With thanks to our colleagues in BDO UK.
On 20 December 2022, the Office of Tax Simplification published its report on Hybrid and Distance Working in which it explored the tax implications of changing working practices. The report followed a consultation with a number of business and service providers into trends surrounding the changing of working practices since the Covid-19 pandemic, and predictions for the future.
Key trends
A shift towards hybrid working (allowing employees that can work from home the ability to do so for some of their time) was almost universally reported amongst businesses surveyed for the report. It is accepted that employees have come to expect more flexible working conditions, so having that flexibility as part of a people proposition is vital to attract and retain employees.
Many large businesses have introduced policies allowing their staff to work for short periods in another country from the usual place of work. Uptake of such opportunities - while not at significant levels yet – is expected to increase in coming years.
Where short periods abroad are permitted, the most common pattern observed was for employers to allow up to 20 working days to be spent overseas in a rolling 12-month period, with many requiring that those 20 days be split into no more than two periods of overseas working. Many employers were in the 10-30 overseas working days bracket, with a small number considering longer periods of up to 90 days of presence overseas.
Some employers have enabled small numbers of employees to work overseas on a longer-term basis whilst continuing to perform their role for the UK business from the overseas territory.
Policies governing the access to overseas working flexibility generally included commentary on the eligibility of employees, any restrictions on activities that could be carried out, and permitted countries from a tax perspective.
In situations where there is a longer-term arrangement, the compliance challenges or requirement for additional supporting infrastructure was noted, with items under consideration being:
- Which entity should employ an individual (or whether an Employer of Record may be needed)
- The risk of permanent establishment creation
- Transfer pricing issues
- Payroll and social security obligations
- Business visitor reporting.
Employer requests
The OTS acknowledged that respondents had requested a review of the UK expenses and benefits system, as most concepts are geared towards dealing with more traditional working practices. For example, should the costs of travelling between a home-based workplace and an office workplace be tax deductible? Could the troublesome distinction between employer-incurred costs and reimbursed costs be removed?
While the OTS considered that adding additional tax reliefs would carry a significant cost to the Exchequer, it concluded that new ways of working do present the government with an opportunity to reconsider the approach to employee tax reliefs without necessarily adding to Exchequer costs.
It seems more likely that the improved guidance that respondents requested to assist both employers and employees could be achieved: currently there is only limited guidance available on hybrid working situations and the complex social security and payroll implications of cross-border working. More joined-up guidance on how permanent establishment and transfer pricing principles interact with staff choosing to work overseas for longer periods was also highlighted as a key need.
Current risks
The OTS report observes that where hybrid or remote working takes place in a different country from the main business location, there are a wide range of legal issues (including employment law) to be overcome, and these take employers’ primary attention. Naturally, there are often tax and social security issues and compliance obligations as well, but these can be an “afterthought” for employers – causing problems down the line.
The majority of the concern around cross-border issues was the potential for employees overseas to create a permanent establishment for the business in the overseas location. Whilst the tax impact may be negligible, the administrative burden of the registration and filing requirements is significant. It is important to note that tax and social security withholding are often the obligation of the employer that needs to be handled upfront, regardless of the personal tax position of the employee, and cannot be overlooked.
Non-tax issues such as insurance coverage and data security are areas that could be problematic to employers if not considered in advance.
Read the OTS report
How we can help
In a busy commercial environment, it can be tempting for employers to consider that there isn’t a problem with employees working remotely until one arises – sadly, that can be a costly approach.
Our specialist team can work with you on to prevent hybrid and distance working creating unforeseen problems and help you put practical solutions in place to navigate the compliance complexities that can arise when employees work remotely from overseas.
To discuss your position and how we can help, please get in touch with Geraldine Browne or Renee Dawson.