Growing scrutiny from UK tax authorities
Do you travel to the United Kingdom to visit a UK subsidiary, parent company or another affiliate of the group? If so, has the UK entity entered into a Short Term Visitor Agreement (STBV) with the HM Revenue & Customs (HMRC)? If not, as of April 6, 2014 the UK entity will need to withhold PAYE (Pay As You Earn) based on your compensation.
Short Term Business Visitors — The Issues
For some time now, UK organisations with business visitors (i.e. employees of an overseas subsidiary, parent or other group company who come to work in the office of a UK organisation for up to 183 days) have been under scrutiny from HMRC and, from information just received, our affiliate in London believes that this scrutiny is only going to increase.
UK PAYE regulations apply to the earnings of an employee working for the benefit of a UK company for as little as one day. It is a common misconception that PAYE rules can be ignored if an individual works in the UK for only a short period of time. Do not make this mistake. The PAYE rules are not aligned with income tax rules and they apply in the following cases:
— The employee is non-resident in the UK,
— The employee continues to be paid by the overseas entity,
— Tax is deducted from the employee's wages in the home location,
— The employee's earnings are ultimately exempt from UK tax under the provisions of a relevant double taxation Treaty.
If you fail to operate PAYE and do not track business visitors, HM Revenue and Customs (HMRC) will estimate the PAYE tax owing by your company. You will be required to make good the tax that should have been withheld. You may not be able to collect all the tax back from the employees in question due to a variety of practical and legal reasons. Penalties and interest will also be assessed by HMRC. This will be of greater importance when in year PAYE penalties apply.
In many cases, short term business visitors (STBVs) will not ultimately have a liability to UK tax. As a starting point you do need to be able to track such visitors. How many do you have, where do they come, from, how frequently and are there recharges in relation to their salary and costs?
Historically, HMRC allowed UK organisations to assess for themselves whether or not a business visitor should be subject to PAYE without formally signing up for HMRC's Short Term Business Visitor (STBV) Agreement. However, from 6 April 2013, this option is no longer available. HMRC's view is that where no STBV agreement is in place, PAYE must be operated in all cases; even those where ultimately no UK tax will be due.
If you do send business visitors to the UK but do not as yet have an STBV agreement in place then the choice is to either:
— Make an application now, or
— Ensure that PAYE is operated for all short term business visitors from 6 April 2013
HMRC have stated that they are currently willing to accept applications for an STBV agreement to operate on a retrospective basis from 6 April 2013 but only if the application is not made at the last minute and the agreement can be put in place prior to 5 April 2014. By signing up for the agreement, you will be required to submit the first return providing details of short term business visitors to the UK by 31 May 2014.
Time is running out for making an STBV agreement which runs retrospectively from 6 April 2013. Without an STBV agreement in place, from 6 April 2013 you can no longer assess whether PAYE should or should not apply. PAYE must be operated for all business visitors. When signing up for the STBV agreement companies also need to consider how they are going to collate the information required for the annual returns. By signing up to the agreement, they need to be prepared for HMRC asking them questions on how they have monitored business visitors in prior years. They may not ask any questions but it is advisable to be prepared.
Companies not in compliance need to immediately;
— Review and assess their systems and processes for tracking business visitors.
— Assess whether they have exposure to PAYE penalties for prior years.
— Equip them with the knowledge to manage the STBV process going forward.
— Prepare and submit an application to HMRC for an STBV agreement.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances. James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: firstname.lastname@example.org