International Mobile Executives (IMEs) and the NIC Treatment of their Earnings

The Issue

The UK Revenue has published updated guidance explaining its view of how National Insurance Contributions (NIC – The UK version of Social Security) should be calculated for cash earnings (e.g. bonuses and certain types of employee share compensation), paid to internationally mobile executives (IMEs) who have worked partly in the UK during the ‘earnings period’ of such payments.
What has changed

The new guidance from HMRC clarifies that they believe the employee and employer NIC liability arises based on the ‘earnings period’ of the relevant payment, though the actual payment liability is only crystalised and payable when the earnings are physically paid to individual. In effect, HMRC are now holding that:

• NIC should be assessed based on the IMEs liability to UK NICs during the earnings period; and
• Therefore employees, for example, who have left the UK may be liable to NIC on ‘trailing income’, regardless of the jurisdiction which they are physically working in at the time of payment, even when they have ‘fallen out’ of the regular UK NIC net when the payment is made.

This change in HMRC may mean that employers need to (i) amend their payroll reporting processes (e.g. to capture additional foreign-paid earnings for IMEs who have left the UK), and (ii) could in some scenarios create ‘double liabilities’ for IMEs and the company. That is, more individuals may be liable to both UK and overseas social charges on the ‘same income’, if for example the other country charges their equivalent of NICs on a cash (paid) basis.

The background to this issue

For many years, HMRC (and the accounting profession) have traditionally treated NICs as being charged on a cash paid basis, though individual Revenue Inspectors did agree different treatments on a case-by-case basis.

The default, cash basis position of HMRC meant that in simple terms, if the employee was liable to NIC at the time of payment, NICs (employee & employer) were due on 100% of the payment. On the other hand, if they were ‘outside the NIC net’ at the time of payment, the compensation was totally exempt from NICs. Whilst there have been some exceptions to this standard position (e.g. with regard to ‘securities options’ – e.g. share options or similar stock-based awards for companies listed on a stock market), those exceptions were generally the result of specific legislative changes by HMRC.

However, HMRC is now suggesting that this historical, cash basis approach is incorrect legally, though they have not provided any legal justification supporting this change of position. Whilst HMRC are claiming that this new guidance provides ‘clarity and consistency’ re how NICs should be calculated, it creates several potential challenges for employers.

What do employers need to do?

The changing guidance from HMRC on this issue does create a number of ‘questions’ for employers, which they will need to consider, as they look to assess what they should be doing next in this area.

Key points for employers include:

1. Assessing whether they wish to follow the HMRC guidance on a going forward basis (as mentioned above, it is not clear that the new guidance from HMRC on this area is legally valid).
2. When assessing whether to follow the HMRC guidance, it is important to realise that the official HMRC position could actually be in ‘conflict’ with UK Employment Rights Legislation, which – in very simple terms – states that an employer is only entitled to take tax and NIC withholdings from an employee where this is legally required (and it is not clear that this threshold is necessarily met in this situation).
3. Where employers do wish to follow the HMRC guidance in this regard, it is important to assess what ‘process steps’ are required internally, to ensure that the payroll correctly captures the information that would be required per HMRC’s recent guidance. It is also important to consider related issues such as the possibility of double liabilities and the impact this could have from an employer budgetary perspective.
4. HMRC is suggesting that the new guidance is also valid on a ‘retrospective’ basis and are suggesting, for example, that were employers used the ‘cash basis’ for assessing NICs historically, they would (typically) be required to amend their payroll declarations for these earlier years. Such amended declarations could be required for a period of six years.

Some additional practical challenges and problems

Whilst the initial guidance from HMRC on this topic provides some ‘case studies’, there are various scenarios that they have not addressed by the Revenue in their guidance so far. For example, it is not clear how NICs should be calculated for ‘spot bonuses’ (i.e. bonuses which do not have a distinct ‘earnings period’) or ‘termination awards’.

In addition, HMRC suggest that not just bonuses and similar, ‘long-term’ earnings are liable to the apportionment basis for calculating NICs but that monthly salaries should also be captured for NIC reporting purposes, where someone is liable to NIC for part of a month (e.g. the IME was in the UK NIC net until say the 15th of the month and then was paid at the end of the month). However, it is not clear that most payroll systems have the flexibility to handle such arrangements, and this process will therefore probably require a lot of ‘manual adjustment’ on the part of an employer’s payroll team.

Finally, there can also be significant complexities for employers when it comes to the tracking of IMEs and their ‘NIC earnings period’, as this NIC period may not always be the same as someone’s earnings period for income tax purposes. For example, one may continue to have an NIC liability but no tax liability in the following situation:

A UK legal employee gets seconded overseas (to a country with whom the UK does not have a Social Security Totalization Agreement) for three years;

As they have retained their UK legal employment, they would (usually) continue to be liable to NICs for the first 52 weeks overseas; and

Therefore, if they had a bonus paid whilst overseas and fully relating to non-UK duties, but which partly covered this initial 52-week period of their secondment, you would have:

• No liability to UK income tax on that bonus payment; but
• A liability to NIC on (a pro-rated) element of the award.

In summary

The new HMRC guidance in this area represents a significant shift in their position and may create significant uncertainties and additional costs for many employers. Whilst one hopes that the Revenue will provide additional guidance (and clear legal justification) for their new position, it is important that employers pro-actively review what they are doing in this area and understand the impact of the changes on their processes and overall risk and cost position.

In addition, given the potential conflict between the HMRC guidance on this area and the employee’s rights under the UK Employment Rights Act, employers need to ensure that this matter isn’t just assessed from a payroll and finance ‘process perspective’, but that wider compliance position of the company is also considered.

Would you like to know more?

HMRC’s new guidance on National Insurance for internationally mobile executives marks a major shift that could expose employers to unexpected liabilities, double charges, and even retrospective payroll adjustments. The rules are complex, their legal basis uncertain, and they may conflict with UK employment law, creating both compliance and employee-relations risks.

Speaking to our specialist advisers now will help you assess the impact on your business, review payroll processes, and ensure you remain compliant while protecting against unnecessary cost or challenge.

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Robert Salter using the form below.