Tax equalisation

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax equalisation
  • Introduction
  • In practice
  • The employee’s earnings
  • Record-keeping
  • Amounts payable to HMRC
  • Social security (NIC) liabilities
  • Equalisation and double tax deductions
  • Tax protection
  • Tax equalisation problems in practice

Introduction

Tax equalisation is widely used by multi-national companies or group moving employees from one country to another. It is not a statutory concept but is an arrangement between an employer and employee.

The idea behind tax equalisation is that an employee accepting an assignment somewhere other than in his home country should neither be better off nor worse off from a tax perspective as the result of the move. The individual will continue to be subject to an equivalent level of tax as if he had remained in his home country. The system can apply to those leaving the UK and to those coming to the UK.

A similar system can cover social security contributions, though this is relatively rare as many expatriates remain in their home country social security regimes and are exempt in the host state, in which case there is no need to equalise the net earnings arising from applying the two countries’ contribution rates. Further, a higher level of contributions will generally generate a higher entitlement to state benefits such as a pension in retirement and the employer may be less inclined to protect an employee against higher costs if higher benefits are received in consequence.

The main advantage of tax equalisation as a tool in facilitating international assignments is that the risk of higher rates of tax and, sometimes, social security contributions in the country of assignment is carried by the employer rather than the employee. This removes an important potential source of financial anxiety that an employee might face in deciding whether to take up an offer to work overseas.

HMRC is aware of the popularity of tax equalisation arrangements and offers specific guidance (see HS212 ) for employers and advisers preparing self-assessment returns for tax-equalised employees as well as modified PAYE arrangements for tax-equalised employees (see the section on ‘Amounts payable to HMRC’

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