UK firms strengthen oversight as Middle East relocations expose tax compliance risk

The current instability in the Middle East is prompting some employees to return to the UK at short notice, often with little clarity on how long they will stay. As we’ve seen in previous programmes, that can create immediate tax and payroll questions. But it also raises a broader issue for employers, and one which many will recognise from the Covid pandemic.

For HR teams, the challenge is visibility. Where employees relocate quickly and without formal planning, it is not always clear where they are working from at any given time. During Covid, that led to situations where organisations only discovered later that employees had moved and were working from a different country, creating tax and compliance risks which could have been avoided. The same risk arises here. Tax and payroll obligations can depend directly on location, and if employers do not have a clear picture of where their people are, those obligations may already have arisen without anyone realising.

So the key question for employers is what lessons can be learned from that experience, and what needs to be in place now to ensure that employee movements are properly tracked and nothing is missed.

Earlier I caught up with tax lawyer Chris Thomas who joined me by video link and I put that question to him:

Chris Thomas: “Well, I think the main similarity is that people have been caused to unexpectedly relocate from one place to another in a way that wasn't planned. So unlike your traditional assignments, or relocations, of employees where advice can be taken, it can be structured appropriately, this is liable to happen in a bit of a rush. Also, we've got the same issue with just uncertainty as to well, nobody knows, frankly, how long it might go on, nobody knows how long an individual who has come back to the UK might need to stay here before they can safely go back or, indeed, they might decide that they're not going to go back, so I think that those are a couple of the big parallels. Then in terms of the learnings that we might apply from Covid I think the first one is that a lot of employees were of the view, and many probably still are, that, oh, why does it really matter where I physically am? I'm still doing the job, it’s all online now anyway, I'm doing the job adequately and keeping in touch, and whatever but, of course, from an employer perspective, and certainly from a tax perspective, it is absolutely critical to understand where the employee is because there is a whole load of tax compliance obligations that follow from that and, of course, particularly with the Gulf countries it's not as if there's going to be any tax that's currently being paid out there that can be kind of credited off under the relevant tax treaty so it is going to be an additional exposure of what is being deducted. The other thing, going back to the points I made, is actually just understanding where people physically are because the employee doesn't necessarily disclose that so you need to make sure that you've got quite robust processes in place to be able to identify to whom this applies and being in constant touch with them, really, as things evolve to establish what their intentions actually are because that is relevant to know as to whether this is a long term thing, or actually, do they intend to go back as soon as they can, for example?”

Joe Glavina: “What lessons should employers take from that experience, particularly in terms of managing risk and making sure nothing is missed?”

Chris Thomas: “Yes, that's a very good point. Having those strong internal links and information flows will be really key, because HR needs to make sure that information they may have about which employees have come back and where they physically are – they do need to make sure that the payroll team are aware of that. This is something else we did see happen sometimes during Covid where one part of the organisation might know but that didn't quite feed its way through to others because obviously the payroll team will need to have full visibility where there are people who are now back in the UK or, indeed, anywhere else unexpectedly so that they can then make a judgment as to what they need to report for the purposes of the monthly PAYE reporting – do they need to be making applications to HMRC to change the tax coding that these individuals will currently be on? So yes, it is very important that there are good, strong, lines of communication between HR and payroll.”

For HR, the key takeaway is that if you don’t know where your employees are working, you can’t manage your tax risk. That makes clear visibility and strong communication between HR and payroll essential, particularly where employees relocate at short notice. If you would like help reviewing your current processes or putting in place systems to track employee location and manage the associated risks, please do contact Chris - his details are there on the screen for you.