The Covid-19 pandemic has witnessed most of the world engage in a mass working from home experiment. It has also seen an explosion in remote or virtual employment across international borders as people become unexpectedly separated from their employers, either because they cannot return home after a holiday, cannot travel to start a new employment previously agreed, or simply wish to work from home in a more picturesque country!
Remote cross-border working can give rise to some very complex tax issues for both employees and employers, and it is vital that both parties seek tax advice before embarking on an extended period of working from an overseas location.
As a basic principle of international tax, work is taxable where it is carried out, i.e. the physical location of the employee. The location of the employer and/or its clients and the legal jurisdiction of the employment contract are, for the most part, irrelevant.
This presents a two-fold problem – with previously non-resident employees working for extended periods in the UK and normally UK resident employees working overseas.
Accidental UK Workers
An individual who has spent an unexpected amount of time in the UK and has been working remotely during this time needs to consider the following points:
• Whether they have become UK resident for a given tax year and are therefore potentially liable to UK on their worldwide income and gains;
• Even if non-resident, whether the UK workdays are taxable in the UK;
• In both cases, what exceptions and reliefs that are available to reduce or eliminate the UK tax liability thereby arising.
The UK’s complex tax residence rules have been adjusted in some circumstances to mitigate the impact of Covid-related travel restrictions, but these are narrowly drawn we do expect HMRC to challenge a reasonable number of claims where the tax at stake is substantial.
Accidental Overseas Workers
Previously UK-resident employees working overseas must similarly consider the following points:
• Whether they became non-UK resident in the year of absence and whether they also trigger residence status in their ‘host’ country
• As above, whether the host country has taxing rights on the overseas workdays even if residence is avoided;
• The exemptions and reliefs available and, equally, how to give effect to these claims in a foreign jurisdiction.
Clearly this will require local advice as well as UK advice, unless the local position is straight forward i.e. where the host country does not impose income tax on individuals.
Social security (known as ‘National Insurance’ in the UK) operates in parallel to income tax on employment income and often, unhelpfully, with a different set of rules and definitions. Thus one could be liable for social security on a period of international employment but not income tax (and, of course, vice versa).
Moreover, unlike income tax, in many cases the employer is liable to pay ‘secondary’ contributions in the employee’s host jurisdiction, and in context of European Union engagements the rate of these contributions can be very high.
In our experience, many employers are unaware of these obligations and may be facing an unpleasant surprise some way down the line with overdue payroll taxes and related fines.
We would advise employers with employees working in an overseas jurisdiction to consider whether:
• The employee has acquired ‘local’ employment rights which would override contractual terms;
• Depending on the seniority of the employee, the employer has inadvertently created a taxable corporate presence overseas (known as a ‘permanent establishment’);
• The employer has a duty to consider the health and safely of the employee according to prevailing local standards and, crucially, whether the employee even has a right to work in the host country.
How Can We Help?
We specialise in advising both inbound and outbound employees on the UK tax impact of their international employment situation, their residency status and what can be done to mitigate any unexpected financial downsides. If you would like our assistance, please contact us.