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What is shadow payroll?

A shadow payroll is a method used by employers to fulfil their local tax compliance and reporting requirements for employees on international assignment, or who trigger a secondary withholding tax liability in a different country. It works by replicating or “shadowing” the compensation reporting of the home payroll in the host country, without physically paying the employee.

Our Shadow payroll service allows employers to remain compliant with their home and host country payroll obligations by calculating accurate tax and social security contributions in the UK & Ireland. This enables employers to keep their employees on home country payroll (and therefore remain within their home country benefits and pension plans), while complying with the tax regulations in the UK & Ireland.

Sounds simple enough...

When is a shadow payroll required?

The need for a shadow payroll typically arises when an employee triggers a tax withholding requirement in a second country as a result of their physical presence, and working pattern in that country.

While the specific rules vary based on jurisdiction, shadow payroll obligations can arise as part of long or short term assignments, or due to regular commuting, cross border working, and even extended business travel.

Shadow payroll obligations can also arise where the employee has an ongoing social security obligation, or if they receive “trailing payments” (i.e. bonuses or share based remuneration) that are subject to local withholding taxes.

That is where we can help

It can be challenging

What are the challenges with operating a shadow payroll?

Whilst most organisations have robust payroll processes in place to manage their domestic workforce population, operating a shadow payroll can be complex, due to the unique types of benefits and expenses provided to internationally mobile employees.

This can often involve obtaining information from multiple vendors and sources – sometimes with very short turnaround times –  and payroll teams may lack the resources, and international payroll knowledge to do this in-house.

In addition, some payroll systems are not designed to deliver tax withholding in multiple jurisdictions, and may lack the technical capabilities to deliver shadow payroll solutions.

Let us explain

Let us explain

A real world scenario

An employee of a French company is sent on assignment from France to the UK for 3 years. While the employee would not be subject to French withholding tax, they would typically remain on French payroll for the duration of the assignment in order to keep the employee within the scope of French social security, and retain their entitlement to home country benefits and pension contributions.

Based on the length of the assignment, a UK PAYE withholding tax liability will arise for the French Company in the UK. While the employee will be exempt from UK National Insurance contributions due to the reciprocal social security agreement between the countries, a shadow payroll is required in order for the Company to meet its UK payroll obligations.

Nothing will be paid to the employee via the shadow payroll, its sole purposes is to calculate, report and remit the UK tax due to HMRC.

Short term assignees, commuters and remote workers may face additional challenges as their earnings may be taxable in both the home and host locations.

It's a global challenge

A global challenge

We are your expert advisors

In an increasingly global and digital economy, there is increasing pressure on employers to find innovative cross border solutions to hire, retain and engage the workforce of today.

Compliance with cross border payroll obligations has always been complex, but in the Post Covid Era, with a trend towards remote working and employees less willing to permanently relocate for work, this can become even more challenging for businesses as they seek to manage their tax and social security obligations in multiple jurisdictions.

Tax authorities are increasingly looking to maximise revenues and placing growing emphasis on corporate wage tax settlements in the face of declining tax revenues. Improvements in technology and global inter agency reporting have also enabled closer alignment between immigration and tax authorities, increasing the risk of inadvertent non-compliance being identified and penalties being imposed.

In summary

Shadow payroll is a specialist technical service we offer to help manage your employer payroll obligations in the UK and Ireland.

Our team of payroll specialists can work with your existing vendors to deliver various expat payroll solutions for your internationally mobile employees in the UK and Ireland, including:

  • Shadow payroll, year-end reporting and P11Ds/P11D(b)s.
  • Local payroll solutions in the UK and Ireland where there is a need to deliver compensation in these locations.
  • Payroll solutions for Board Directors, including non-resident directors and INEDs.
  • EP Appendix 4 and Appendix 8 STBV reporting.
  • EP Appendix 5 Net of FTC Code Applications and ongoing payroll management.
  • s690 Applications.

Get in touch to learn more about how we can help mobilise your workforce through Shadow Payroll support