Simplifying PAYE withholding – section 690 directions
For many years, UK employers have experienced long delays in obtaining directions from HMRC under section 690 ITEPA 2003. These directions are an important part of the payroll compliance process, as they enable an employer to reduce the amount of pay subject to PAYE withholding for a non-UK resident employee who is employed by a UK company, ensuring that the tax withheld broadly corresponds to the amount which should ultimately be due via Self-Assessment, based on a best estimate of their likely UK workdays during the tax year. To reduce administration for HMRC without loss of tax, and address lengthy delays currently experienced by employers and employees, we would support employers being granted the leeway to operate PAYE provisionally, on the basis requested, immediately after applying for a direction from HMRC.
Enhancing HMRC’s guidance for employers and employees
Another key difficulty for cross-border working arrangements is the general availability of guidance to support an employer’s tax compliance process. By way of example, we have encountered uncertainty from employers where a non-UK company has an employee working for that entity from their home in the UK and they need to determine whether there is a PAYE withholding obligation in the UK (either due to the employer having a PAYE presence or another UK entity being subject to the ‘host employer’ rule at s.689 ITEPA 2003). Published guidance in relation to the practical application of the PAYE rules in such cases is limited and so we would endorse a review and expansion of HMRC’s guidance to include examples that address modern remote and distance working arrangements.
Maintaining a focus on simplification via tax treaties and multilateral engagement
Our experience has shown that increasingly, unrelieved double taxation has arisen for individuals who have worked remotely in a different country from the one in which they are contractually employed or assigned. On some occasions this has been due to a differing interpretation of tax treaty articles by Contracting States; on others, outdated treaties which were concluded around 75 years ago, simply do not have the provisions to address double taxation scenarios now arising from distance working arrangements. However, such issues by their nature require multilateral engagement and the cooperation of member states of bodies such as the EU, the OECD and the UN to resolve and simplify in future. Countries may have different drivers depending on whether they are experiencing a drain or influx of remote workers and so some may favour measures which protect their tax base by casting their net more broadly, whilst others may offer tax exemptions or reliefs to incentivise workers to base themselves in their country, regardless of where their contractual employer may be. As such, at a multilateral level, finding common ground may be hard to achieve in the short to mid-term. Nevertheless, we would encourage the UK authorities to maintain an active involvement in international initiatives which are focussed on enhancing the interpretation and application of double taxation agreements to support hybrid and distance working arrangements.
Hybrid and distance working arrangements have attracted great interest from employers in recent times and we are grateful to the OTS for its work in shining a light on the tax and social security challenges which this presents. We look forward to reading the OTS’s recommendations in the coming weeks.
