Tax risk for businesses allowing remote working overseas, study shows

New research shows organisations are increasingly permitting employees to work outside of the UK to combat staffing challenges, but many are not aware of the potential risks.

The research, covered by People Management, is by tax consultancy RSM and appears in The Real Economy Report’. It found that the 33% of organisations who allow employees to work remotely outside the UK are doing so in response to staffing challenges, with 88% of businesses finding employee turnover an issue.

Businesses are also looking overseas to source labour in response to a difficult recruitment and retention market – over half of firms, 52%, have increased the amount of overseas labour they’ve taken on in the past year. However, as the article points out, lawyers and accountants are warning that allowing staff to work remotely outside the UK creates a slew of taxation and legal questions.

We agree, it does, and it’s something we have been flagging with our clients. Penny Simmons in a tax specialist and she’s been advising clients of the risk of creating a taxable presence in the overseas location:

Penny Simmons: “So, lots of clients come will approach me from the business angle. So where an individual wants to work abroad for a period of time, and I think, Joe, we’ve talked about this before, but the key issue that comes up from my clients is if this person works abroad for an extended period of time, say for example, a few months, is there a risk that they are going to create a taxable presence in that location for our business? So, if the business doesn't have a taxable presence in that location, is there a risk that that individual is going to create one? That's something that because the law is complicated, it will be dependent on a number of factors looking at precisely what the individual would be doing in that location. That’s not necessarily a quick and easy answer. So those would be the tax considerations. You also have to think about social security contributions and exactly what employment taxes need to be paid and where they need to be paid. So, it can often be quite complicated. So, clients will be asking for advice generally on what are the implications of one of my UK-based employees going to work abroad for a limited period of time with fully with the intention of coming back to the UK, so it's not a permanent move, it’s a temporary move.”

Joe Glavina: “What’s your message to HR around this Penny? Should they be conducting some sort of audit, or review, to identify potential issues?”

Penny Simmons: “There isn't a set audit or review process. Really, it's everything that we've talked about before in relation to other areas of employment tax law. We would strongly encourage that the HR functions within a business and the tax functions within a business, they talk to each other and they communicate a lot and that there are processes in place so where an individual goes to HR, because that's traditionally where they would go to ask - can I go and work abroad for a period of time? - HR doesn't just look at the employment considerations, and that’s exactly the point where they need a process in place so that they contact their internal tax team, or their external tax advisers, to check what are the tax implications going to be both for the individual, from an employment tax perspective, but also for the business, if we allow this person to go and work abroad for a period of time, and it's probably a good idea, because these requests are increasing, and they're certainly a lot more common than they were before the pandemic, that a business has in place a policy and processes for how long they will allow an individual to work abroad and what happens when an individual first makes that request so that there is, if you like, a clear process in place so that businesses can deal with those requests for the individuals themselves, but also to make sure that they safeguard the employment and tax risks for the business.”
Penny and the tax team have produced a guide on managing tax risks for UK companies engaging overseas contractors. We’ve put a link to that guide in the transcript of this programme for you.

LINKS
- Link to Out-Law guide on managing tax risks for UK companies engaging overseas contractors