Even before the pandemic, it wasn’t just multi-national companies that allowed remote working from home, even if that home was in another country. Now though, recent events have seen a stepped increase in employers allowing their staff to make full use of the technology that can enable employees to operate from anywhere in the world. Reasons for this can include a realisation that home working is a valuable part of the business culture, or that the closure of international borders left employees stranded, but still able to perform their duties fully.
Employers of all sizes now find themselves in what was previously unchartered waters – understanding their responsibilities in overseas jurisdictions.
Corporate residence and permanent establishments
Determining the corporate residence of a truly international company is a complicated area, but for most SME’s based in the UK, merely allowing an employee to work from home in another jurisdiction is unlikely to change its tax residence. However, a secondary consideration is that of a ‘permanent establishment’. Where a UK company has a permanent establishment elsewhere, it is possible that corporate profits attributed to that presence will be taxed in the overseas country. It is generally viewed that where the overseas employee’s presence working at home is neither ‘habitual’ nor ‘becomes the new norm’ then there is no permanent establishment. However, if once the pandemic is over, overseas working relaxes into a regular mode, a closer review will be required.
Payroll taxes
Although it depends on the country in question, short postings or secondments overseas do not usually require the operation of payroll in the host country, especially if there is a tax treaty in place. However, longer periods of overseas working, and especially if it becomes a permanent arrangement, will usually require payroll to be run in the overseas jurisdiction. This will lead to payroll taxes and possibly social security being payable overseas and in the local currency. Provided an employee’s duties are all performed overseas it should be possible to notify HMRC to prevent tax being paid in the UK on the same salary. A certificate of residence is usually required as evidence.
Alternatively, the tax treaty may exempt the income of the individual overseas from local payroll, but instead a withholding tax is levied. This may sometimes be set against the UK payroll taxes, via an ‘Appendix 5’ agreement with HMRC. To ensure that there is no tax leakage, the agreement should be entered into from the outset.
It should be noted that in non-treaty countries (or treaty countries where payroll is not covered), local taxes may be due from day one, regardless of the duration of the employment. Local advice is imperative, particularly in less accommodating regimes.
Social security (National Insurance)
It must not be assumed that tax and social security are one and the same. There are many occasions where tax may be due and social security not, or vice versa. EU member states will generally allow a temporary (usually less than two years) placed employee to continue paying NI in the UK (although note that this is not anticipated to continue after the UK leaves the EU). There are also treaties for social security with some non-EU members to achieve similar relaxations. Crucially, written evidence, usually in a standard form from HMRC will need to be provided to the host country’s tax authority to prove the exemptions.
COVID-19 provisions
Many states have provided temporary relaxations to the above rules during the pandemic, and while each case needs to be considered separately, as employers adapt to the ‘new normal’ the relaxations cannot be expected to continue. UK businesses with employees based overseas must carefully consider their responsibilities at home and abroad. Hazlewoods are experts in advising businesses with a ‘mobile’ workforce and our membership of HLB International allows us to provide up to date tax advice in the UK and overseas.