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Overseas employers seconding staff to the UK should be aware of significant tax breaks that can reduce employment costs and employee taxes, says Sarah Brock, Corporate Tax Manager at Ward Williams.

General Tax Relief for Travelling and Subsistence Expenses

Employees seconded to the UK for up to 24 months, and who keep their employment contract and permanent workplace in the home country, can enjoy tax-free living expenses at their UK temporary workplace.  This is a generous relief that can cover rent, utilities and council tax, and also the cost of food and meals, local travel and household goods.  The relief can either be in the form of a tax-free benefit if the employer bears the costs, or if the employee bears the costs the relief can be claimed as a deduction from taxable earnings through the employee’s UK personal tax return.  A typical arrangement would be where the employer provides the accommodation, leaving the employee to bear other living costs.  Such arrangements could involve a salary sacrifice whereby employer and employee share the tax benefits.  Also there is an exemption from social security charges (NICs) for both employer and employee on expenses qualifying for the tax relief.

The secondment arrangements will require coordination between employer, employee and the professional advisers to ensure that the employment documentation is correctly drawn up and that the information reported to HM Revenue & Customs (HMRC) by both employer and employee are synchronised.  Other matters requiring careful attention can be whether or not the employee remains in the home-country social security system, and whether the employee may remain tax-resident in the home country.  It also has to be remembered that secondments to the UK will normally require the employee to be included in a UK payroll scheme (PAYE) whereby tax and (where applicable) NIC are deducted and paid over to HMRC.  Typically the PAYE scheme is operated by a UK group company acting as “host employer”.

Overseas Workday Relief

There is a separate tax relief available to employees who are resident but not ordinarily resident in the UK, who can benefit from an exemption from UK tax on earnings for duties performed outside the UK.  Typically this will apply to individuals who come to the UK for employment where they intend to leave the UK within 3 years.  This so-called “Overseas Workday Relief” applies to the proportion of earnings relating to duties performed outside the UK to the extent such earnings are paid outside the UK and not brought into or used in the UK.  (Note that the concept of “ordinary residence” is proposed to be abolished from April 2013 with the introduction of new UK statutory tax residence rules, but the new rules are intended to retain this tax exemption, with some changes.)  Overseas workday relief can be available whether or not the employer is UK-resident.  The relief is claimed on the employee’s personal tax return, but the employer can apply to HMRC for provisional relief to be given through PAYE.

Treaty Relief

There is also an exemption from UK tax that can be available to employees working in the UK who are not UK-resident and work for an employer who is not UK-resident.  In such cases a UK tax exemption can apply under the provisions of a double tax treaty if certain conditions are satisfied.

In conclusion, the UK tax rules can offer overseas employers and their employees coming to the UK significant tax and cost savings.  Proper planning and preparation is important to ensure smooth operation of the tax reliefs, and careful consideration is usually required of the effects of the tax residence rules in each country and of relevant double tax treaty provisions.