Author: Mary Nyhan, principal, Nyhan Tax Advisers Indeed, the National Institute of Economic and Social Research stated this month that the UK economy is finally bigger than it was before the crisis, with gross domestic product surpassing its pre-recession peak. Enterprise Ireland has also estimated that the UK is the greatest market for Irish companies expanding abroad. In my own experience, this is a function of the realistic optimism that is returning to the market, along with the realisation that the benefits of dealing with our nearest neighbouring country outweigh the legal, contractual, financial and business risks of far-flung locations. The project may vary from a light-rail project, a data centre, hospital, shopping centre, road or private-sector project. However, the one matter that will remain constant regardless of the nature of the UK project is the approach on tax. When it comes to projects in the UK, there are a number of fundamental tax matters that need to be addressed so the potential bottom line after-tax results are clear:

  • Will the corporation tax rate be higher as a result of the project being based in the UK?
  • Will additional tax costs arise on bringing the monies back to Ireland to use on other projects?
  • What is the best way of funding the UK project?
  • Will the individuals working on the project be subject to both Irish and UK PAYE?
  • Will the net after-tax pay of the individuals working on the project be affected? As a result, will either a permanent or a temporary cash-flow cost arise for the company?
  • What are the tax issues that are a must for executives and employees to know before they start work in the UK?
  • How will the tax-free expense position be affected?
  • How will the individual’s social security position be affected?
  • How will the individual’s pension position be affected?
CORPORATION TAX The lowest rate of corporation tax in the UK is 20%. However, that does not necessarily mean that the profit from the project will be reduced by 7.5%, given that our Irish rate is 12.5%. A project is only subject to UK corporation tax if it is carried on by a UK company or if the work in the UK on the project lasts for more than six months. Such short-term projects should always be reflected in the Irish company to avoid the reduction in margin. Once the project exceeds six months, then the profits should be recorded in a UK company. However, not all the project’s profits will be subject to UK corporation tax. The Irish company should seek a profit for the know-how and expertise that it has provided. In my experience, many Irish businesses operating in the UK fail to reflect the appropriate reward for the Irish company and, hence, are suffering unnecessary reductions in their margins due to the higher UK corporation tax rate. With regard to bringing the money back, no additional tax cost should arise on bringing the profits back to Ireland. If a UK company is involved, the rate of tax on dividends would be 12.5% but no tax should be payable, as credit would be given for the UK tax paid on the project’s profits. The simple and most effective way of funding the project is by loans from the Irish company. Complex funding structures and significant share capital investments are best avoided. IRISH AND UK PAYE The tax issues associated with Irish individuals working in the UK is more complex than the interaction between any other two countries. It is disappointing that the Irish Revenue has not focused more on simplifying this area. The following are some issues that the company must consider:
  • How many days can an employee or executive spend working in the UK before UK PAYE applies? A general rule is 60 days over any 12 month time-frame, but the specifics must be looked at in each case. If there is no corporation tax in the UK, the individual may be able to spend up to 183 days a year in the UK before a charge arises.
  • When does Irish PAYE cease to apply? Irish PAYE will cease to apply once the individual spends sufficient days in the UK to be regarded as non-Irish resident and all the work for the year is carried out in the UK. However, the company must obtain a PAYE Exclusion Order from Revenue in this case.
  • How does the employer company affect the position of the employees? If the employer company is based in the UK with no work carried out in Ireland, the onus is on the employee to take care of his Irish tax responsibilities by submitting an annual Irish income tax return rather than PAYE applying.
If income tax in both countries applies, then the company needs to quantify the temporary cash-flow cost in its projects. The UK PAYE will be for the account of the company on a monthly basis, but a refund of this PAYE will only arise well after the end of the year on application to Irish Revenue. The onus is on the individual to ensure that he or she is aware of the following before the assignment to the UK commences:
  • What will the position regarding Irish and UK PAYE be and the effect on their monthly net pay;
  • How will the number of days spent in Ireland (e.g. at weekends) affect their income tax position;
  • If Irish residence applies, if any reliefs are available to exempt the income, or part of it, from Irish income tax. For example, Cross Border Relief can be claimed if a person is working exclusively in the UK but spending at least one day a week (e.g. weekends) in Ireland. It is necessary to apply for this relief on submission of an annual Irish tax return, as it is not automatic;
  • What procedures and registrations are required when dealing with UK Revenue.
EXPENSES – GETTING THE RIGHT RESULT It cannot be assumed that expenses provided by the company on flights, subsistence and accommodation remain outside the scope of income tax once the individual is in the UK for a defined time-frame, rather than just back and forth on a daily basis. The Irish and UK rules require a detailed analysis and the following are some general principles that apply:
  • The individual must be away from his/her normal place of work;
  • The time away must be on a temporary basis;
  • Having a UK employer, suggests that the normal place of work has become the UK;
  • The UK has an exemption for flights for the first five years of an individual’s assignment;
  • The flat rate tax-free subsistence allowances are reduced as the length of the assignment increases.
When it comes to social security matters, for assignments of less than five years and if the individual stays employed by the Irish company, Irish social security continues to apply. In effect, if the individual is within the remit of Irish PAYE rules, Irish social security rules also apply. While social security benefits can transfer between Ireland and the UK and the rates are similar, I would always recommend retention on the Irish system for simplicity. While there are specific rules for pensions, in general, the individual can remain within the existing Irish pension fund, provided the secondment to the UK is temporary and the individual remains with the remit of Irish PAYE rules. WHERE TO NOW? There are a significant number of tax issues that a company needs to be familiar with before commencing a project in the UK. In particular, the tax position relating to its employees and executives working in the UK is complex and often independent advice will be required. The onus is also on the individuals involved to familiarise themselves with their own particular position rather than relying exclusively on the company. Mary Nyhan is the principal of Nyhan Tax Advisers. This practice focuses on advising owners, companies and their executives on taxation matters. The practice has specific experience on the construction and engineering sectors, having worked with nearly all of Ireland’s top companies in these sectors. Ireland-UK cross-border matters are also a particular area of expertise of the practice. If further information is required on this article, please contact mary.nyhan@nyhantaxadvisers.com.