HMRC has, in a recent Tax Bulletin (Number 81), announced that the rules relating to Modified Payrolls are to change from April 2007.
Under a longstanding arrangement set up by HMRC, employers can agree to modify the operation of PAYE on the earnings of so-called “tax equalised” employees coming from abroad to work in the UK.
Under a Modified PAYE arrangement, employers can prepare a best estimate of cash earnings and non-cash benefits at the beginning of each tax year. This estimate is grossed up because under the terms of the tax equalisation policy, the employer is obliged to meet the employee’s UK tax liability on cash earnings and non-cash benefits. Grossing up reflects the principle that the payment by an employer of an employee’s personal tax liability represents additional earnings from the employment.
The best estimate will include, where relevant, the annual salary, any cash bonus awards made to 5 April and non-cash benefits provided by a home country employer. The best estimate should also take into account provisional relief for overseas workdays based on each employee’s workday history or as anticipated by employees who join during the tax year.
In general, employer contributions to overseas pension schemes and expenses paid to employees covered by a dispensation should also be excluded from the best estimate.
Employers are required to update their estimated PAYE calculation during the tax year to reflect arrivals and departures of employees subject to the arrangement. Between December and the end of the tax year, employers must carry out a review of the best estimate to take account of any material changes, and in particular, to ensure that calendar or tax year end bonuses are accounted for.
Employers who already operate Modified PAYE for tax equalised employees will need to re-apply under the revised procedures before 6 April 2007. Where an application has not been made under the revised procedures before 6 April 2007, any previously agreed arrangement will be regarded as terminated with effect from the start of 2007-08.
This page was last updated on Friday, January 04, 2008.
