When an overseas business wants people working for it in the UK, one option is to set up a UK company to run the payroll. The UK company pays the staff, the staff work for the overseas business, and the two companies settle up between themselves.
It sounds simple, but this kind of set-up touches several areas of tax in the UK, and possibly abroad too.
Does this affect you?
It may do if your UK company pays people who really work for a related business based outside the UK. If your UK company simply employs staff to work in its own business, there’s nothing to worry about here.
Start with the employment contracts
The first thing to check is which company is named as the employer in the staff contracts. It isn’t always the company running the payroll or paying the wages, and the answer shapes how almost everything else is treated.
Where things can go wrong
- Not charging enough, or at all. UK rules expect related companies to charge each other what two unconnected businesses would agree. If the UK company charges nothing, HMRC can tax it on income it should have received. Simply passing on the costs may not be enough. Smaller groups may be exempt from these pricing rules, but not if the overseas business is based in a country without a suitable tax treaty with the UK.
- Letting the balance build up. If the money owed between the companies isn’t settled regularly, HMRC may treat it as a loan and tax the UK company on interest it never received.
- Losses stuck in the UK. Without a charge, the UK company has costs but no income. The losses this creates can’t be passed to the overseas parent for UK tax purposes.
- VAT. How the charge is treated for VAT depends on the details. There is also a risk that the overseas business is treated as having a taxable presence in the UK, which could bring UK VAT into play.
- Tax on profits. The overseas business could be treated as having a permanent base in the UK for tax on profits (known as a permanent establishment), for example if someone here regularly agrees contracts on its behalf. If so, the UK could tax some of its profits.
- Tax relief overseas. If the overseas business is never charged, it has no staff costs to claim against its own tax. Even when it is charged, local rules decide whether it gets relief.
- National Insurance. Depending on who the employer is, the UK company may have to pay employer National Insurance. Any social security agreement between the UK and the other country also matters.
Put it in writing
A written agreement between the two companies, setting out what is provided, how the charge is worked out and when it is paid, lowers the risk across the board.
What to do next
Every arrangement is different, so if this sounds like your set-up, speak to us before it carries on as it is.
For more detail, read our TaxDash guide: UK Company paying staff for an overseas business
This article is for general information only and does not constitute tax, financial or legal advice. You should seek professional advice before acting on its contents. EOACC accepts no liability for any loss arising from reliance on this information, to the fullest extent permitted by law.