The working world has changed inexorably due to the Covid-19 pandemic and mobile working has certainly become the new norm for many of us. At the same time, the pandemic and events like Brexit have caused major gaps to emerge in essential industries, and workers are again being sought from other locations to provide short-term solutions for skills shortages. However, whilst it may be physically possible for most employees to work from anywhere, a ‘plug-and-go’ approach can have serious tax consequences, particularly where individuals work across different countries.
For example, foreign nationals relocating to the UK who remain employed by non UK companies or hold paid directorship positions with foreign entities often wrongly assume that their remuneration is not taxable in the UK, particularly where the remuneration is taxed at source by the foreign employer/company and/or the remuneration is received offshore and not brought to the UK. This can be a very expensive mistake! The default position is in fact that general earnings from employment, earned in a year when an individual is tax resident in the UK are chargeable to tax in the UK upon receipt, unless specific reliefs apply and are formally claimed.
Which reliefs are available to foreign workers resident in the UK?
Certain reliefs are available to foreign nationals in this position but there are a number of conditions that must be satisfied in order to successfully rely on them and, what’s more, the reliefs must be actively claimed via a tax return; they are not automatically applicable.
Overseas Workday Relief (‘OWR’)
OWR is available to foreign workers who become UK tax resident but continue to perform duties abroad for their foreign employers. Simply put, in order to claim it, the earnings you receive must be ‘foreign earnings’ and there are various conditions that must be satisfied. For example, you cannot have been tax-resident in the UK in the previous three years, you must not be domiciled in the UK, you must claim the remittance basis and the duties must be wholly/partly carried out outside the UK. Furthermore, the earnings must be paid into a foreign (non UK) account and cannot be brought into/spent in the UK if you want to prevent a UK tax charge. This relief only applies for a maximum of three years.
Overseas Earnings Relief (‘OER’)
OER is more difficult to claim than OWR but can, in limited circumstances, be used where an employee has become more established in the UK and does not have three recent years of non-residence to rely on. The relief is technically available to UK resident, non-domiciled individuals who elect to use the remittance basis, where the duties of employment are performed wholly outside the UK and the remuneration is paid into an offshore account (and, once again, not remitted to the UK). In practice, this relief is aimed at those undertaking ‘contractor’ style work abroad and will not be available to directors/ roles involving intellectual work and consideration as there is a presumption that these types of duties are ongoing and therefore will, at least in part, be carried out in the UK.
What about Treaty residence?
For individuals who work for foreign companies and split their time between the UK and overseas, it may be possible to claim relief under a Dual Taxation Treaty (providing there is one) between the UK and the other country. Again, however, this is a not a simple matter and a range of tests must be applied pursuant to the relevant treaty in order to determine ‘Treaty Residence’ and to establish which country has primary or exclusive taxation rights. To the extent that the country where the non UK company is located has taxation rights over the employment income or directorship fees, it should be possible to deduct the foreign tax from the corresponding UK tax.
Year of arrival and year of departure
If an individual is not yet UK tax resident in the relevant year (which could be the case in the year of arrival in the UK or the year of departure from the UK), then a UK tax charge may be limited to earnings for duties that are performed in the UK. Therefore, the remuneration of employees of UK companies who decide to relocate offshore and employees of foreign companies who are relocating to the UK but who remain non-UK resident for the first year may not necessarily be taxable in the UK (or, if they are, they will be by reference only to the workdays spent in the UK).
If you are UK tax resident (based on the application of the UK statutory residence test), consideration should also be given as to whether it is appropriate to claim split year treatment for the relevant year (whether it is the year of arrival or the year of departure). Split year treatment will treat you as non-resident for part of the tax year and resident for the other part. Claiming split year treatment as this may assist in limiting the UK tax exposure to work carried out in the UK for a UK employer (whether this is your new employer in the case of arrival to the UK or your old employer in the case of departure from the UK to take up a new job abroad).
The key point, for anyone considering working from Blighty, is to check the position with tax advisors ahead of time, to find out if any of the above reliefs might apply and deal with the relevant filings appropriately, to ensure that your mobile working doesn’t lead to a tax headache that’s hard to shift or untangle in the future!