Modified payrolls for inbound employees

By Tolley in association with Paul Tew
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The following Employment Tax guidance note by Tolley in association with Paul Tew provides comprehensive and up to date tax information covering:

  • Modified payrolls for inbound employees
  • What is a modified PAYE scheme?
  • Operating a modified payroll
  • Modified payrolls and Real Time Information (RTI) reporting duties
  • Modified payrolls and employer year-end duties
  • Using a modified NIC scheme

A seconded employee for PAYE purposes includes all individuals included by an employer within an expatriate modified PAYE scheme.

What is a modified PAYE scheme?

A modified PAYE scheme is suitable for expatriate non-domiciled employees sent by an overseas employer to work in the UK who are covered by a tax equalisation scheme ― see the Tax equalisation guidance note. Tax equalisation generally describes an arrangement where an employer agrees to pay a foreign national employee working in the UK a specified net amount of cash earnings and non-cash benefits. With tax equalisation, the employer undertakes to meet on the employee’s behalf any additional UK tax payable above the tax that the employee would have paid in the individual’s home country, which arises on the total secondment income.

The use of a modified PAYE scheme avoids having to use the normal PAYE tax codes and self assessment tax payment procedures, ie making a payment on account, which may prove impracticable in calculating tax liabilities for tax equalised expatriate employees. Most modified UK payrolls are shadow payrolls used to account for UK tax and NICs only, and not used to deliver actual net earnings to the seconded employee, which are paid by the overseas employer’s payroll. Any non-sterling payments should be converted to sterling using the current exchange rate at the time of each payment.

A modified PAYE scheme can be used to calculate PAYE for an individual previously incorrectly treated as a short-term business visitor under Employment Procedures (EP) Appendix 4 arrangements ― see the Short-term employments in the UK guidance note.

Operating a modified payroll

A modified PAYE scheme is operated separately from the employer’s main PAYE scheme, with a unique PAYE reference number allocated. An employer must obtain formal approval from HMRC before starting to use a modified PAYE scheme for any of its

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