Covid-19 has made remote working the ‘new normal’ for many employees across the UK. Some are using this new way of working to spend time in other jurisdictions, whether that be for the experience or simply to return to their home nation to avoid spending lockdown on their own. While this might seem innocent enough, there are complicated issues that both employers and employees should consider.
Tax and social security implications
Generally, if an employee intends to work in another country on a short-term basis, the employer should continue to deduct tax and national insurance contributions in the UK in the usual way. However, consideration must be given to whether the employee’s stay in the other country gives rise to any local tax or social security issues.
A number of tax authorities have relaxed their residence rules as a result of the pandemic, but not all countries have done so, so it is important to check. Generally, the country will have the main taxing rights over employment income earned by an employee physically working in its jurisdiction.
However, employees will typically be exempt from paying tax in the country if a double tax treaty between the country and the UK exists, and the employee is not tax resident in the country. Very broadly, this usually means he or she has not been in the country for more than 183 days during the country's tax year, but there are many factors to consider and a shorter period can be sufficient to trigger tax residence in a different jurisdiction.
It is always prudent to check any relevant double tax treaty as, even if a tax liability does not arise, there may still be compliance obligations for both the employer and the employee (for example, for the business to register as an overseas employer with the tax authorities in the other country).
The starting point is that, for both employee and employer, social security obligations arise in the country in which the work is actually performed, but whether or not it is payable will depend on what (if any) arrangements are in place between the country and the UK. For example, provided certain criteria are met, if an employee works in a European member state, he or she will only be required to pay national insurance contributions in the UK, and not in the country they work. This, however, might change in 2021 as a result of Brexit.
Permanent establishment risk
There is also risk that employees working in another country will create a permanent establishment (PE) for the UK employer in that country. If a PE is created, the profits attributable to that ‘establishment’ would be subject to local corporation tax.
This will always be fact dependent, and the risk is greatest where the employee has a sales or business development role, and has the authority to conclude and negotiate contracts in the name of the UK employer while in the other country. The risk increases the longer the employee remains in that country.
Other issues to consider
Aside from the tax implications, employers and employees should consider whether immigration permissions to work in another country are required and whether local employment laws apply. While an employee’s contract might be UK based and governed by the laws of England and Wales, employees can often benefit from local employment rights by virtue of performing their services in that jurisdiction.
Steps businesses can take
It is important that employers have a policy that makes clear employees should not work overseas without advance approval. If an business is considering agreeing to a request, they should first:
- check the country's residence, tax, compliance and immigration regimes;
- consider carefully whether the employee’s role might give rise to a PE risk; and
- document any agreement, making it clear that the employee is responsible for any additional tax or employee social security contributions.
Joe Beeston is an employment senior associate and Kelly Noel-Smith a private client partner at Forsters