, even if it’s only a month or two working here, perhaps, the basic principle is that that does create a UK income tax obligation and if my employer has got a presence here they would be obliged to apply PAYE unless they can get an exemption, which, as I say, a UK employer generally wouldn’t and a foreign employer might be able to. Then for NIC purposes, it’s a different regime but because the UK doesn’t have a reciprocal agreement with any of the Middle Eastern countries, I believe, you kind of fall back on fundamental principles as to when is a NICs liability triggered and there’s some slightly complicated rules there. The general principle would be that it is determined by where you’re physically doing the work, which would be the UK, but in some circumstances there’s effectively – they call it the 52 week rule – so the first 52 weeks of being in the UK might potentially not attract NICs but again it rather depends on what the residence status of that individual is, and it is a little bit complicated and rather depends on the facts. So it would need looking at, really, on an individual kind of basis to see exactly what exposure there might be.”

Joe Glavina: “So what should employers be doing now to manage those risks in practice, Chris?”

Chris Thomas: “Well, first and foremost, as I’ve already said, is able to track where your people actually are, so that you know what your starting point is. Secondly, I think it’s probably to get some advice on the kind of scenarios that you are anticipating. So you may have one, or possibly more employees who are in that situation and just get some advice on what the parameters are in more depth than we can do in this programme, obviously, for what you should be doing at which stage. So what do you need to be doing on day one? Well, depending on your circumstances, you might actually need to be reporting something to HMRC straight away, and other circumstances might mean you don’t. Then understanding what the thresholds are, I suppose, because obviously none of us know how this is going to pan out. The employee probably isn’t going to know any more than anybody else how long they might be in the UK for assuming that they’ve not come back for good. So it’s keeping it under review as well, I think, and understanding what the trigger points could be say, for example, when they might become a UK resident.”

So for HR, the key takeaway is that UK tax and payroll obligations can arise even where an employee has not become UK resident, simply because they are working from the UK. That makes early visibility critical, particularly where employees return at short notice and the position may evolve over time. If you would like help reviewing your current arrangements or assessing whether PAYE obligations may already have been triggered, please do contact Chris - his details are there on the screen for you.