COVID-19 has had a profound effect on how and where we work. As we emerge from the pandemic, there is an increasing level of demand for more flexible and remote working arrangements to continue long-term, including on an international and cross border basis.
It is clear that businesses that choose to adopt international remote working arrangements as part of a longer-term talent strategy may gain access to a more global and diverse talent pool. They may also benefit from improved talent attraction and retention. There are, however, various tax, HR and legal considerations that need to be approached holistically to ensure that any international remote working arrangement is both effective and compliant. These considerations are examined in further detail below.
A UK employee who remains UK tax resident during their period of overseas work will generally continue to remain liable to UK income tax on their employment income. The extent to which an income tax charge is triggered in the overseas territory in which the employee is working will be dependent primarily upon their personal tax residence status in that territory, along with their ability to claim relief from local taxes under the terms of an applicable double tax treaty. Tax residence rules and the exemption conditions set out within double tax treaties can vary between territories and should be reviewed on a case by case basis. Furthermore, not all countries have a double tax treaty in place with the UK and so an income tax charge can arise in these territories from day one.
Where an income tax charge is triggered in the overseas territory, local filing requirements are likely to arise for the employee, which may also trigger employer reporting requirements, including payroll withholding. Any dual withholding or income tax charges would need to be effectively managed in order to mitigate adverse cash flow implications.
It is also important to be aware that the social security position does not always follow the income tax position and so should be considered separately.
If employees work remotely overseas, it could create a permanent establishment (PE) risk in the country in which the individual is working. This in turn could create a corporate tax exposure for their employer. Consideration would also need to be given to the transfer pricing implications of such arrangements. In the event that a PE is triggered in the overseas territory, an attribution of profits to the PE may need to be undertaken, which would be subject to local corporation tax. The methodology used to attribute profits to the PE could impact the ability of the employee to claim relief from personal income tax charges in the host country under the terms of an applicable double tax treaty.
A robust international remote working policy should exist, which clearly sets out the parameters within which an employee can work remotely overseas. This should set out allowable periods of work and explain how these are defined, and include the roles and responsibilities of both parties during the relevant period. A formal policy can also help to develop a consistent approach to dealing with international remote working requests, manage employee expectations, and mitigate risk.
The implementation of an international remote working policy provides employers with an opportunity to review existing reward strategies and to ensure that they are aligned with both corporate objectives and new ways of working. The tax, social security and reporting requirements associated with any existing and future reward plan should also be considered.
Immigration and legal
Employers who allow employees to work overseas should be mindful of local immigration laws and specific advice should be sought on any specific immigration requirements.
Employers should also assess any employment rights and protections that may be available in the country in which an employee is working, in addition to any rights they may already have in the UK. Local legal advice should always be obtained.
How we can help
We can provide a full suite of services to support you with managing the various tax, social security, payroll and employer reporting considerations associated with international remote working arrangements in both the UK and overseas. Our specialist advisers can also support you with the design and implementation of formal remote working policies, governance frameworks, and reward plans.
As a member of Nexia International, we have a global network which covers more than 700 offices across 128 countries and allows us to provide a truly global service. Our network also extends to independent law firms, meaning that we can also provide a seamless service when it comes to the provision of both tax and legal advice.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.