New Law Drops Expat Employers In Tax Evasion Trap

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Expat employers could face prosecution for their overseas employees failing to declare their earnings under strict new laws.

HM Revenue & Customs (HMRC) wants to make offshore tax evasion a criminal offence – but a loophole in the draft legislation could catch employers who have done nothing wrong and who are oblivious of the financial affairs of their expat employees.

The new offence is aimed at individual taxpayers rather than companies, but companies with expats on the payroll who fail to report their income could also fall foul of the rules.

To make matters worse, the new offence depends on strict liability – so HMRC does not have to prove anyone intended to evade paying the correct amount of tax, only that they failed to do so.

Strict liability for tax evasion would work the same way as a speeding offence – if you are caught you are either driving over the limit or not and no one has to prove you deliberately committed the offence.

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Tax triggers

British firms with expat employees are at risk because their workers could earn income overseas which the employee may not report to HMRC.

Typical tax triggers could be:

  • Expats being granted shares in non-UK companies when they work in the UK which could be taxable under UK tax law
  • Expats often have contracts that allow them to draw a salary in the UK and from an overseas company

The problem for an employer is identifying their employee is an expat and including these non-UK earnings in their worker’s Pay-As-You-Earn salaries even though they are paid overseas.

To make sure they are not inadvertently involved in unwitting tax evasion, employers may have to investigate whether their employees were domiciled or UK resident in earlier tax years – even if they were not on the payroll during that time.

Poor wording

Failing to do so could mean the risk of payroll penalties for not reporting the income, even though the employee has the responsibility for disclosing the circumstances on a self-assessment return to HMRC.

The poorly worded draft legislation gives HMRC the power to fine employers for non-disclosure by an expat employee for keeping inaccurate payroll records.

Even worse, if the employer failed to declare the earnings and the employer failed to include them on payroll returns to HMRC, the employee could argue the employer was to blame as a defence.

Either way, business owners could find themselves prosecuted for a criminal offence that is not their fault.

Details of the new rules are in Tackling offshore tax evasion: A new criminal offence consultation

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