Working remotely abroad can give rise to a variety of tax and legal issues. Tim Stovold and John Williams from Moore Kingston Smith take a look at what to bear in mind when you or your employees are not based in the same country as your organisation.
Following the increase in remote working during the Coronavirus pandemic, it has become commonplace for companies to allow their employees to live and work abroad in a country that is not the country that they are primarily employed in.
Whether these overseas remote worker arrangements are temporary, or part of a new long-term way of working, tax and legal risks arise for both the UK employer and employee.
The main issues are manageable and are considered below.
Income tax
A common misconception is that an employee hired and paid by a UK business is only subject to UK income tax on their earnings.
In fact, unless the employee is protected by a double tax agreement, the employee’s earnings can also be subject to income tax in the country where they physically perform their duties.
The starting point is to consider where the employee is tax-resident and if there is a comprehensive double tax agreement between the UK and the other country.
Broadly speaking, where an employee remains UK-resident and the days spent in the other county do not exceed 183 days in a prescribed 12-month period, no tax should be due in the other country. Other conditions apply and the employer should check the terms of the double tax treaty in place.
For longer-term remote working arrangements, or employees that work in a country for which the UK has no comprehensive double tax treaty, tax is likely to be due in the other country, even when the employee’s earnings remain subject to UK tax.
A multitude of income tax scenarios can result from overseas remote working arrangements. Some of the most common are summarised below.
The below table is not exhaustive but provides the most likely outcomes based on our experience advising companies on their remote worker arrangements.
Income tax outcome
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When this outcome may arise
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The employee remains subject to UK tax only on their earnings
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Where the remote working period is short-term (i.e. less than six months) and the employee is protected by a double tax treaty
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The employee remains subject to UK tax but is also subject to tax in the other country (with a foreign tax credit claimed in UK)
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Where the remote working period is medium-term (i.e. more than six months) but not long enough for the employee to bream UK residence
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The employee ceases to be subject to UK tax, and only tax in the other country is due
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Where the remote working arrangement is long-term such that the employee breaks UK residence and acquires residence in the other country
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The employee is subject to foreign tax and is also subject to UK tax (with a foreign tax credit claimed in the other country)
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Where the remote working arrangement is long-term but the employee performs some work days back in the UK (e.g. short business trips)
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Social security
It is often assumed that the social security position will follow the tax position. However, social security is determined under separate rules and a social security liability may arise even when there is no charge to income tax.
The starting point is to consider whether the other country where the work duties are performed remotely is in:
- The EU
- A reciprocal-agreement country
- Or somewhere else (i.e. a non-agreement country)
For remote working in the EU and countries that have a social security reciprocal agreement with the UK, social security is usually due in the country the work is performed.
However, for short-term remote working arrangements, it may be possible to apply for a certificate of coverage so that social security is only due in the UK.
Brexit has complicated the position in EU countries. Depending on when the remote working arrangement commenced, employers will need to consider either the pre-1 January 2021 EU social security regulations or the new EU protocol that applied from 1 January 2021.
Employer responsibilities and further risks
Payroll obligations
International employee payroll withholding failures often cause the highest financial exposure for an employer.
Where a liability to tax or social security arises in the other country, the employer may be required to withhold the tax and social security (e.g. by operating a local payroll in the other country).
Permanent establishment risks
Corporate tax and VAT liabilities, as well as other reporting requirements, may arise for the employing business where a permanent establishment is inadvertently created by virtue of the employee working remotely in an unplanned location.
There is a need to review the potential impact of changes to the employee’s roles and responsibilities to ensure that a permanent establishment has not been created inadvertently.
Immigration and local law
Work permits must be in place, otherwise both the employer and employee face penalties and potential expulsion from the country they are working from.
Employers may not have been aware of the overseas remote work and it is possible that no work permits may have been applied for in the other country.
Employees working remotely overseas will also bring about compliance with the country’s local labour laws. Employers must ensure they adhere to working time requirements, leave and overtime entitlements, and many more aspects.
Tracking
It is crucial that employers track the movements of their employees to manage these tax, immigration and legal issues. New tracking systems may need to be implemented to replace existing systems if they are not sufficient.
Getting the right advice
The above is only a guide, and expert tax and global mobility advice is required to navigate the complex situations that result from the above issues.
Remote worker solutions include:
1. Working with an organisation to produce a remote working policy document. This typically includes rules around which employees are eligible, what countries an employee is permitted to work in and duration of remote working period.
2. UK tax, UK social security and UK reporting advice for both employer and employee.
3. Tax, social security and reporting advice in the country the employee will work remotely from. This advice is provided through the Moore Global network.
4. Compliance services in the UK and overseas, e.g. payroll administration, applications for certificate of coverage and registration with relevant tax authorities.
5. Advice on mitigating a permanent establishment being created for the UK business in the other country.
6. Helping organisations adapt or produce employment contracts to reflect the remote working arrangement through our specialist HR consulting team.
The Moore Kingston Smith Global Employer Services team assists employers with matters relating to international workforces. The team also advise non-UK businesses that hire an individual to work remotely from the UK. Find out more.