Company "Hypothetical " Tax whilst Working Abroad

[AndyBHastings]

My Company has a policy of insisting on levying a Hypothetical tax on me whilst working abroad even though I am eligable for tax free status and in fact am NT coded. Basically they deduct an amount from my salary each month reflecting the amount of tax I would have paid if I had been working in the UK, thus in effect forcing me to pay a tax. If I am non NT coded and pay full UK tax, on my return they insist on submitting a tax return on my behalf and the rebate goes to them and not me. Is this legal, can they do this ? As you can imagine over the last 10 years this has developed into a tidy sum.

Any help much appreciated

[kirstie.williamson@a]

You work under a tax equalisation policy which is very common with large multinational employers.

The reason for such policies is so that when sending expats abroad they do not get all their staff wanting to go to the low tax locations ( such as Saudi) and no-one wanting to go to high tax locations (such as Sweden). Tax should be incidental to your choice of overseas location - not a deciding factor.

So when you go to Saudi you pay the same tax as if you were in the UK and if you went to Sweden ( where i think the top rate of tax is 60%) then you would still only pay UK tax rates. I think that you would be very glad of the policy in that case !

The company pay all the local taxes for you. If the taxes are higher then than in the UK then they pay the difference and use your hypo as a contribution. If the taxes are lower, as in your case, then they keep your hypo as a contributin towards the cost of your assignment. No doubt you have "expat style" accommodation and various other allowances depending on your seniority which you would not get if you were in the UK. It is not unusual for example for expats to have all their children privately educated at the local British or American school at the expense of the company.

You also have all your tax filings paid for by the company if required by the local jurisidiction.

You must have agreed to the policy when you took the assignment and it is therefore binding. The hypo tax is an internal company deduction.

Presumably you were recruited because of your skills and you accepted the overseas assignment because it would enhance those skills and progress your career - not just because you thought you would get a tax break. That is precisiely the reason for an equalisation policy and this should have been explained to you by the company's HR department or their tax advisors.

Expats are generally the most expensive components of a company's workforce. This is how many of them choose to fund that cost.

By the way - hypo is only levied on benefits you would have received in the UK - eg salary, bonus, car etc. Any benefits relating directly to the assignment such as accommodation, school fees, relocation, disturbance allowance, cost of living allowance, medical benefit etc are not included in the hypo calc so you should still be better off.

KW

[AndyBHastings]

Kirstie, thanks for taking the time to reply. Now I see why, still sounds a little like extortion as is the Customers asking me to work abroad, I would have thought my Company were covered under the cost of the contracts etc. I will have to dig out all my files to check that I have not been equalised on my allowances. Best regards.

[kirstie.williamson@a]

Jiggles

I would also advise you to ask for a copy of the company's equalisation policy. This should be a written document ( often running to several pages) which explains how the policy is applied and should have been given to you when you first went on assignment.

You should also check that it has been updated to take recent tax changes into account - for example if you were to be entitled to tax credits in the UK then this should be factored into your hypo tax calculation. This is not as crazy as it sounds since you can earn up to £60k pa and possibly still be entitled to something.

Finally I would ask your employer what their policy is on loclistion ( if they have one). Many policies impose a time limit on the period to which equalisation applies - often 5 years. After this time you either have to repatriate to the UK, reassign to another location or become "localised".

This sounds good in practice since it means, in your case, that you would not pay any tax at all. However, you would lose the protection afforded by your UK employment contract ( which may not be desirable depending on local employment laws), lose your expat benefits and allowances and move on to a local salary ( often far lower than the enhanced expat remuneration packages).

Glad to have helped.

KW

[luckyboy]

my company is wanting to introduce "Hypotax", at the moment we pay 9% into a tax fund. ( they intoduced this about 4 years ago but gave us a 9% rise to pay for it)
in my contract they state that they will pay all income taxes etc in the country to which I am delegated, although in principle i am responsible for them.
they propose that we pay this hypo tax as if we were working in the UK. ( although I never do) they also propose to refund the variance to us if they send us to where the tax is lower then the UK but not to charge us any more if the tax is higher than UK.

they also offer us the option of paying our own taxes in the countries we are assigned to.

they have also indicated that there will be NO "Hypotax allowances" i.e reduction for pension and AVC contributions etc.
I accepted the salary offered to me 8 years ago knowing that they would be paying the tax overseas, is it legal for them to reduce my net salary by this method?

[Tony Joyce]

Hi all,
I'm new to Hypo tax and have a question. I have been asked to apply hypo tax on a benefit being paid to an employee in Denmark, I don't think I should but I cannot find documentation to prove that it should not be taxed. can you help please? Thanks, Tony

[etf]

As a starting point, you will need to obtain a copy of the employer's tax equalisation policy which hopefully will offer some guidance on how hypo tax is to be calculated.

KR

etf

www.theexpatriatetaxfactory.com