Are your immigration costs creating an unexpected tax bill?

As the cost of immigration sponsorship continues to rise, increasing attention is being paid to the employment tax treatment of visa and immigration-related expenses, with potentially significant consequences for businesses that have historically regarded many of these costs as simply a cost of employing international talent.

The position is particularly challenging because immigration law and tax law do not necessarily reach the same conclusion. A cost that an employer is required to bear for immigration purposes could potentially still be viewed by HMRC as providing a taxable benefit to the employee. However, this does not mean that every immigration-related cost is automatically taxable. The technical position depends on the nature of the expenditure, who is legally responsible for it, who actually receives the benefit and whether a specific exemption or deduction is available. HMRC’s position on some categories of expenditure also remains open to challenge.

For employers, the message is clear: it is time to review your approach.

Which immigration costs could be taxable?

Where an employer pays or reimburses an employee’s personal immigration costs, such as visa application fees or the Immigration Health Surcharge, there may be a taxable benefit unless a specific exemption or deduction is available.

However, questions are increasingly arising around a much wider range of expenditure, including:

• Visa application fees
• Immigration Health Surcharge costs
• Dependant visa and Immigration Health Surcharge costs
• Certificate of Sponsorship fees
• The Immigration Skills Charge and
• associated immigration and legal advice

HMRC’s starting position appears to be that the benefits legislation is deliberately broad, referring to a “benefit or facility of any kind”, and that an employment connection may therefore be sufficient to bring certain costs within the benefits regime. This creates a particularly difficult question for costs such as the Certificate of Sponsorship (CoS) and Immigration Skills Charge (ISC). These are fundamentally employer obligations and, from an immigration perspective, the employer is required to bear them. Nevertheless, HMRC has been considering whether such costs could still represent a taxable benefit for the sponsored employee.

Who actually receives the benefit?

This is where the technical position becomes considerably less straightforward.

An employer sponsors an international employee because it needs that individual to work for its business. In many cases, the employer, not simply the employee, derives a clear commercial benefit from obtaining the necessary immigration permissions. There is therefore a legitimate question as to whether costs that the employer is legally required to incur should automatically be regarded as providing a personal benefit to the employee.

The same issue arises with professional fees. Immigration lawyers may advise an employer on its sponsor licence obligations, compliance responsibilities and immigration strategy, while also providing advice directly connected with the employee’s visa application.

Should all of those professional fees automatically be attributed to the employee?

The answer is not necessarily straightforward. Where advice is genuinely provided for the benefit of the employer, there may be arguments that it should not constitute an employee benefit. Even where there is an element of personal benefit, consideration should be given to whether the costs can reasonably be apportioned between employer and employee-related services. At present, there is limited definitive case law or published guidance addressing some of these questions. Employers should therefore be cautious about assuming either that all immigration costs are taxable or, conversely, that historically accepted treatments will necessarily remain unchallenged.

What about spouses and family members?

The position can become even more important where an employer meets immigration costs for an employee’s spouse, partner or children. Dependant visa fees, Immigration Health Surcharges and related professional costs may be more likely to be regarded as providing a personal benefit to the employee and their family than costs directly connected with the employee’s ability to perform their role in the UK. The availability of any exemption or deduction therefore needs to be considered carefully, and employers should not simply assume that family costs will follow the same tax treatment as the employee’s own immigration costs.

This can also have a significant commercial impact. An employer supporting one international hire may be funding immigration costs for a family of three, four or five. If some or all of those costs create taxable benefits and the employer agrees to bear the resulting tax through a gross-up or PAYE Settlement Agreement, the true cost of the international move can be significantly higher than the headline immigration fees.

Employers should therefore budget for the fully loaded cost of sponsorship rather than looking at Home Office and professional fees in isolation.

Could tax relief still be available?

Even where an immigration cost initially falls within the benefits regime, that is not necessarily the end of the analysis. UK tax legislation provides potential relief for certain travel and related expenses where an individual comes to work in the UK. Depending on the employee’s circumstances and the nature and timing of the immigration expenditure, relief may therefore be available. The distinction between the initial move to the UK and subsequent visa extensions can be particularly important. Employers should consequently avoid applying a blanket approach and each category of expenditure should be considered separately to determine:

1. whether a taxable benefit arises in the first place
2. whether an exemption or deduction is available and
3. how any remaining taxable amount should be reported

This can produce a very different outcome depending on the individual employee and the circumstances of their move.

The tax cost can quickly escalate

The commercial implications should not be underestimated.

If an immigration cost is treated as a taxable benefit, the employer will need to determine how it should be reported and who is ultimately expected to bear the tax. Depending on the circumstances, this could involve payroll reporting, benefit reporting or potentially settlement through a PAYE Settlement Agreement.

Employer National Insurance contributions may also arise and where an employer has agreed to protect an internationally mobile employee from additional tax costs, the benefit may need to be grossed up. That can turn an already significant immigration cost into a substantially larger overall expense. For businesses sponsoring multiple employees and potentially their families, the cumulative exposure can become material.

Could there also be a historical exposure?

Employers should also consider whether their historic treatment of immigration costs remains defensible. Where significant costs have previously been treated as non-taxable without a detailed analysis, it may be appropriate to review the position before HMRC raises the question. Equally, businesses should not automatically assume that HMRC’s current interpretation means every historic position was necessarily incorrect. The right approach is to understand what costs have been paid, the basis on which they were treated for tax purposes and the strength of the technical position taken.

This is particularly important where different teams may have been operating independently. Immigration may approve and process the expenditure, Finance may pay it, Global Mobility may manage the employee, and Payroll may never be told that a potentially reportable benefit has arisen.

What should employers do now?

Employers sponsoring international talent should consider undertaking a targeted review of their immigration cost policies and processes.

This should bring together Global Mobility, Immigration, HR, Payroll, Finance and Employment Tax to establish a consistent approach. In particular, businesses should identify:

• Which immigration and associated professional costs are being paid
• Whether the cost relates to the employee, their family or the employer
• Who is legally responsible for paying each cost
• Who receives the underlying benefit
• Whether a specific tax exemption or deduction is available
• Whether the current payroll, benefits or PSA treatment is appropriate
• Whether the employer has agreed to meet any resulting employee tax liability; and
• whether historical treatment should be reviewed

As international recruitment becomes more expensive, understanding these costs at the outset is also increasingly important when modelling the overall cost of hiring or relocating international talent.

Immigration and employment tax need to be joined up

The key issue is that immigration and employment tax can no longer be considered in isolation.

A business may comply fully with its immigration obligations and still create an unexpected employment tax exposure. Equally, HMRC taking a broad view of the benefits legislation does not necessarily mean that every cost associated with sponsoring an international employee should automatically be taxable.

The technical position remains nuanced and, in some areas, uncertain. That makes it particularly important for employers to understand their current position, distinguish genuine employer costs from employee benefits, identify available reliefs and establish a consistent approach before HMRC asks the question.

With immigration costs continuing to increase, the question for employers is no longer simply “How much does sponsorship cost?” It is also, “Have we accounted for the potential tax and National Insurance cost that comes with it?”

If you are unsure whether your immigration costs could create an employment tax exposure, our Global Mobility and Employment Tax specialists can help you review your current approach, identify potential risks and ensure your policies, payroll and reporting processes are aligned. Contact our team to discuss your position.