NIC developments for internationally mobile employees

For several years there has been uncertainty over the correct treatment of deferred remuneration (eg, cash bonuses and other income taxed as earnings) paid to internationally or globally mobile employees that relates back to a period of employment wholly or partially spent outside the UK. Internationally or globally mobile employees are those who:

• have left the UK for a period of work;
• come to the UK for a period work;
• regularly work both in and outside the UK; or
• have an employer based overseas.

Clarity was sought via the now disbanded Joint Forum on Expatriate Tax and NIC. HMRC has involved various policy and technical teams to consider the position. For employment related securities the position was clarified by the rules introduced in 2015. HMRC has now updated its National Insurance Manual and published Agent Update 135 with long awaited guidance on NIC for internationally or globally mobile employees

The issue

The question for employers has been: Is NIC liability on deferred remuneration determined by the employee’s NIC liability status at the time the earnings are paid (referred to here as the “all or nothing approach”), or during the earnings period (the “apportionment approach”)?

Under the all or nothing approach, NIC was only charged if the employee was liable to NIC at the point the payment was made, and then it was on the full amount. Under the apportionment approach, NIC was charged on that proportion of the payment that related to the period during which the individual was liable to NIC.

Of course, in some more straightforward cases, especially those where a certificate of coverage is in place, the answer will be the same. However, in other cases the employee may have been liable to social security outside the UK for some of the performance period, or did not return to the UK at all and so is no longer within the scope of the NIC system at the point the payment is made. However, where the other country was a non-agreement country for social security purposes, or multiple countries were involved, the position has historically been unclear.

Common practice

Employers and agents have typically taken a consistent approach in good faith (ie, applying either the all or nothing approach or the apportionment approach in all cases).

HMRC’s guidance to date has been informal, varied and unclear. At one point, HMRC’s practice was not to collect NIC on earnings once an employee was outside the NIC system and not covered by a social security agreement. However, within the EU, it was usually suggested the apportionment approach was more in line with most of the other countries’ approaches. Several HMRC enquiries have been concluded on either basis, sometimes taking into account the position in the other country and whether social security was due and paid there.

Going forward

HMRC’s guidance is now clear that NIC should be applied in line with the earnings period (ie, if the employee was liable to NIC throughout the period the bonus was earned, the bonus is liable to NIC even if they are no longer paying national insurance or living in the UK at the point the bonus is paid). HMRC states that “liability to Class 1 NICs arises on earnings when they are earned and the liability to pay Class 1 NICs arises at the time earnings are paid”.

Conversely, therefore, if the earnings relate to a period when the individual had no national insurance liability, the same will be true and no NIC is due, even when the individual is UK employed and fully liable to NIC at the time of receipt. For example, an employee who has come to the UK from a non-agreement country is exempt from NIC for the first 52 weeks. If the employee receives a bonus once within the NIC system, but the performance period falls within the 52-week exemption period or before, there will be no liability to NIC on the bonus specifically.

Where things might get more complicated is when an individual was liable to NIC for part of the period and then became liable to social security in another jurisdiction. In such cases the earnings need to be apportioned in line with the earnings period. Domestic rules sometimes mean a dual liability can arise and this is mitigated by the provisions of the relevant social security agreement, although sometimes this does require mutual agreement between the competent authorities which can take considerable time.

In summary, HMRC’s stance is now that apportionment is the correct approach (where there is a split liability or NIC begins or ceases during the performance period) and NIC should be applied accordingly. In many ways this is the most logical answer and consistent with many EU and other countries’ approaches. It is also somewhat welcome clarity after several years of uncertainty and varying opinions.

Practical issues

HMRC’s guidance also confirms that the NIC liability should be apportioned in accordance with the exact earnings period for regular earnings too. For example, where an employee arrives or leaves the UK and the 52-week liability or exemption period is in point, then HMRC expects the relevant period to be apportioned accurately to the day the liability begins or ceases. This has not always been common practice as employers have sometimes subjected a full month’s pay to NIC on arrival or departure depending on when the payment date fell and if the employee was liable to NIC at that time. Therefore, this may also constitute a need to change the monthly or regular payroll process for some employers with globally mobile populations.

More concerningly, HMRC is also insisting that employers review their payroll submissions for the previous six years and “correct” any errors where the “all or nothing”, and not the apportionment approach, was applied. This may mean paying underpaid NIC or claiming refunds where NIC is not due based on the new guidance. However, HMRC has previously confirmed that it will not seek to reopen settled cases where the all or nothing approach was agreed.

Guidance is available in Agent Update 135 on how to correct employer returns where an under or overpayment of NIC is now determined. Employers are encouraged to correct their payroll submissions for the last six years via real time information (RTI) using their payroll software. There are also instructions for employees who believe they are due a repayment whose employers have not submitted a refund request themselves.

Future developments

HMRC has acknowledged that the refund process is currently not fit for purpose and has indicated that it is working on a digital solution to improve it.

Further, there is no mention in HMRC’s guidance of any action to take where social security has been paid or is now due in another country, any impact on qualifying years for benefits purposes in either jurisdiction or any other complications that might arise by significantly adjusting the NIC records for past periods.

ICAEW will continue to engage with HMRC to ensure that its processes are as efficient, and its guidance as helpful as possible for employers.