Working in a post-pandemic world
Matthew Briggs considers the tax implications for employees and employers when employees work abroad.
The COVID-19 pandemic brought about significant changes in working patterns, with many employees working remotely, even from abroad. In December 2022, the Office of Tax Simplification published a report on hybrid and distance working, exploring the tax implications of changing working practices, and business and organisations have had to adapt their internal processes and infrastructures to accommodate new working arrangements. As the cross-border working trend looks set to continue, both employers and employees must be aware of the important legal and tax consequences of working remotely while overseas.
Non-UK tax resident employees working abroad
Spending a few days working overseas is unlikely to trigger any unexpected tax liabilities. If the move is longer (or permanent), then it may be the case that employees working abroad relinquish UK tax residency altogether and acquire tax residence in the new host country. In such circumstances, the employee will need to consider the following.
Becoming non-UK resident
Employees must remember to apply the statutory residence test (SRT) to each UK tax year to determine their residence for UK tax purposes.
There are three parts to the SRT. The first two tests assess whether an individual is automatically overseas resident or automatically UK resident. If the individual does not satisfy either test, the ‘sufficient ties test’ is applied. In short, the more ties an individual has with the UK, the less time they can spend here without becoming UK resident.
One of the tests for automatic UK residence looks at working in the UK. The rules surrounding this are complex and involve looking at the hours worked overseas and in the UK in the tax year, as well as the previous tax year. If the rules are not carefully followed, there is a risk that the employee may inadvertently become UK resident. It is therefore important that the employee takes advice about how these rules will apply if they plan to carry out any work in the UK whilst wishing to remain non-UK resident.
Even if an employee can avoid automatic UK tax residence, employment arrangements continue to have a bearing on an employee’s tax residence under the sufficient ties test of the SRT. An individual has a ‘work tie’ to the UK if they work in the UK for at least 40 days in the UK in the year. The meaning of ‘work’ is broad and includes self-employment. A 'working day' is a day on which an individual works for more than three hours. This may limit the days that the employee can spend in the UK in a given tax year before becoming UK tax resident.
If an employee has a settled lifestyle or strong roots in the UK, they will need to think carefully about the lengths to which they are prepared to go (including limiting the number of days they will spend in the UK in each tax year) to become non-UK tax resident. They will also need to consider the tax consequences of becoming resident in another country under that country’s own laws.
For those employees who successfully establish non-UK tax residency, they will only be liable to UK tax on employment income insofar as duties are performed in the UK. These rules apply whether the employer is based in the UK or not and are subject to any applicable double tax treaty.
If an employee is UK resident for part of a tax year, the general rule is that they are treated as UK resident for the whole of that tax year, unless they can claim ‘split year’ treatment. If claimed successfully, the individual will be treated as non-UK resident from a date part-way through the tax year eg from when the individual or their partner starts full-time work overseas. The rules surrounding split-year treatment are complex and care should be taken to ensure that such treatment can be successfully claimed.
The territorial scope of UK taxation
Employees leaving the UK to work abroad should remember that non-UK tax residence does not mean total exclusion from the UK tax net.
Direct or indirect disposals by non-UK tax residents of UK property or land are subject to capital gains tax in the UK. Similarly, those individuals receiving UK rental income who live abroad for six months or more per year are classed as non-resident landlords by HM Revenue and Customs (HMRC) (the SRT does not apply in this regard). Income tax at the basic rate will be deducted from rent received (after allowing for expenses paid) unless the non-UK resident applies to receive the rent in full under the Non-Resident Landlord Scheme (and then pays income tax on the rental income through self-assessment).
Employees choosing to become non-UK tax resident and work abroad for a defined period will also need to be wary of an anti-avoidance rule directed at those who are temporarily non-UK tax resident. This rule provides that disposals by a non-UK tax resident and certain types of income received during a period of non-UK residence may be brought back into charge for UK purposes unless (typically) the individual is non-resident for six complete UK tax years.
Often the concept of 'residence' has a different meaning in tax law than it does for immigration purposes. Employees working abroad must be sure to take advice in the overseas country and familiarise themselves with the visa requirements for residence in that jurisdiction. Visa terms may exclude working in the jurisdiction concerned, so care must be taken. Legal systems will also differ, and it is important that employee rights and benefits comply with the tax and employment laws in the relevant overseas country.
Trusts and companies
If the migrating employee is a trustee of a trust or the director of a UK resident company, they should consider whether their move abroad could cause that entity to become non-UK tax resident, potentially triggering exit charges to capital gains tax and corporation tax, respectively.
UK tax resident employees working abroad
Some employees working from abroad for defined periods may remain UK tax resident. In such circumstances, the employee will need to consider the following.
Arising basis taxpayers
The basic rule is that if an employee is UK tax resident and does not (or cannot) claim the remittance basis of taxation, they are taxed on all their worldwide earnings. This means that employees who remain UK tax resident, but choose to work from abroad, may be subject to income (or other) tax exposure in both the UK and the foreign country. Careful consideration will need to be given in relation to double tax treaties between the UK and the country from which the employee works and whether these will alleviate any double taxation.
Overseas workday relief
Non-UK domiciled employees who claim the remittance basis of taxation may also claim overseas workday relief (OWR) for the first three UK tax years in which they are UK tax resident. This keeps an employee’s foreign earnings outside the UK tax net and they will only be liable to UK tax on earnings in respect of duties performed wholly or partly in the UK (whether or not they are brought to the UK), as well as their earnings in respect of duties performed wholly or partly outside the UK that they remit to the UK.
For an employee to claim OWR, they will need to identify which part of their employment income arises in respect of duties performed outside the UK and ensure that they are paid the non-UK part of their earnings outside the UK (and do not remit those to the UK).
Chargeable overseas earnings
Where OWR does not apply, it may still be possible for a non-UK domiciled individual to secure the remittance basis on earnings which fall within the definition of ‘chargeable overseas earnings’ so that they only become taxable when remitted to the UK. Among the conditions, the duties of employment must be performed wholly outside the UK (unless those duties are incidental) and, unlike OWR, the employer must be non-UK resident. Employees of non-UK companies working abroad and who are taxed in the UK on the remittance basis should consider this if OWR is not available.
Wider tax advice should always be taken in relation to issues such as domicile and residence.
Considerations for employers
Pay As You Earn (PAYE)
PAYE is an arrangement for the withholding of UK income tax on employment income and employers are legally obliged to operate PAYE if they have a UK place of business and employees. If an employee decides to work abroad, an employer caught by PAYE must continue to calculate and deduct PAYE tax from all payments made to the employee. Where the employee is on an overseas contract, the overseas jurisdiction may look to make tax deductions in a similar way. An employer will need to contact the overseas authority to ensure all necessary obligations are being met in the UK and host country of the employee working abroad.
Employers of employees claiming OWR may also need to agree with HMRC how much income tax the employer should deduct at source to account for the fact that not all the earnings will be taxable in the UK.
National Insurance Contributions (NICs)
The rules relating to NICs where employees work abroad will depend on the specific circumstances of the employee and from which jurisdiction they decide to work.
Where an employee works abroad from the EU, they will only have to pay into one country’s social security scheme at a time (either the host country or the UK). The same applies if the employee chooses to work from Iceland, Norway or Switzerland. Contributions will ordinarily be due in the country where the work is being performed, although for employments starting after 31 December 2020, the rules have changed for postings to Iceland, Norway, Switzerland and Liechtenstein, and temporary presence in a country may mean that UK NICs still apply.
If an employee works in a country that is not in the EU (or Iceland, Norway or Switzerland), but with which the UK has a social security agreement (sometimes called reciprocal agreements or double contribution conventions), the employee will usually pay social security contributions in that country, rather than NICs in the UK.
In some circumstances, the employee may need to apply for a certificate to ensure that NICs are only paid in the country in which they are due or may need to pay voluntary contributions in the UK, and employers should take advice as required.
Creating a permanent establishment outside the UK
Employers must be aware of the potential risk of an employee creating a permanent establishment of the business outside the UK when their employees work abroad. While this is unlikely to happen simply where an employee, working from abroad, carries out their ordinary everyday duties from a foreign country, the risk will be far greater where that employee frequently negotiates contracts in that foreign jurisdiction on behalf of the employer, or takes key strategic decisions from the business in that jurisdiction. This risk will only increase over time. Establishing a permanent establishment in another country would have significant corporation tax implications for the employer in the UK and/or foreign country from which the employee works. Employers will need to ensure that their employee’s presence abroad does not constitute sufficient activity to create an unintended taxable presence in that jurisdiction.
Employers and employees alike will need to be aware of the legal rights to work in an overseas jurisdiction. Certain countries may also require the employer to sponsor the employee to work there. Employers will need to take the requisite local employment and immigration advice to ensure they are not in breach of any laws in that territory.
This is a complex area and care needs to be taken. It is important that employees and their employers are aware of the tax risks of overseas working and plan accordingly. Advice should be taken not only in the UK, but also the foreign country concerned to ensure legal compliance in a world where cross-border working is considered business as usual.
Matthew Briggs is a partner at Irwin Mitchell.