Whilst the COVID-19 vaccine roll out progresses and hopes of ‘returning to normal’ appear more well founded, many employers are nevertheless coming to terms with remote working having become a key feature of working life in the longer term. Some employees are taking advantage of the opportunity that not having to attend a particular place of work brings and are looking to work from overseas – either where they have family or places that they simply want to visit – so called ‘workations’. Stays may be short term, for just a few weeks, however, others are relocating more permanently, or making a number of trips to the same place on a regular basis. Indeed, many countries are encouraging this trend with visas and tax breaks available for longer stays of up to a year.
However, what are the potential pitfalls that UK employers need to be aware of?
If an employee is based outside the UK for a reasonable period of time (as opposed to a fleeting visit) it is possible that they may benefit from local employment rights (how and when such rights accrue will likely vary from country to country) simply by virtue of working from that country, even if they’re employed by a UK company and have an employment contract governed by UK laws. These could include minimum amounts of holiday or other conditions around maximum working hours, but could also include protection against discrimination or dismissal that varies from the UK. It’s important to note that some jurisdictions are more employee-friendly, for example with more generous redundancy payments, or collective bargaining agreements that apply to certain sectors.
Employee income taxes
An internationally mobile individual is at risk of exposure to taxation of their employment income in more than one jurisdiction. Therefore an employee who is in this position already, or is looking to take advantage of a move to more international working arrangements, should be in a position to make an informed decision as to which jurisdiction they will be exposed to income tax, and how best to try to mitigate the risk of double taxation through the use of applicable double taxation treaties. In addition to where the tax liability itself arises, thought should also be given to the compliance aspects and ensuring that the individual knows where they will need to make relevant income tax filings.
In addition to the employee understanding their personal position, a UK employer will need to know about an employee’s activities outside the UK in case that gives rise to a different set of reporting requirements for the employer, including any local payroll operating requirements in the relevant jurisdictions(s.
It is also important to note that the rules for National Insurance contributions (“NICs”) in the UK, often referred to as social security taxes in other jurisdictions, are not identical to the rules for income tax.
This is often true in other jurisdictions, and separate international agreements have been reached in respect to these type of taxes or charges. As such, both the employee and the UK employer will not only need to consider the income tax position, but also look to obtain advice as to where any NICs or social security obligations will arise.
Corporate taxes for employers
Employers should be mindful that having an employee working in a different country to where the business is primarily based can result in the employer having a ‘permanent establishment’ (in other words, a taxable presence) in that jurisdiction, which could give rise to corporate tax obligations in that jurisdiction for profits attributable to the work being undertaken there. There could be an even wider reaching corporate tax implication where an employee who is an office holder with an element of management and control over an entity, is operating outside the UK and so may, subject to local rules, pull the UK entity in its entirety into the tax net of that other jurisdiction.
There is no reason why an employee resident overseas cannot continue to build up benefits in a UK registered pension scheme. However, unless the employee continues to have taxable UK earnings, the tax relief available will be limited to gross contributions of £3,600 per annum. If the employee still has taxable UK earnings, the tax relief operates as for a UK resident individual – relief is available on contributions of up to 100% of the employee’s earnings, subject to the Annual Allowance.
There may be reasons why it is desirable to keep making or receiving contributions to a UK registered pension scheme even if tax relief is not available on those contributions, but this should be considered on a case by case basis, taking into account factors such as any alternative benefits on offer.
A final point to note is that if an employee is resident overseas, but continues to work (or ordinarily work) in the UK, the automatic enrolment legislation will still apply to him or her such that provision for pension saving in a UK registered pension scheme must be made. This may be the case even if he or she does not travel to the UK at all while the pandemic continues.
Most non-EEA jurisdictions offer lower standards of data protection and so where employees are working overseas, there’s a risk they’ll be processing personal data (for example, relating to colleagues or customers) as part of their day-to-day work in a jurisdiction without the same level of protection that applies in the UK.
In limited circumstances, the accessing of personal data by overseas staff may be considered a ‘restricted international transfer’ under data protection legislation. This would usually be the case where the individual is self-employed or providing their services through an intermediary, such as a limited company and working from outside the UK, Switzerland, the EEA or approved ‘adequate jurisdictions’. Generally, international transfer restrictions do not apply when overseas access to personal data is done by someone employed by the business, however a case by case analysis may be necessary, particularly for employees with overseas access to sensitive information.
Another data protection issue to consider is employee monitoring. Monitoring tends to range from asking employees to submit timesheets, to asking employees to work with their webcam turned on for the entire day, every day. Data protection legislation and regulatory guidance set acceptable monitoring standards, but the guidance often varies between jurisdictions. As a rule of thumb, employers should not engage in excessive monitoring and should not ask employees to ‘consent’ to monitoring. Employees should be notified and consulted prior to the launch of a monitoring programme. Local regulatory guidance should be reviewed, particularly for monitoring employees in Switzerland or the EEA.
These are often offered as a tax efficient way to engage employees in the business. However, these schemes usually have conditions attaching to them and if an employee moves out of the UK for a period of time with a result that any condition can no longer be met, the employee may no longer be eligible for favourable tax treatment on these incentives. Similarly, if the employee reduces their working hours or takes a period of sabbatical they may no longer qualify for the beneficial tax treatment. Both employer and employee may therefore need to be aware of the conditions enabling the incentive plan to be offered and for an employee to be eligible so as to ensure the benefits of such awards are not inadvertently jeopardised.
Further, for those employees holding non-tax advantaged share options there are other UK tax rules that may need to be considered with regard to the taxation of internationally mobile employees in the event of a disposal of those share options.
Whilst some countries are offering specific visas for remote workers, this is not the case with all destinations. If an employee is working from a country outside of the UK, depending on the jurisdiction, they may need a visa or work permit. This is of particular relevance, post Brexit, where each EEA country may take a different approach to UK nationals now that free movement/free right to work is ending. It is important that employees satisfy the national requirements of the location they wish to work in, as breaching local immigration rules could have serious consequences for both employee and employer. Further, if an employee is in the UK on a visa, they should take care that any time spent working from overseas does not affect their visa or any longer term immigration plans.
So, what do you need to do?
If you are an employer, whose employee wants to work from overseas, you may want to consider the following practical steps:
- Take UK advice and advice in the jurisdiction that your employee is working in for any period of time. To help manage the situation, you may wish to encourage employees to only work from certain jurisdictions where you already have operations or have advice on local requirements.
- The shorter and more ad hoc the period the employee is working abroad, the smaller the risks are likely to be; so you could consider approving requests to work overseas only for a short time-limited duration where the employee’s return date is clearly documented. This may or may not be feasible from a talent management perspective. Care should also be taken where the time spent overseas may be short in duration but there is a consistent pattern of behaviour.
- For longer term stints overseas, you could consider altering the employment relationship. An example could be having a more flexible consultancy agreement which could limit some of the risks identified, although local advice may still need to be taken as to whether the arrangement would be considered one of self-employment in that jurisdiction and what rights and obligations would apply.
- Ensure the arrangement is properly documented. Is it a consultancy agreement or an employment contract? Is it compliant with local statutory requirements? If it’s a flexible arrangement, could you introduce a contractual right to terminate the ability to work overseas and require the individual to revert to working from the UK? There might be certain obligations that you can shift to the employee under the contract, however, certain obligations – such as local payroll obligations (and associated tax withholding requirements) – can rarely be passed to the employee.
- We’re also seeing employers introducing policies governing working from overseas, for example setting out what is and isn’t permitted in terms of working outside of the UK, and introducing an obligation for the employee to notify their employer if they’re wanting to work abroad for any period of time.
If you need any assistance with determining whether you are affected by any of the above points, whether you are an employer or employee, please get in touch.