Posted: 17/09/2020
Since lockdown started in March, homeworking has become the norm for millions of workers who were previously office-based. In April the Office of National Statistics showed that 49.2% of adults in employment were working from home, and in August a YouGov survey of 4,000 workers has revealed that one-third believe they will not return to their place of work until 2021, if at all. A quarter said that they expected to return sometime in 2021, but 8% expected to continue working from home indefinitely. Some 80% would prefer to continue working from home at least one day a week. There are various reasons why employees are keen not to return to work, from concerns about the virus, to a desire to reduce commuting time and to achieve a better work/life balance. Homeworking certainly seems to be here to stay, and it provides opportunities for workers to be ever more flexible: we are seeing many examples where workers want not only to work from home in the UK, but to move abroad and carry on working for their UK employer.
In this note we look at the key issues employers should consider where a worker wishes to work from outside the UK and set out what practical steps employers can take to minimise the risks.
Tax and social security is a key consideration, and one which may complicate things for both the worker and employer.
Provided that the anticipated duration of the stay in a host country is not so long that it would impact tax residency (see below), UK employers should continue to deduct income tax under the PAYE system in accordance with the employee’s PAYE code. The employer should also continue to pay employer National Insurance Contributions (NICs) and deduct employee contributions.
Each country will however have its own rules about when someone is considered tax resident and therefore liable to income tax in that country. In the UK, for example, although the starting position is that someone may be resident in a tax year for 183 days before they become tax resident, the number of days that a person can actually spend in the UK before becoming tax resident depends on previous tax residency and how many ‘ties’ the individual has to the UK (eg home, job, family). If an individual has been resident in the last tax year and has four or more ties to the UK, the period is only 16 days before they are considered tax resident. Other countries will have their own national law rules and these will need to be considered.
Employers should therefore consider whether the duration of the worker’s stay in the host country creates risks of income tax or social security liability in that country. The starting point is that the host country has primary taxing rights over employment income an employee earns while physically working in that country. However, the UK has a double tax treaty (DTT) with most countries, including all 27 EU countries (and most other major world economies). The DTT determines who has primary taxing rights and also prevents double taxation, and it does this by treating the tax paid in the country with the primary taxing rights as a credit towards the tax due in the country with the secondary taxing rights. If the country with primary taxing rights has the higher tax rate, there will be no tax to pay in the country with the secondary taxing rights, but there will still be filing obligations to claim the tax credit for tax paid in the other state.
Someone leaving the UK will need to file Form P85 with HMRC, otherwise the employer will still be required to deduct under PAYE which will lead to cash flow issues if the individual is also required to pay tax in the new country of residence.
For social security purposes, the position will broadly depend on whether the UK has a social security agreement with the other country and how long the period of residence in the other country is anticipated to last. If the period abroad will be temporary (less than two years) and the UK has a social security agreement with the other country, it is possible to continue to pay NICs in the UK rather than social security in the other country.
Employers should also ensure that the actions of the worker are not going to cause the UK employer to have a ‘permanent establishment’ abroad. For example, if the employee is signing contracts and deals abroad there is a potential risk that a ‘permanent establishment’ could be created. If so, the host country will seek to tax the profits attributable to it. Whether or not a permanent establishment is formed abroad depends entirely on the laws and interpretation of that country.
Employees living and working abroad, even for relatively short periods, are likely to fall under the jurisdiction of the host country. This could result in employees benefiting from local mandatory employment law protections such as minimum rates of pay, paid annual holidays and rights on termination.
Employers have a duty to protect the health, safety and welfare of their workers, which includes providing a safe working environment when they are working from home – wherever that home is based. Employers will also need to ensure that the working environment is compliant with any local health and safety requirements.
They must consider if any local equivalents to employers’ liability insurance apply where the worker is not ordinarily resident in the UK.
If an employee is requesting to work from a country outside of the EEA which is not subject to the GDPR and other EU privacy laws, this could give rise to data protection issues including whether any data being handled or generated by the worker is being processed lawfully. The nature of an employee’s role may mean that significant amounts of personal data are being processed.
Employers should check to ensure there are no territorial restrictions on the use of third party software or other IT systems which might put them in breach of their contracts with suppliers if a worker is based abroad.
Employers in regulated sectors should also check to ensure there are no regulatory requirements which might affect overseas working.
If the worker 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 a worker is not an EEA national and/or wishes to work from a non-EEA country, employers should consider what visa restrictions and requirements may be in place in the host country.
If an employee is a non-British national, they will need to consider whether their absence from the UK may affect their visa, or their eligibility to apply for other types of status in the future where absences are assessed, such as settlement or naturalisation as a British citizen.
Employers should bear in mind that EEA nationals who want to benefit from the UK’s EU Settlement Scheme (EUSS) must have started living in the UK by 31 December 2020 and can then apply under the scheme for settled status or pre-settled status until 30 June 2021. It is possible to apply under the EUSS from outside the UK by 31 December 2020 if they are able to show evidence of residence in the UK within the last six months of applying.
Whilst there are a number of important issues for employers to consider, generally speaking, the shorter the period the worker works abroad, the smaller the risks are likely to be. Further, if the employee is seeking to work within the EEA, this is generally more straightforward. However, this will change after 31 December 2020 when the Brexit implementation period comes to an end.
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