International tax – Have you taken too much credit?

Continuing on with our multipart series looking into Norwegian tax considerations companies need to be aware of when sending their employees abroad, AAB’s team discusses the interaction between foreign taxes and HM Revenue & Customs.

Tax Assessment Notices – Part 2

Now that the six-week deadline to appeal the Norwegian tax assessment notice has expired, employers and employees may feel that their compliance duties can be safely forgotten about, at least until next year. However, here at AAB we know that the tax assessment notice (and similar documents from other jurisdictions) have further implications across the rest of the UK tax year.

Double Tax Agreements

An employer sending an employee to Norway (or other countries) may have a duty to deduct foreign tax in addition to UK PAYE from salaries. This means that an employee may be taxed twice on the same gross pay.

In the first instance, it is important to determine if a Double Tax Agreement (“DTA”) exists between the UK and the country in question, as is the case with Norway. The DTA will specify under which circumstances an employer must deduct foreign tax. Usual triggers are the employee working over a threshold number of days abroad, or if the UK employer has created a permanent establishment (“PE”). Each DTA differs and therefore is it essential that professional advice is sought before posting employees abroad.

Net of Foreign Tax Credit Relief

The DTA between the UK and Norway specifies that UK tax residents are taxable from day 1, therefore to avoid employees being subject to double taxation, HMRC will allow (subject to a successful application) an employer to operate a Net of Foreign Tax Credit Relief Scheme (“NOTC”). This allows an employer to reduce the employees PAYE liability by the amount of tax paid to Norway. However, with it comes additional reporting obligations that must be filed correctly and on time; failure to do so can result in financial penalties.

The usual operation of the NOTC scheme through a company’s payroll, is to first calculate the foreign tax due and then reduce the PAYE by this amount, giving the employee interim credit. As mentioned in the previous blog it is essential that the sum of the interim credits does not exceed the amount in the tax assessment notice. HMRC treat any over claims of credit as a serious matter and can and will apply further penalties and interest on any amounts due.

You must also ensure employees fully understand what tax they have paid on what income and where, so if required, they can ensure that the correct credit is being claimed on their UK tax return. Remember also, in a lot of cases the UK and foreign jurisdiction tax year will not be fully aligned so it is important that the relevant reconciliations have been carried out.

If you are considering posting employees abroad and require assistance, then please contact our specialist Norway team (helen.Wood@aab.uk, Catriona.Ross@aab.uk or Carol.Sim@aab.uk) for more information.