Working remotely increased significantly during the COVID-19 pandemic and, while many employers have since moved to a hybrid approach (with employees splitting their time between home and the office), a significant proportion of the UK workforce remains fully remote.
Where employees are not required to work from an office, some are taking advantage of the opportunity to move house, potentially a considerable distance from their employer’s premises. If the employee moves to a different part of the UK, they may have to pay different rates of income tax as Scottish taxpayers pay Scottish tax rates on their employment, self-employment and property income instead of UK rates.
But there can be further implications when an employee moves overseas, and these will vary depending on how long they remain there. So, whilst offering flexibility on location may help attract talent and help retain key employees, failing to consider tax issues if employees relocate overseas could leave the employer liable for additional liabilities, penalties and interest.
Local payroll requirements
An employee living and working overseas could, in some cases, mean that the employer must register for payroll taxes in the other country, even if the employer has no physical base there. Requirements for payroll returns vary between countries, so it is important to be aware of the rules of the country in question, as returns could be needed from the employee’s first day of working there.
Local payroll requirements could potentially mean that there is a need for the employer to deduct income tax in the overseas country, as well as being liable for social security contributions similar to National Insurance or local health insurance schemes. International social security obligations can be complex and our previous article on international social security issues looked at various factors that employers need to consider.
As well as the additional tax and social security costs, operating an overseas payroll creates work for HR and finance departments and this can increase compliance costs.
Risk of permanent establishment
A further risk is that an employee working in another country could create a ‘permanent establishment’ for tax purposes, even if the employer has no fixed place of business there. This will depend on the nature of the employee’s work, the tax legislation in the country and any Double Taxation Agreement with the UK.
Where an employee working overseas creates a permanent establishment, the employer may have to pay tax on their profits in the other country. Depending on the country, this could be at a higher rate of tax than the UK. Although double taxation relief may be available, any difference between the UK tax and overseas tax will be an additional cost for the employer.
Other tax issues
Depending on the country, there may be local requirements for the employer to register as a business with the local tax authorities. This could include the local equivalent to VAT, and the registration thresholds will vary between countries.
The employee may have also have their own tax registration needs, especially if they become tax resident in the other country. As this will vary by country, and they should seek tax advice to make sure that they are aware of the rules that affect them.
Wider issues to think about
The local employment law may have rules on working practices that the employer must follow, which may be different to the UK. This could include restrictions on working hours, different minimum wage levels and the need to take out public liability insurance and employer’s liability insurance. Care also needs to be taken that employees working abroad do not cause problems with regards to IT and data security.
Employees working overseas can be an extremely complex area and is often checked as part of any due diligence on the sale of a business. Getting it right first time will generally be the easiest approach in the longer term, which may mean that the employer needs professional advice in the UK and/or the other country.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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