Personal PAYE

A client who is a UK taxpayer is employed in this country as the representative of an overseas business. The client works on his own initiative from an office in his own home, but how is his income tax liability collected?
My client is a UK citizen who works as the UK representative of a firm that is based abroad. It appears that he has a contract of employment and is paid a salary with additional commission based on results. His offshore employer provides instructions, leads and advice, but he also works on his own initiative.
He works from an office in his own home. My question is how his UK income tax liability is collected. The employment has only just started and it seems that the employer has proposed to pay him gross and that he will settle the tax and other liabilities.
However, should the gross income simply be declared on his annual self-assessment tax return or should he set up a PAYE scheme and pay under this?
Furthermore, what is the Class 1 National Insurance situation? Do both the client and the employer have a liability?
Finally, there is a proposal that an employee from abroad will be seconded to the UK to work alongside my client if business takes off as expected. They will probably then work from a serviced office, and I anticipate being asked to deal with that person’s UK liabilities as well. Will the same position apply to the offshore employee?
I hope readers can advise.
Query 18,222 – Lonely
Reply from David Kirk
The employer is outside the PAYE net if it has no “tax presence” in the UK, which means not being resident and not trading through an agency or permanent establishment. HMRC’s views on this matter can be found in the PAYE Manual at PAYE81610, and follow the reasoning given in Clark v Oceanic Contractors Inc (1982) 56 TC 183.
If the employer has no tax presence, the employee should register to pay tax through self- assessment. This should be done within the normal time limits on form SA1.
The criteria for deciding whether the employer is required to pay Class 1 National Insurance are, to all intents and purposes, the same; and the client should then register to pay primary (employee’s) contributions only by writing to HMRC NICEO International Caseworker Team, Benton Park View, Newcastle upon Tyne NE98 1ZZ, giving their full circumstances.
Care needs to be taken that the employee’s presence in the UK does not, of itself, constitute an agency, and thereby give the employer a tax presence. This will depend very much on what the employee does and what his powers are.
For this, there needs to be a trading presence and for the agent to “[have] and habitually exercise [in the UK] authority to do business on behalf of the company”.
There is no real guidance as to what “doing business” means but, for a trading presence, see FL Smidth & Co v Greenwood (1921) 8 TC 193, which is commented on by HMRC in the International Manual at INTM263050. Lord Atkin asked: “I think that the question is, where do the operations take place from which the profits in substance arise?”
The employer could sign up to operate PAYE voluntarily under a modified scheme for expatriate employers. I do not recommend this for three reasons:
 HMRC are likely to insist that the employee files a tax return anyway, so there is an extra layer of bureaucracy;  if there are adjustments, the process of recording them and reclaiming overpayments is a great deal easier under self-assessment than under PAYE; and  HMRC say that they will exercise common sense and flexibility under the RTI (real time information) reporting requirements where expatriate payrolls are concerned, but it remains to be seen how this will work out in practice. It is altogether easier not to have to try.
Hopefully the above information will enable Lonely to navigate his way through this.
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On July 17, 2013, posted in: Articles by