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Employers should consider a variety of issues, including tax, social security, immigration and employment implications, before agreeing to an employee’s request to work from home when ‘home’ is not in the UK. This article looks at each of these issues below before explaining what practical steps employers can take to minimise the risks.
Tax and social security implications of working temporarily abroad
From a UK perspective, unless the anticipated duration of the stay is so long that it may impact tax residency, the UK employer should continue to deduct income tax under the PAYE system in accordance with the employee’s PAYE code notwithstanding that the employee is temporarily working overseas. In addition, the employer should continue to deduct employee national insurance contributions (NICs) and pay employer NICs.
It is important to consider, however, whether the employee’s stay in the host country creates risks of income tax or social security liability in that country – or even the risk that the employer is regarded as having created a permanent establishment there. Several tax authorities have issued concessions in the light of COVID-19, but not all have done so, and it will be important to establish the rules in place in the relevant host country. We briefly outline the issues below.
Income tax may be payable in host country if employee becomes tax resident
The starting point is that the host country has primary taxing rights over the employment income that the employee earns while physically working in that country. However, if there is a double tax treaty (DTT) between the UK and the host country, the employee may be exempt from income tax there if certain conditions are satisfied, including that the employee is not a tax resident in the host country.
The employee’s residence status is determined in accordance with the DTT by reference to their personal circumstances, and whether the number of days they are present in the host country over a 12-month period (however briefly and irrespective of the reason) exceeds 183 days.
The UK has a DTT with most countries, including all 27 EU countries and most other major world economies. In practice, this means that a short stay abroad in many locations is not going to result in the employee becoming liable for host country income tax.
Importantly, however, employees who have already spent other periods in the host country in the same 12-month period (e.g. Visiting family) may reach the 183-day threshold sooner than previously thought. Also, the full details of the conditions can differ from DTT to DTT (particularly the period over which the 183-day test must be satisfied), and the employer and/or employee may still have obligations in the host country even if the DTT applies. (For example, the employer may need to register with local authorities as an employer and/or report on the income that is being paid to the employee.). It is, therefore, important to understand the local position.
If the employee does become subject to tax in the host country but remains a UK tax resident, they will remain subject to UK income tax on their worldwide income but should be able to obtain credit for some or all the tax they pay in the host country. They will, however, need to complete the appropriate tax declarations, which could be a complex process.
Social security position is complex and depends on what agreements are in place
The general rule is that employee and employer social security obligations arise in the country in which the employee is physically carrying out their duties.
In the European Economic Area (EEA) and Switzerland, there are currently exceptions to this general rule which allow a UK employee and their employer to continue to pay UK NICs and not pay social security contributions in the host country if certain conditions are satisfied. It is crucial to obtain an A1 (or E101) certificate from HMRC (or the social security authorities in the employee’s country of residence if different). Note that these rules are due to expire on 31 December 2020, when the current Brexit implementation period ends, and it remains to be seen whether there will be a trade agreement between the UK and EU which will replicate any of these features.
Outside the EEA and Switzerland, the position will depend on whether there is a reciprocal agreement between the host country and the UK. In countries where there is a reciprocal agreement, such as the USA or Japan, it is possible for an employee to remain within the UK system (and not pay local social security contributions) for up to five years if they have a valid certificate of coverage.
In other countries where no agreement exists, the UK employer must continue to deduct employee UK NICs and pay employer NICs for the first 52 weeks. Further, depending on the social security regime that is in place, there may also be a liability to pay social security contributions in the host country in addition to any contributions that are made in the UK.
Risk of creating a permanent establishment is low but should be considered
In some situations, there will be a risk that the employee’s activities or presence in the host country will create a permanent establishment for the employer in that country. This would be the case if, for example, the employee has a sales or business development role and is habitually exercising an authority to conclude contracts in the name of the employer while in the host country.
If a permanent establishment is created, the profits attributable to that establishment would be subject to corporate tax in that country. It would also mean that the income tax exemption in the DTT would not apply. While this may be less of a problem if a business already has established operations in the host country, it could be a real headache if this is not the case.
Assuming the working-from-home arrangement is only short term, it would be difficult for the tax authorities to argue that a permanent establishment had been created. The longer the arrangement continues, however, the greater the risk – particularly if the employee routinely negotiates the principal terms of contracts with customers which are simply ‘rubber-stamped’ without amendment by UK employees.
Immigration implications of working abroad temporarily
Immigration permission is generally not required for business visits. Depending on the employee’s activities, it may be possible to characterise their stay as a business visit – for example, if their activities are limited to those typically undertaken during business trips (e.g. meetings and training). However, restricting an employee’s activities in this way is unlikely to be practical for many employees and, in general, the longer an employee works without permission, the more difficult it will be to characterise their stay as a business visit. In some countries, work itself is prohibited even as a business visitor.
Currently, if the employee is a UK or EEA national, they have the right to live and work in an EEA country (although this position will change for UK nationals from 31 December 2020 when the current Brexit implementation period ends).
If an employee is not an EEA national and/or wishes to work from a non-EEA country, it is important to consider what restrictions may be in place. For example, if employees want to work in Hong Kong but don’t have permission to stay there indefinitely, they should not undertake any work without permission, even for a limited period and even if the employing entity is not a Hong Kong entity. As with tax and social security, some countries have implemented emergency COVID-19 legislation that will affect the normal immigration position, but this is not the case everywhere.
Employers may also need to consider any immigration issues that could arise on the employee’s return to the UK. For example, EU nationals should consider whether to secure settled or pre-settled status in the UK before they travel overseas. Other non-British nationals should consider whether their absence from the UK may affect their visa, or their eligibility to apply for other types of status in future where absences are assessed, such as indefinite leave to remain, permanent residence or naturalisation as a British citizen.
Employment law and data privacy implications of working abroad temporarily
On top of the tax, social security and immigration implications explained above, there are various other employment law and data privacy considerations.
Mandatory employment protections may apply
If employees live and work abroad, even for short periods, they can become subject to the jurisdiction of that other country and start to benefit from the applicable local mandatory employment protections. These may include minimum rates of pay, paid annual holidays and – perhaps most importantly in the event of a dispute – rights on termination. What protections, if any, an employee acquires will depend on the country in question.
Within the EEA, there is also the Posted Workers Directive (PWD) to consider. This applies where an employee is “posted” from one undertaking or establishment to another cross-border within the EEA (and, until 31 December 2020, the UK). Changes to the PWD, which must be implemented by the end of July, mean that employees will be entitled to the same mandatory pay as comparable employees in the host location.
The PWD itself was not designed to cover the situation of an employee working from home temporarily in another EEA country, and it would not be directly engaged unless a formal secondment to a local group company is opted for or ask the employee to work on a contract for a local client. However, the local implementation of the PWD may nonetheless end up capturing this situation.
For example, in Belgium, the local implementation of the PWD requires that all employment, remuneration, working terms and conditions and collective bargaining agreements that have been declared generally binding apply as of day one to any employee working temporarily in Belgium. This is also true of the UK, where employees have certain minimum statutory rights from day one. This can be a complicating factor, particularly if a dispute or termination scenario arises and the employee asserts that they have employment rights in another jurisdiction.
Be careful about transferring data
If an employee’s role involves processing personal data, this could give rise to data protection issues, especially if the employee is requesting to work from a country outside of the EEA which is not subject to the General Data Protection Regulation and other EU data privacy laws.
Local health and safety protections may apply
UK employers have a duty to protect the health, safety and welfare of their employees, which includes providing a safe working environment when they are working from home. If an employee works from home abroad, you should also ensure that it is compliant with any local health and safety requirements. For example, in the Netherlands, employers must provide employees with the equipment needed to ensure a safe working environment, which in some cases, might involve making a contribution or purchasing relevant equipment.
Employees will also need to comply with applicable public health guidance (e.g. quarantine periods) both in the host country and on their return to the UK.
How to minimise the risks
Given the current situation, employers will no doubt want to be flexible when it comes to accommodating requests to work from home overseas, and they will also want to minimise the risks. Depending on how many requests employers expect to receive, it may be worth developing a short policy to ensure that these situations are dealt with consistently and fairly. It is possible that more such requests will be made in future, as employees look to take advantage of increased remote-working opportunities to ask if they can work abroad for a short period on a regular basis.
The key practical steps for minimising the risks are as follows:
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