This is the third and final installment in my short mobile employee glossary. I'm going to include the same disclaimer as with the other two: This short glossary is intended only to help you understand what you are hearing or reading when it comes to global mobility. Always consult your company's tax advisor when making decisions about tax withholding and reporting.
In this entry, I am going to touch on some definitions that are specific to the United Kingdom. First, however, there are a few general terms that I missed in my first blog.
Certificate of Coverage: This is a document issued by the home country social security administration authority under the Totalization agreement (see below) that serves as proof that the employee and employer are exempt from Social Security taxes in the host country.
Hypothetical Tax: This is the aproximate income tax that an employee would have incurred assuming continued employment in the home country. It is used for calculations in situations where cross-border employees are tax equalized (see below).
Long-Term Assignment: Generally an assignment period greater than one year.
Short-Term Assignment: Generally an assignment period of one year or less.
Tax Equalized: Some companies implement a tax equalization policy for employees who are sent overseas on assignment. A tax equalization policy is based on the premise that an employee accepting an overseas assignment may incur additional home and host country taxes because of the international assignment. A tax equalization policy works to ensure that an employee will neither suffer a financial hardship nor realize a financial windfall as a result of the tax consequences of an overseas assignment. Tax equalized employees typically pay only the hypothetical tax (see above), while the company covers any additional required income tax withholding (grossed-up so that it does not result in additional income tax payable by the employee).
Totalization Agreement: To help address the issue of double taxation for social tax purposes, many countries have entered into bilateral Social Security (or Totalization) agreements. These agreements coordinate the payment of social taxes as well as the receipt of benefits for cross-border employees. Although the details of each Totalization agreement are unique, they all assign social taxes to one country and exempt both the cross-border employee and the employer from paying social taxes in the other country. For a list of countries with which the United States has Totalization agreements, along with links to each agreement, visit the Social Security Administration site HERE.
The following terms are specific to the United Kingdom:
HMRC: Her Majesty's Revenue & Customs (HMRC) is similar to the IRS in the United States. The HMRC collects direct and indirect taxes as well as pays and administers certain income tax benefits and credits in the UK. You can find more at http://www.hmrc.gov.uk/index.htm.
Resident: Unlike the IRS, the HMRC does not provide a specific definition for resident. The issue of "intent" is important when determining residency in the UK. Very generally speaking, a resident is someone who is present in the UK during the tax year (which is April 6 to April 5) and intends to remain in the UK for some time. Although it does not cover all the ways in which an individual may be considered a resident in the UK, the general rule is that employees are tax resident in the U.K. if they:
- spend 183 days or more in the UK during any tax year, or,
- spend or intend to spend an average of 91 or more days per tax year in the UK over a period of three years, or,
- arrive in the UK intending to spend two years or more in the UK.
Ordinarily Resident: Employees who are resident in the UK "year after year" are ordinarily resident. The HMRC does not provide a specific definition for individuals who will be treated as ordinarily resident. Employees who leave the UK to work abroad may lose their status as ordinarily resident after one full tax year (from April 6 to April 5), providing their return visits do not exceed the maximum allowable days. Employees who move to the UK may be considered ordinarily resident from the day they arrive if they intend to remain a minimum of three years in the UK. Otherwise, they may be considered ordinarily resident after a period of time. Employees who stay in the UK for four years will most likely be considered ordinarily resident regardless of their intentions.
Not Ordinarily Resident: Employees who are resident in the UK, but do not fall in the category of ordinarily resident are resident, not ordinarily resident.
Domicile: Employees may be resident of multiple countries, but may only be domiciled in one country. There are many parameters that come together to determine where an employee is domiciled. But, generally speaking, domicile is the country of permanent residence. UK employees who work in another country are "domiciled abroad".
Several of our NASPP Global Stock Plans Portal Task Force members have put together a great session for our 17th Annual NASPP Conference this year: You Really Asked for It! Hot Topics From the NASPP's "Global Stock Plans Q&A Discussion Forum". It's not too late to slip a question to them that you'd like to have addressed in that session; just submit it HERE.
-Rachel