During the pandemic, we have been repeatedly recommended by the government to work from home wherever possible. Some employees may have chosen to go back to their home countries and work from home there.
This may not make a difference to the employer’s operations, but it can have reporting consequences for the employer.
PAYE tax and Social Security
How a UK employer calculates and pays PAYE tax and National Insurance contributions for an employee working abroad depends on where the employee is working and how long it is expected they will be working there.
If an employee is working outside the UK for less than 183 days, they should remain UK resident for tax purposes. In this situation, the UK employer should continue to deduct UK income tax and social security costs as normal. If the employee is working in an EEA country or Switzerland then the UK employer should also apply for a “Portable Document A1” from HMRC to confirm that the employee is entitled to continue to pay UK social security (i,e, Class 1 National insurance contributions) and is exempt from any foreign contributions.
If the employee is working in a country which has a “double tax treaty” with the UK, then this will prevent an additional tax charge in the foreign country whilst the employee remains UK resident for tax purposes. Luckily, most countries have a double tax treaty with the UK, but this should be confirmed in every case.
If the employee is working outside the UK for a longer period of time (more than 183 days) then this may affect the employee’s tax residency status. The tax position then becomes more complex and specialist advice should be sought.
Another factor to consider is whether the employee could be regarded as creating a permanent establishment for tax purposes in the jurisdiction in which the employee is working. Although the risk is low, the repercussions are significant in relation to potential corporation tax liabilities for the UK employer.
Whether the employee is creating a permanent establishment will very much depend on the type of role that the individual is carrying out, but could arise if the individual habitually exercises an authority to conclude contracts in the employer’s name in the foreign country. An employee working abroad for a short period of time is very unlikely to create a permanent establishment, but the longer the arrangement continues, the greater the risk.
If a permanent establishment is created, not only will the income tax exemption in the Double tax treaty no longer apply, but any profits attributable to that establishment would be subject to corporation tax in that country.
It is important to remember that tax and social security are not the only issues for employers to consider. Employment law, immigration law, data protection, insurance, health and safety are all considerations too. If a UK employer wishes to allow its employees to work abroad, it is recommended to ensure an expert is consulted on all of these issues.
It is important that employers know when and where their employees are working abroad. Employers need to have a clear and distributed policy to remind employees that they need to inform their employer before working abroad and any agreement must be made in writing.
As ever, we are here to support our clients through these challenging times, so if you would like to discuss any of the above in more detail then please get in touch with Stephanie Gover on 01268 983905 or via [email protected] for more information.