Key tax issues for employers for cross border home working.
As a result of COVID-19, there has been a significant increase in home working. Many businesses are facing the challenge of managing employees who request to work remotely from overseas locations, even asking to do so indefinitely. These requests were not unknown in the past, but have increased because of COVID 19, travel restrictions, but also family circumstances, and the wider shift to flexible working. We set out below the key tax issues for employers for cross border home working arrangements.
What should an employer do if an employee requests to work remotely from an overseas location?
Employers should consider a variety of issues, including tax, social security, immigration, withholding requirements, employment law and regulatory implications before agreeing to an employee's request to work from overseas. Importantly, employers need to be aware of what they are still responsible for, even where the employee is relocating as a personal choice.
Income tax and social security implications of employees working temporarily abroad
From a UK perspective, a person who remains UK tax resident, will typically remain liable to UK income tax on worldwide income. From an overseas perspective, many countries have an existing double tax agreement with the UK. If so, where the Organisation for Economic Co-operation and Development (OECD) model tax convention is followed, conditions could be set out within the employment article for an income tax exemption for that employee working in the other country (the host country)
Note that :
- these treaty conditions vary country to country. Each case should be reviewed carefully, as the nature of the work and role undertaken as these could remove the available exemptions, especially if that employee’s work is having a significant impact locally;
- not all countries have a double tax agreement with the UK. If so, or if one of these conditions is not met, income tax could be liable from arrival in the other country
- this exemption may not remove additional administration such as payroll withholding; in country registrations; other employer and employee compliance; and in country business visitor reporting;
- this exemption only applies to income tax. It does not apply to social security. Social security charges should be considered separately.
Due to COVID-19, many tax and social security authorities have granted concessions to account for the exceptional circumstances that have arisen over the past few months. We have, however, now seen many of these relaxations expire. Employees who will have relocated overseas during lockdown, who are still working overseas, may have now gone over the 183 day threshold.
In addition, if the employee remains UK tax resident, the UK employer must continue to deduct income tax under Pay As You Earn (PAYE), even though the employee is temporarily working overseas. Should there be any payroll withholding requirements in the host country, the UK employer may have to support their administration, even where the employee has relocated for personal reasons.
Corporation tax implications and permanent establishment risk
In some situations, there may also be a risk that the employee's activities or presence in the host country could create a ‘permanent establishment’ for the employer in that country. If a permanent establishment is created, the profits attributable to that establishment could be subject to corporation tax in the host country.
How can we help?
- We can help you and your teams understand whether you need to take any actions for your employees who have worked abroad over past months.
- We can review individual requests for home working, advising on the employer/employee obligations and practical next steps both in the UK and, through our Nexia international network of colleagues, in the host country.
- Our team and Nexia network can support you with payroll, tax and social security administration for globally mobile employees, including applying for coverage certificates, advising on tax code changes, and advising on modified payroll arrangements.
- We can work with you to design and implement a remote working policy setting out the provisions within which employees can work abroad, to manage employee expectations and mitigate tax risk;
We can help put processes in place to manage requests for homeworking overseas and set limitations for employees considering the local country rules to mitigate tax liabilities and to avoid burdensome administration being triggered.
For any queries in relation to the above, please speak to David Yewdall (email@example.com) or Alex Simpson (firstname.lastname@example.org) Employer Solutions Partners or any member or your usual Smith & Williamson contacts.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.