Tax risk with allowing staff to work overseas, warns expert

The Covid pandemic has brought many changes to the way we work, most obviously flexible and hybrid working and a marked increase in remote working. While this will usually mean working from home, or from within the UK, what happens when working remotely means working from abroad? We’ll take a look at an issue often overlooked when it comes to overseas working, namely the tax implications. 

This is the subject of an article in People Management asking: ‘What are the legal rules if an employee wants to work remotely overseas?’ As they explain, the starting point is, of course, the contract of employment and agreement between the parties for the individual to work from an overseas location, but assuming there is an agreement what are the main issues for HR to think about? In a very general piece, they flag immigration, data protection and health and safety risks but the issue we want to highlight in this programme is tax. On that issue they say: ‘For longer-term arrangements employers need to think through what implications arise in relation to both tax and the legal position of the employee. An employee may acquire tax residency in another country or jurisdiction.” That is the key point - the risk of acquiring tax residency in another country or jurisdiction - so let’s consider that. Penny Simmons is a tax specialist and she’s been advising clients about this particular risk:

Penny Simmons: “So, lots of clients come will approach me from the business angle. So where an individual wants to work abroad for a period of time, and I think, Joe, we’ve talked about this before, but the key issue that comes up from my clients is if this person works abroad for an extended period of time, say for example, a few months, is there a risk that they are going to create a taxable presence in that location for our business? So, if the business doesn't have a taxable presence in that location, is there a risk that that individual is going to create one? That's something that because the law is complicated, it will be dependent on a number of factors looking at precisely what the individual would be doing in that location. That’s not necessarily a quick and easy answer. So those would be the tax considerations. You also have to think about social security contributions and exactly what employment taxes need to be paid and where they need to be paid. So, it can often be quite complicated. So, clients will be asking for advice generally on what are the implications of one of my UK-based employees going to work abroad for a limited period of time fully with the intention of coming back to the UK, so it's not a permanent move, it’s a temporary move.”

Joe Glavina: “What’s your message to HR around this Penny? Should they be conducting some sort of audit, or review, to identify potential issues?”

Penny Simmons: “There isn't a set audit or review process. Really, it's everything that we've talked about before in relation to other areas of employment tax law. We would strongly encourage that the HR functions within a business and the tax functions within a business, they talk to each other and they communicate a lot and that there are processes in place so where an individual goes to HR, because that's traditionally where they would go to ask - can I go and work abroad for a period of time? - HR doesn't just look at the employment considerations, and that’s exactly the point where they need a process in place so that they contact their internal tax team, or their external tax advisers, to check what are the tax implications going to be both for the individual, from an employment tax perspective, but also for the business, if we allow this person to go and work abroad for a period of time, and it's probably a good idea, because these requests are increasing, and they're certainly a lot more common than they were before the pandemic, that a business has in place a policy and processes for how long they will allow an individual to work abroad and what happens when an individual first makes that request so that there is, if you like, a clear process in place so that businesses can deal with those requests for the individuals themselves, but also to make sure that they safeguard the employment and tax risks for the business.”

Penny and the tax team have produced a guide on managing tax risks for UK companies engaging overseas contractors. We’ve put a link to that guide in the transcript of this programme for you.

LINKS
- Link to Out-Law guide on managing tax risks for UK companies engaging overseas contractors