Short-Term Assignments to the U.K.

by Andrew Wholey, KPMG LLP, United Kingdom
(a KPMG International member firm)

As a consequence of the ever-increasing integration of global businesses, improved technologies, and improved transport infrastructures, there has been a growing number of short-term project-based international assignments. In some ways, short-term assignments can be harder to manage than the more traditional, longer-term international assignments.

Short-term assignments generate a host of legal issues - including income tax, social security, and immigration law - which need to be considered carefully.

Often, individuals on short-term assignments will remain tax resident in their home countries and at the same time, "crystallize" liabilities - of which they may or may not be aware - in the host countries that they visit while on one or several short-term project-based assignments. This is so even though they may not become resident in the host jurisdiction(s).

Governmental agencies are increasingly interested in the taxing opportunities presented by individuals on short-term assignments, both because of and in spite of a growing network of double taxation and social security reciprocal agreements. The application of a double taxation agreement is not always as simple as one might expect; the same treaty partners can interpret key words differently. At worst, this can result in real double taxation. There may be a lack of clarity about the way in which key terms should be interpreted. An organization can find itself dealing with complex details and ambiguities, many open to subjective interpretation.

This article summarizes the various issues associated with short-term assignments to the United Kingdom. While the spotlight is on the U.K., many of the principles identified are of global relevance, although detailed legal requirements will vary across different jurisdictions.

Finally, this article offers some suggestions on how to effectively and proactively manage short-term assignments.

U.K. Income Tax and Related Withholding Obligations - Domestic Law and Practice

An individual who is not resident in the United Kingdom and who visits the U.K. to undertake the duties of his or her employment, is liable to pay U.K. income tax on earnings attributable to those U.K. duties. Even though an individual may be an employee of a non-U.K. employer and be paid in a foreign currency by means of an overseas payroll maintained by the foreign employer, if he or she works for a person in the United Kingdom, then that person (or the employer) has an obligation to account for U.K. withholding/Pay As You Earn (PAYE) in respect of earnings and benefits provided, attributable to duties performed in the United Kingdom.

This strict legal position is modified by Her Majesty's Revenue and Customs ("HMRC", formerly Inland Revenue) practice. HMRC's publication IR20, Residents and non-residents; Liability to tax in the United Kingdom, recognizes the concept of incidental duties that may be performed in the United Kingdom (when compared to the nature of duties performed outside the country). Where such incidental duties are performed in the United Kingdom, they are treated as though they had been performed outside the country and do not give rise to earnings assessable to U.K. income tax.

The question of whether or not duties are incidental is dependant upon all specific facts and circumstances relevant to a particular case. Such duties need to be ancillary or subordinate when compared to duties performed outside the United Kingdom; if work performed in the country has no importance in itself, but simply enables an individual to undertake his or her normal duties outside the United Kingdom (such as, reporting to or receiving fresh instruction from U.K. management, or training) then related duties may be regarded as being incidental.

Under any circumstances, if more than 91 days in a tax year are spent working in the United Kingdom, then related activity could not be regarded as being incidental to duties of the non-U.K. employment.

Application of Double Taxation Agreements (Which Override U.K. Domestic Law)

The U.K. is a member country of the Organisation for Economic Cooperation and Development (OECD) and the terms of most double taxation agreements are based on the OECD Model Convention. In interpreting double taxation agreements, HMRC seeks to be consistent with guidance provided in the form of commentary on the Model Convention.

Article 15 of the Model Convention can provide relief against double taxation of employment income where duties of an employment are performed in two contracting states. This is achieved by exempting earnings from taxation in one of the two contracting states (upon application). The presumption is that if an individual who is a resident of State A, performs duties of his or her employment in State B, then State B has a taxing right over earnings attributable to duties performed in State B.

The Model Convention then sets out three conditions which, if met, enable an individual who is resident in State A, to claim exemption from taxation in State B in respect of earnings attributable to duties performed in State B. The conditions that have to be met to claim treaty exemption under article 15 are:

• The individual can only be present in State B for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned
• The remuneration must be paid by, or on behalf of, an employer who is not a resident of State B, and
• The remuneration must not be borne by a permanent establishment (branch) which the employer has in State B.

The wording of specific treaties may vary (particularly in the context of the first bullet point above).

In interpreting the United Kingdom's extensive network of double taxation agreements, HMRC adopts an interpretation of the OECD extended definition of the term "employer"; which means that a treaty exemption that may otherwise appear to be available, is not. This view was confirmed and communicated in the June 1995 IR Tax Bulletin 17.

Broadly, a U.K. entity will be regarded as being the economic employer if remuneration (including benefits) is recharged to and borne by the U.K. entity (the term "recharge" is construed widely). A recharge of costs is in itself, not necessarily conclusive in determining whether or not the U.K. entity is the economic employer. Other factors can be taken into account, including:

• Which entity bears the responsibility or risk for the work undertaken by the employee?
• Which entity has the authority to instruct the employee?
• Other factors which influence the degree to which an individual is operating as an integrated part of the business.

While the issue of recharges is often the easiest to address (and perhaps, therefore, HMRC's favored line of enquiry), consideration of the other above-mentioned factors may lead to the conclusion that an overseas entity remains as the economic employer, notwithstanding that there is a recharge of associated costs into the U.K. entity.

By being proactive in the design of a short-term assignment policy, and by being clear about roles, responsibilities, and reporting lines, one may be in a position to more easily establish that the economic employer is still the overseas employer. This, in turn, could facilitate claims to treaty exemption in countries visited while on short-term assignment.

Also, there may be grounds for challenging the legality of the HMRC's interpretation of the term "employer," but to date it appears that no such case has been brought.

If HMRC's view is accepted (and they are confident that it is the correct view), it poses many practical problems associated with the capture of information necessary to determine whether or not treaty exemption is available. Also, the interpretation of factors, other than a recharge of costs, is inevitably subjective.

HMRC's 60-day Rule

HMRC announced details of their 60-day rule in "Tax Bulletin 25" issued in October 1996, and further guidance was made available in "Tax Bulletin 68" issued in December 2003.

Broadly, HMRC does not consider that a short-term business visitor is sufficiently integrated into the business of a U.K. company for it to be regarded as the economic employer where:

• The employee is in the United Kingdom for less than 60 days in a tax year, and
• The period does not form part of a more substantial period when the individual is present in the United Kingdom.

The selection of 60 days (as opposed to 50 days or 70 days) appears to have been arbitrary, but this development provided employers with a significant and welcome measure of relief from what could otherwise be almost insurmountable problems in complying with U.K. law.

HMRC's Short-term Business Visitor's Agreement

A procedure exists that enables otherwise strict withholding or PAYE requirements to be relaxed in the context of short-term business visitors to the United Kingdom.

Such an agreement is only available upon application and is subject to the agreement of the employer's tax office (PAYE district). The arrangements can be applicable where, broadly, it can be shown that treaty exemption will be available in the United Kingdom. To do this, an employer must be able to demonstrate that either the costs of remuneration will not be borne by the U.K. entity to be visited by the short-term assignee, or that the entity will not otherwise become the economic employer. Critically, an agreement will also be appropriate where such visits are anticipated to be for less than 60 days in the U.K. tax year. In effect, an employer is agreeing with HMRC that treaty exemption from U.K. income tax will be available in advance of an employee undertaking a short-term assignment to the United Kingdom.

To secure HMRC's agreement to such arrangements, an employer needs to demonstrate the existence and operation of an internal accounting system that gathers sufficient information to enable the employer to comply with the terms of the agreement. There are associated record-keeping requirements, the amount of detail required varying according to the degree of presence in the United Kingdom (there are four critical thresholds: between one day to 30 days, 31 days to 60 days, 61 days to 90 days, and 91 days to 183 days).

The employer also needs to give certain undertakings; that is, where a U.K. liability is subsequently found to arise, the employer must give an undertaking to pay all the U.K. tax on behalf of the employee (grossed-up), unless arrangements are made to recover U.K. tax from the employee.

Where the conditions for treaty exemption are not met, an individual should have PAYE withholding operated on earnings and benefits provided, attributable to U.K. duties, for the duration of the short-term assignment. In the absence of such an agreement, PAYE should be operated on all earnings attributable to duties performed in the U.K., from the outset.

As a practical measure in the U.K., such withholding obligations are perhaps easier to address by operating within an HMRC-approved-and-modified PAYE scheme, specifically established for dealing with short-term assignments to the United Kingdom.

Practical Difficulties

Before approaching HMRC to secure appropriate agreements, a U.K. entity that benefits from work undertaken in the U.K. by an employee of an overseas entity needs to consider the following:

• Does the individual work for a person in the United Kingdom in a manner that crystallizes a PAYE obligation in the country?
• Are duties performed in the United Kingdom incidental to duties performed outside the country?
• Where will the costs of remuneration and benefits provided be borne, and how?
• Which entity will bear the risk associated with the work undertaken in the United Kingdom?
• To whom does the individual report while working in the United Kingdom?
• To what degree is his or her activity an integrated part of the U.K. business?

An accounting system needs to be designed, implemented, and maintained, to enable the employer to demonstrate to HMRC that it can comply with the terms of a "short-term business visitors agreement."

Real Double Taxation?

KPMG LLP in the U.K. understands that with at least one major trading partner of the United Kingdom - and a double taxation agreement has been entered into with this country - the two countries' tax authorities appear to have adopted different interpretations of the term "employer."

On the one hand, the United Kingdom insists that a liability to U.K. income tax has crystallized as it considers the U.K. entity to have become the "economic employer", and has denied claims to treaty exemption. On the other, the trading partner does not necessarily recognize any tax so payable as being properly payable on the basis that they do not accept the U.K.'s application of the extended definition of "economic employer" (and accordingly, may deny any associated claim to double tax relief in the home country).

While the matter has been referred to the competent authorities for resolution, this is a slow process. The time limit for making retrospective claims for double tax relief in the overseas jurisdiction is rather shorter than the period under review in the United Kingdom (years of assessment may be time barred).

Other Perspectives

The adoption of the concept of "economic employer" in interpreting treaty articles relating to employment income is now commonplace (certainly within Western Europe). Having said this, the degree of clarity and timing associated with implementation varies, and this can pose many issues for the unwary.

Conclusion: A Way Forward

With respect to short-term assignments in the United Kingdom, related legislation and HMRC practice are highly evolved. As a matter of routine, related and focused questions are asked as part of an employer PAYE compliance review, and the subject matter can give rise to substantial and costly settlements. In considering how best to proceed, due regard has to be given to the other countries' domestic position in relation to this same issue(s), where the multinational business may operate. In other words, matters need to be considered in a global context.

It is important that a company's international human resources professional (and/or international assignment program manager) secures senior-level buy-in and an adequate budget. Without these, it is difficult to see how an appropriate and effective international assignment policy can be developed and then implemented. The successful international assignment program - one that manages long-term as well as short-term assignments - needs to be supported by adequate resources, appropriate technology tools and processes including a human-resources (HR) accounting system that is capable of capturing the detailed information necessary to comply with a variety of legal requirements, and clear, developed policies. The assignment policy (whether long-term or short-term) cannot be developed in isolation; at the very least, it needs to be constructed carefully so as not to prejudice existing transfer pricing agreements that may be in place.

A possible starting point is a review of the domestic expense reimbursement policy within each jurisdiction that assignees travel to. This needs to dove-tail with the short-term assignment policy from a legal perspective and for the sake of consistency. Detail will be a critical factor in the design of policy. One of the desired outputs is ready access to a "knowledge bank" that assists with the objective and timely identification of the economic employer. (Much of the detail needed will already exist within an organization; the question is how to capture and harness existing knowledge effectively.) For established businesses, this can be an enormous undertaking. By identifying critical flows of short-term assignees (by population, origin, and destination), a company can take a phased approach from the outset. In this way, associated risk can be managed, opportunities to ease the administrative burden can be identified, tax savings can be achieved, and clear, appropriate policy set and administered.

A version of this article was published International Tax Review's "Expatriate Tax Guide" in June 2005; www.internationaltaxreview.com.

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