What are the risks of allowing staff to work abroad?

Out-Law News | 16 Mar 2023 | 12:11 pm |

Penny Simmons tells HRNews about the tax risks of allowing employees to work abroad

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  • Transcript

    So, your employee wants to work from abroad? What are the issues you need to think about? The pandemic has brought about a ‘work from anywhere’ culture which has been adopted, and welcomed, by many employers, but what are the risks? We’ll consider that.

    This is a subject covered last week by People Management  which has flagged insurance as an issue that’s being overlooked by some employers. They quote a survey conducted by insurance and risk management consultants Gallagher which found many people are working abroad without insurance, with the risk having gone unnoticed by the business. The research shows that companies with workers who are based overseas unofficially are more likely to have their business insurance invalidated leaving the business exposed to a number of risks including cyberattacks and work disruptions.

    Neil Hodgson, managing director of risk management at Gallagher, says that both employees and employers should give “significant consideration” to flexible working policies to ensure they are “fit for purpose”, and that employees understand the “consequences” of international working. On the insurance point, the advice is, before permitting an employee to work from abroad, to check the firm’s insurance policies to make sure the existing cover is adequate. So, for example, does employer liability insurance cover overseas working? What about professional indemnity insurance?  What about director liability insurance? We agree. They are good points which HR should check carefully.

    The article goes on to ask the question: ‘What are the other legal risks that can arise with working from abroad?’ and identifies tax as a key consideration. HR is warned about the risk of unintentionally creating a ‘permanent establishment’ in a foreign country where employees are based because doing so could subject the business corporate tax liability in that country. That’s true, but they don’t expand on it, or explain it, so we can do that with help from one of our tax lawyers, Penny Simmons who has been advising on this:

    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 with 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.”

    The Office of Tax Simplification has published a policy paper on Hybrid and Distance Working exploring the tax implications of changing working practices including both hybrid working and overseas working arrangements. It follows a consultation with a number of business and service providers into trends surrounding the change we’ve seen in working practices since the Covid-19 pandemic and sets out what might lie ahead for businesses. The policy paper – the last publication from the OTS before it’s closed down incidentally – is called ‘Hybrid and distance working report: exploring the tax implications of changing working practices’. We have put a link to it in the transcript of this programme.


    - Link to OTS policy paper on hybrid and distance working

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