Lawyer Monthly Magazine August 2020 Edition

57 AUG 2020 | WWW.LAWYER-MONTHLY.COM WHEN ‘WORKING FROM HOME’ MEANS WORKING ABROAD 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 startingpoint is that thehost 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