What are the tax issues arising from overseas home working?

18 Feb 2021 By Merrill April and David Yewdall

Companies need to take a closer look at the implications of their employees doing their jobs abroad, say Merrill April and David Yewdall

Over the last year, organisations have experienced an increase in employees requesting to work from a different country to where they would ordinarily have worked pre-pandemic. Some requests will have been granted urgently, meaning organisations did not formalise such arrangements contractually, as more pressing matters took priority. 

The imperative now is to review such arrangements. Failure to do so puts employers at great risk, owing to the legal, tax and practical implications caused by overseas home working. 

Employment tax, payroll and social security 

Employers should consider various broader commercial issues when granting requests for overseas home working, including tax, social security and other employer and employee registrations and reporting that may arise. 

Crucially, employers need to be aware of their responsibilities, even where an employee is relocating overseas as a personal choice. For example, should income tax or social security be due in another jurisdiction, there may be a payroll withholding requirement imposed on the UK employer in that host country, meaning the UK organisation has to register and maintain an overseas payroll to collect what may be due. This can create tensions in employer/employee relations, and consequently could blur the line between managing corporate risk and managing talent. 

Another pressing concern can arise when an employee operating overseas creates a permanent establishment for the UK business; this could lead to UK corporate profits being subject to overseas taxation, thereby increasing the cost of the arrangement.  

For non-UK resident employees situated in the UK, the 2020 HMRC concessions covering a number of exceptional days that employees were stuck in the UK owing to Covid have not been continued. There is now a process for non-UK residents to file a self-assessment tax return together with supporting evidence to verify inability to leave the UK. Additionally, the guidance states that a day spent working in the UK will continue to be treated as a UK workday and therefore constitute a taxable presence. 

If these matters are not carefully managed, both employers and employees face additional costs and administrative burdens. To avoid this, some employers have asked employees to return to the employer home country as quickly as possible.  

Legal and practical considerations 

Data security risks may be heightened if employers do not have secure systems, such as VPNs in place. Data will be regularly transferred abroad between employer and employee – data protection laws must be complied with and appropriate safeguards put in place. 

Employers have a common law duty of care to employees in addition to a statutory duty, under the Health and Safety at Work Act 1974 to ensure that, so far as is reasonably practicable, the health, safety and welfare of employees are protected. This duty extends to home working and overseas working locations – actions to ensure compliance with these duties will include conducting risk assessments and implementing policies. If businesses are requiring employees to return to the employer's home country they must consider this health and safety risk, mindful of the pandemic and the threat of new variants.

Also, employees working abroad for prolonged periods could acquire local employment rights, despite having a UK employer.

Contractual implications 

Organisations that require their employees to return to the country they are based need to consider whether they will be in breach of the express or implied terms of employment contracts and/or temporary overseas working contractual arrangements, and consider what their options would be if employees refuse to return but remain available and willing to work. 

Those with more than two years’ service have statutory protection from unfair dismissal and it is likely that an employer’s best option will be to negotiate or mediate a settlement that keeps talent in the business while mitigating risk and reducing cost. 

If employers have not done so already, any overseas working arrangements should be documented and they should clarify matters such as the governing law and jurisdiction of the contractual relationship, responsibility for employee risk/losses and responsibility for any local tax or social security payments and personal tax declarations that may need to be made. 

While many employers are still operating in a period of uncertainty, they need to pay close attention to the various implications surrounding the location of their employees and understand the broader issues arising. We encourage employers to seek appropriate expert advice at an early stage to avoid pitfalls.

Merrill April is a partner at CM Murray and David Yewdall a partner at Smith & Williamson

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