New Foreign Service tax relief rules for mobile employees

7 Feb, 2018

Professionals dealing with globally mobile employees need to understand scheduled changes to Foreign Service tax relief rules.

Mobility and Reward/HR professionals dealing with globally mobile employees should make sure they are aware of a significant scheduled change to how termination payments will be taxed in the UK from 6 April 2018. This will impact how assignees returning to the UK, and those in the UK, will be taxed. From April UK income tax could be due at 45% on payments that are currently exempt.

So what’s changing?

These changes have been a long time coming and HMRC gave good notice back in August 2016 that they were to be introduced. However, there still remains some uncertainty of the practical ramifications for employers and employees who will be in the UK or were working overseas.

Currently, employees who have been working overseas are able to use Foreign Service Relief rules to exempt, in whole or part, termination payments from UK income tax. This relief applies where the employee in question has spent part or all of their service/employment overseas. An inbound expat who has recently arrived in the UK, or an outbound expat who has returned recently, after years of service overseas would currently qualify for exemptions.

Under these changes, if the employee is a UK tax resident in the tax year and their employment is terminated, then Foreign Service relief will not apply.

What are the complications?

Residency:

  • Establishing whether an employee is tax resident for UK tax purposes is not always straightforward, so this adds a dimension of complexity. In fact, the tax residency status may not be clear at the point the termination of employment or payment occurs.

Foreign taxes:

  • Another country may also tax the same payment and/or subject it to payroll withholding. Employers may be faced with dual payroll withholding and reporting obligations. They will need to understand how to operate PAYE with an uncertain tax residency position and potential double taxation. The employee will need to understand what taxes are going to be collected at source, how different jurisdictions’ tax systems interact and what this means for cash flow and the eventual final liability.

Top tips for Mobility/Reward/HR professionals

  • Communication: Make sure those involved in discussions around terminations, and employees themselves, are aware of this proposed change. The current rules have been around for a very long time and there may well be an understanding or expectation that the current treatment continues.
  • Analysis: The date the employment is terminated, and the tax residency position of the employee, is absolutely key in terms of determining which tax treatment applies. These areas should be reviewed in detail.
  • Policy: There are likely to be additional taxes due on terminations where there is or has been a history of mobility. Consider, as employers, how your tax reimbursement or tax equalisation approach or policies deal with termination payments. Now may be a good time to clarify your approach.
  • Payroll: Payroll processing could be more complicated and uncertain. Consult early on any impacted cases so the practicalities can be understood and worked through to avoid a last minute rush.
  • If there is any doubt about where your organisation stands on these forthcoming changes, please consider seeking external specialist advice.
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