PAYE guidance on Appendix 5: Net of foreign tax credit relief

14 October 2014

HMRC have updated their detailed guidance for reporting Appendix 5 adjustments correctly on the FPS. Employers who are using software which does not support these arrangements will be unable to report these adjustments with effect from 6 April 2015.

HMRC have issued this background explanation to the new guidance :

EP Appendix 5 arrangements are applicable to those employers who are required to deduct foreign tax in addition to UK PAYE tax from payments made to employees who are sent to work abroad. Its aim is to give provisional relief for double taxation to employees who must pay both UK tax and foreign tax from the same payments of earnings.

With HMRC agreement an employer can give foreign tax credit relief (FTCR) via the payroll where there is a foreign tax withholding obligation as well as PAYE due on the same income. This will require an adjustment to the amount of tax due.

For example, the payroll calculates the UK tax on a monthly salary of £2000 as £500, but foreign tax credit of £300 is also due from these earnings and will be paid to an overseas tax authority. The calculation of the foreign tax will be made outside of the payroll, but under the Appendix 5 arrangements it can then be offset against the calculated figure of £500 UK tax, which will reduce the tax attributable to the UK to £200. This is the amount that employers should report to HMRC for the relevant month and pay by the due date.

If this example is extended over a three month period, we would expect to see the following figures in a P60:

Total pay of £6,000, year to date tax deducted of £600 and the code in operation on a Month 1 basis.

Even though they will have also deducted a further £900 from the employee, this should not be included in the tax deducted figure as it has been paid to the overseas tax authority and is therefore not relevant to the UK deduction. If the same employee left after these 3 months, we would expect the final FPS and any P45 would show the same details (again excluding the £900 foreign tax).

So, if an employer is required to issue a P60 to an employee who has been given relief in this way it should show the taxable pay but only the net figure of UK tax deducted after the foreign tax has been offset.

On a day to day basis the employer will need to use the “deductions from net pay” data item (Data Item 58B) to take account of the foreign tax to ensure that the FPS net pay equates to that actual paid in the same manner as other deductions. Using our example above of pay of £2000, UK tax due £500 less FTCR £300.

Incorrect report:

Gross Pay £2000

Tax deducted £ 200

Pay after statutory deductions £1800 (Incorrect result)

Correct report:

Gross pay £2000

Tax deducted £ 200

Deductions from Net Pay (58B) £ 300

Amount for BACS Hash £1500 (Correct result)

If the data item values areincorrectly reported or an adjustment is not made in respect of foreign tax paid, then the amount the employer reports will not match the amount they pay to HMRC and this may give rise to debt recovery action by HMRC. Additionally the tax calculations for the seconded employees could also be incorrect giving rise to demands for payment or the repayment of tax.