As we move towards a post-Covid era, many employees have transitioned to a hybrid working format, spending a mix of days in the office and at home.
However, some have taken the opportunity to work from home permanently. This can cause complexities for employees who will be based overseas, in particular those in the EU, due to the restrictions on free movement between the UK and Europe following Brexit.
As well as existing employees choosing to work remotely, some employers are now also looking to recruit outside the UK, providing them with access to a far wider talent pool. Our article covers the main tax issues for both of these types of workers.
The first key issue for employers to consider is whether the activities of employees/directors in a foreign country will create a permanent establishment for the company. This is defined in the UK’s double taxation agreements with other countries as, broadly, a fixed place of business. It generally requires:
- A degree of permanency; and
- That the location is at the disposal of the business.
Where the employee will be working from home regularly on an indefinite basis, then unless their role is one that would be considered ‘preparatory or auxiliary’ in nature (for example office functions such as internal HR or IT, or a project looking to set-up an operation in that country), there is a risk of a permanent establishment being created. The risk will be significantly increased where the employee in question is a director or senior employee who can bind the company to contracts and routinely makes management decisions on its behalf.
We would recommend that local advice in the country in question is sought in any cases of uncertainty.
Where a permanent establishment is created, as well as payroll requirements there will be a wider tax registration issue (corporation tax and VAT) and consideration will need to be given as to how profits are attributed to that location to reflect the local employees’ activities.
The payroll position may well vary where there is no permanent establishment in the overseas country; an employer may be considered to be a non-resident employer. This will certainly be the case in respect of the local equivalent of PAYE tax withholding, where there is normally a requirement for the employer to be resident. This is not always the case, however, and local advice should be sought from the country in question. If a permanent establishment is created, the local equivalent of PAYE (where it applies) will almost certainly need to be accounted for through payroll on a month-by-month basis.
For social security purposes, the UK still applies EU legislation post-Brexit. Where an employee is working in another EU state, the employer is deemed resident for the purposes of social security legislation, so there will be a liability on the employer to account for social security contributions (both employee and employer). The UK is typically one of the lower rate countries, so there will be an increase in costs when the employee is based in the EU.
For non-EU countries, the UK has a number of reciprocal agreements, but these are generally not as comprehensive as that with the EU, and specific advice on employer’s responsibilities should generally be sought in such scenarios.
UK work days
So far, we have considered the overseas tax and social security position on the basis that an employee works overseas on an indefinite basis (not for a fixed period of time) and spends all of their time working overseas.
Where an employee has a UK employer and UK work days, earnings in respect of those days will be considered UK source income, and be taxable in the UK even where the employee is not resident. Where the employee only attends occasionally for training, internal meetings and the like, it may be possible to argue these work days in the UK are incidental and so not taxable. However, this will not apply for directors, since HM Revenue & Customs (HMRC) does not consider that the duties of a director can ever be incidental.
Where an exposure to PAYE arises as a result of UK work days, an alternative to following the default route of applying PAYE to all earnings is to agree an apportionment with HMRC in advance, based on the anticipated UK work days. Residents of EU countries will still be entitled to a personal allowance in the UK, so where their apportioned income is less than this, no PAYE will generally be due.
Assuming they are considered habitually resident overseas, even where visits to the UK are regular, social security contributions will remain payable in the home country, but an A1 certificate may be needed to confirm that UK National Insurance contributions are not also due.
Other issues to consider
Following Brexit, there is no longer freedom of movement for workers between the UK and Europe. For UK nationals living abroad, especially those who moved after 31 December 2020, there can be significant regulatory issues.
Whilst not strictly a tax issue, HMRC provides a general ’living in’ guide for all EU countries. This gives general advice on registration, work permits and relevant issues. The guidance can be found here. For staff regularly travelling between the EU and the UK, a Frontier Worker Permit will almost certainly be required, and this may still be the case even for infrequent visitors. This is an employment law issue, so specific advice should be sought.
Employees working permanently abroad will also be subject to local employment law.
This article only considers the position for employees working remotely on an indefinite basis. For employees who are temporarily assigned to another country, the position can vary considerably and separate advice should be obtained in such cases as to how best to structure the assignment, and the associated tax and social security issues.
If you need any further information on how we can support you with remote working overseas, please speak to your usual Saffery contact, or contact Mark Perry, Senior Manager – Employment Tax, E: [email protected].