One of the positives to arise from the national lockdown during the pandemic was that many employers started to review their remote working policies. The office was no longer the only place where effective working could take place – with many employers declaring that their employees need not ever return to the office.
Against this backdrop, one could be forgiven for throwing out the rulebook when it comes to how and where we work. Accordingly, it came as no surprise that when the national COVID-19 restrictions were lifted, many employees took the opportunity to work from home in sunnier climes – either in holiday homes or rental accommodation. Now, in the face of further restrictions and a bleak winter ahead, more people seem to be looking to make a move.
Whilst at first blush this seems harmless, failing to understand the tax and legal implications of such a step may have unintended consequences for both employer and employee.
The general rule is that employment income is taxed in the country where the work activities are carried out. However, where an individual is UK resident, they are taxed on their worldwide income in the UK. Therefore, provided that a period of working from home abroad does not impact a person’s residency status, there may be no tax issues to consider. This means that in practice, a short stay abroad should not trigger any unforeseen tax liabilities.
However, understanding one’s residency position involves looking at the applicable residency rules in the UK and in the foreign jurisdiction.
In circumstances where someone is found to be dual resident for tax purposes, both countries may argue that tax is due. This may give rise to a tax liability in both jurisdictions (commonly referred to as double taxation).
To determine which jurisdiction takes precedence from a tax perspective, a good starting point is to consult any existing double tax treaty between the two countries. The UK has one of the largest collections of double tax treaties, having entered into agreements with over 130 countries.
The purpose of a double tax treaty is to determine which country has taxing rights over a particular source of income and whether any reliefs are available. Whilst the promise of tax relief is somewhat comforting, most reliefs are not automatic and need to be claimed (which is often not a straightforward process) – and may cause some unwanted cash flow issues in the interim.
In the UK social security includes:
- The National Insurance Scheme, which provides cash benefits for sickness, unemployment, death of a partner, retirement, etc. People earn entitlement to these benefits by paying National Insurance Contributions (NIC);
- The National Health Service (NHS), which provides medical, dental and optical treatment and which is normally available free of charge only to people who live in Great Britain and Northern Ireland;
- The child benefit and Child Tax Credit schemes, which provide cash benefits for people bringing up children;
- Non-contributory benefits for certain categories of disabled persons or carers;
- Other statutory payments made by employers to employees entitled to maternity, paternity and adoption leave.
Failing to take into account the impact a period abroad could have on social security could materially affect an employee’s entitlement to benefits. Employees should take advice as to what benefits they are entitled to during any period abroad and/or whether any break would materially impact their access to benefits upon their return.
Where an employee’s period of working abroad does not impact their residency status (as described above), UK employers should continue to deduct income tax under the PAYE system in accordance with the employee’s PAYE code. Employer’s and employee’s NIC should also be paid as normal.
In addition to the tax considerations in respect of the employee, businesses should be mindful of their own tax position when allowing staff to work remotely from another jurisdiction.
The presence of an employee abroad could create a ‘permanent establishment’ for the business which will trigger a tax liability in that country. Whether or not a permanent establishment has been created is fact sensitive but in broad terms the tax authorities will consider whether the employee’s presence has created ongoing locally generated revenue and/or whether the employee is able to make binding decisions on behalf of the company from a fixed place of business.
Where the relevant conditions are satisfied and a permanent establishment has been created, any profits attributable to the business’ presence in the foreign jurisdiction will be subject to corporation tax in that country.
In light of this, only allowing staff to work in jurisdictions where the business already has a presence may reduce the employer’s tax and administrative burdens.
As is the case when looking at residency, the length of an employee’s stay is relevant when looking at permanent establishment. A temporary stay by its very nature is unlikely to be considered permanent, but this is something that a business must keep under review if there is no end date for working arrangements.
The general rule is that social security obligations arise in the country in which the employee is physically carrying out their duties.
If an employee has chosen to work from home in the European Economic Area (EEA) or Switzerland, then provided that certain conditions are then met, both employee and employer can continue to pay UK NIC and social security.
It is important to note that as a result of Brexit, these rules will expire on 31 December 2020 and at present there is no guidance as to whether any proposed trade agreement will include similar provisions.
Outside of the EEA, the position depends solely on the arrangements that the UK has in place with the relevant country. Local advice should be taken to fully understand the operative provisions.
What to do?
Employers should not be deterred from being flexible when seeking to accommodate employee’s requests to work from home abroad, but it is important that proper advice is taken to minimise the risks.
Some practical points to consider:
- Draft a specific working from home abroad policy to be shared with the workforce.
- Encourage employees to apply for such arrangements to be put in place.
- Approve requests that have a time-limit.
- Ask for documentation to confirm leave and return dates.
- Ensure that both the business and the employee have taken relevant UK and local advice.
- Confirm that staff are aware of the impact any period abroad may have on their benefits.
- Understand the employee’s residency position.
- Create a temporary working abroad agreement setting out the obligations and responsibilities of both employer and employee.