Senior UK staff working abroad? Beware corporate tax risk, warns lawyer

The taxation of UK employees working from home or overseas is to face greater scrutiny. The Office of Tax Simplification, an independent adviser to the UK government, has launched a consultation into how companies are adapting to the rise in hybrid and remote working.

As the FT reports, the OTS review will be published next spring and will examine the tax and social security implications for companies and employees of working across borders, as well as homeworking in the UK. It will also assess the role of “digital nomad” visas now offered to attract mobile workers in more than 40 jurisdictions. These are temporary residence permits for those who earn an income working remotely.

Penny Simmons comments on this for Out-Law. She says the review is a welcome development which will help end ‘significant challenges’ faced by employers since the start of the Covid-19 pandemic. She says: ‘In recent years, there have been radical changes to peoples’ working patterns with an increasing occurrence of hybrid and remote working and UK based individuals looking to work remotely from an overseas location for a short period”. She says the UK’s tax system has not been updated to reflect modern working practices, hence why the review is needed. She highlights her key concern, namely, how the risk of creating a taxable presence in another jurisdiction is increased if the employee based there is involved in managerial decision-making.

So, what does she mean by that and why should that concern HR? Earlier Penny joined me by video-link to discuss the OTS review and I put that question to her:

Penny Simmons: “Okay, so when people talk about the OTS review, particularly when you're coming from an HR perspective, you're talking about individual employees who might want to go and work abroad for a bit, particularly those who may want to work abroad over the summer months, for example, or for family reasons. There is often a focus on do they have the right to work abroad, and other kinds of employment-related issues. There is a key tax issue, and it is a corporate tax issue, that businesses need to be alive to, and need to be aware of, particularly when we're talking about senior employees who may go and work abroad and be part of the strategic decision-making of the business. There is a risk that if they are working abroad for a period of time, and they're involved in decision-making whilst working abroad, they could cause the business to have a place of business abroad in the jurisdiction in which that individual is working, and that could actually create overseas corporate tax issues for the business and that could be a significant problem, particularly if the business doesn't already have a place of business in that particular jurisdiction. So where I'm coming from, Joe, and what my advice would be, particularly to HR professionals, if they receive requests from individuals asking to work abroad, don't just focus on do they have the right to work and what employment issues could be involved, or even employment tax issues could be involved in terms of social security contributions, but it's also important to make sure that you liaise with your corporate tax team to ensure that there wouldn't be this risk of that individual creating what we call in the corporate tax world a ‘permanent establishment’ in that overseas jurisdiction and cause the business to have to pay corporation tax profits overseas.”

Joe Glavina: “OTS findings are a long way off - spring 2023 – so why should we be concerned about this now?”

Penny Simmons: “So this is an OTS review, it’s an OTS-commissioned review that the government will look at, but the government is not obliged to take onboard the OTS’s recommendations and, even when they do, we know that the OTS are not going to publish their review until 2023 so we're talking quite a way down the line before we have any changes that are directly linked to this review. But this is a risk right now and this has always been a risk, if you like, from a corporate tax perspective, but even more so recently because of the change in working practices particularly accelerated during and after the COVID 19 pandemic where you have lots of individuals now looking to work abroad on the basis that they can work in an agile way, they just need their laptop, and what have you, and they can do that just as easily abroad as they can do from their home office in the UK or, potentially, from their normal place of work.”

Joe Glavina: “So should employers be doing between now and next spring when the OTS’s finding are published?”

Penny Simmons: “I would recommend a review of individuals who may have worked, or requested to work, abroad for a period of time. If that that population is very large, then it may be pragmatic to narrow that review to more senior individuals who are more likely to be making those decisions that could bind the business and create this fixed place of business in the overseas jurisdiction. I would be recommending that businesses who think this may be relevant to them, particularly HR professionals who may not have been in touch with their tax colleagues, have a look at which employees, particularly those who are senior, have worked aboard recently.”

Penny’s article on this deals with a number of those points in more detail if you are interested in that. That’s ‘Experts welcome OTS review of remote worker UK tax status’ and is available from the Out-Law website. We’ve put a link to it in the transcript of this programme.

LINKS
- Link to ‘Review of hybrid and distance working - Call for evidence’
- Link to Out-Law article; ‘Experts welcome OTS review of remote worker UK tax status’