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Research from 91̽»¨’s ‘The Real Economy’ report found that 33% of organisations are responding to staffing challenges by allowing employees to work remotely outside the UK, in a bid to combat recruitment and retention issues in a tight labour market. 

While many employers look to encourage workers back into the office to increase productivity, our research also found that 88% of businesses are finding employee turnover an issue, meaning employees have more influence on what their employment package looks like. However, despite businesses’ best intentions to keep their people happy, they must also consider the additional tax risks this gives rise to.

There are significant corporate tax implications if an employee working abroad has created a ‘permanent establishment’ for the employer in the host country. This is a particular risk if the employee is in a sales role that includes concluding contracts, which are then simply agreed by UK based staff without amendment. The existence of a ‘permanent establishment’ means that the profits attributable to that establishment could be subject to local corporate income taxes, which in some countries are charged at a considerably higher rate than UK corporation tax. It could also affect the way bilateral double taxation treaties apply to the individual’s tax position.

UK employers are responsible for operating PAYE on their UK employees’ remuneration, deducting and withholding amounts in respect of income tax and National Insurance contributions (NICs) as required. However, if an employee works abroad, overseas income tax and social security may also be due. Therefore, there may be a payroll obligation in the host country for the employer too. The question of who pays NICs or social security contributions in which country must also be considered and will depend primarily upon what agreements the UK has in place with the host country. This is a complex area of law and the relevant rules vary for different host countries, depending on the particular agreement in place.

In addition, employers should be aware that an individual who works abroad, even for a short time, can obtain protection under the local employment legislation of their host country in relation to holiday, minimum pay and on termination of employment. Many countries, particularly in Europe, afford individuals greater protection against dismissal than they are entitled to in the UK, and it is possible employees may seek to rely on those enhanced rights if they are conducting their work abroad and their employment is terminated.

Employers should also be clued up on immigration rules, as it is a common misconception that individuals may enter a country as a ‘visitor’ and work remotely there without first obtaining a work visa. Employers need to undertake a ‘Right to Work’ compliance check and may have to satisfy local reporting requirements regarding individuals based in that location. There are significant consequences for both individuals and businesses if they get this wrong.

There are further different health and safety laws applicable when working abroad, and UK employers are under a duty to protect the health, safety and welfare of their employees, irrespective of where they are working, including when they are working from home. If individuals are working abroad, employers must ensure they are compliant with local health and safety laws.

While employers may be focused on recruiting and retaining their workforce through overseas working offerings to mitigate labour challenges in the short term, the complexity of the tax, administrative and legal issues which may arise should be carefully considered before permitting such arrangements.