The number of U.K. employees working from home to avoid COVID-19 infection has increased in recent months, and so have requests to telework in countries other than the U.K. Before granting permission for these out-of-country work arrangements, U.K. employers should consider the potential tax, social security and employment law consequences.
Taxation
It’s important to note that the host country maintains the right to tax employment income earned by someone working in that country. However, over 130 countries, including all 27 European Union (EU) members, have double tax treaties (DTT) with the U.K. These treaties exempt an employee from taxation by the host country assuming other conditions are satisfied, most significantly that the employee is not a tax resident of the host country and is not present in that country, regardless of the reason, for more than 183 days in a 12-month period. If the employee is a tax resident in the U.K. and the host country, the employee’s residence status is determined under the DTT by a series of tie-breaker tests looking at personal circumstances, including where the employee’s permanent home is, as well as principal economic and social interests.
“The U.K. usually enters into these treaties directly with the countries in question, and their existence is not related to membership in the EU,” according to Rosie Moore and Victoria Goode, attorneys with Lewis Silkin LLP in London. The treaties are likely to remain in effect after the Brexit transition period, unless the countries concerned decide to renegotiate the terms, they said.
So, generally a U.K. employer should continue to deduct income tax under the Pay As You Earn system unless the employer gets clearance from U.K. tax authorities when there is reason to believe the employee plans to stay in the host country long enough that the employee will no longer be a U.K. tax resident. In cases where the employee becomes liable for taxes in the host country but remains a U.K. tax resident, that person’s worldwide income will be subject to U.K. taxation, with a credit for a portion of the tax paid to the host country, Moore said.
Social Security
Similarly, a U.K. employer should continue to pay employer national insurance contributions (NICs) and deduct employee NICs for employees working abroad during the pandemic. Although social security obligations generally attach in the host country, exceptions exist in the European Economic Area (EEA) and Switzerland, provided a certificate is obtained from the U.K.’s Her Majesty’s Revenue & Customs. The certificate allows continued coverage by the U.K. system for up to 24 months with no social security contributions due in the host country, Moore said. “However, if the U.K. leaves the EU without a deal, social security may arise both in the host country and the U.K. from Jan. 1, 2021,” she cautioned. “If the certificate expires, and no extension is granted, social security contributions will need to be made in the host country.”
Many other countries have reciprocal agreements allowing employees to continue in the U.K. system for up to five years so long as they have a certificate of coverage, according to Moore. If the employee is working from a non-EEA country that does not have a reciprocal agreement with the U.K., the U.K. employer and employee must continue to pay U.K. social security contributions for the first 52 weeks. Depending on the host country’s system, the employer and employee may then have to make contributions in the host country in addition to those made in the U.K.
Employers also should be aware that the longer the working arrangement continues, the greater the risk that they will be deemed to have created a permanent establishment in that country. Moore recommended limiting the time an employee spends abroad. Further, employers should be aware that if multiple employees are working from the same location, it may be more convincingly argued that a permanent establishment has been created.
Employment Law Consequences
Assuming that the employee continues to work solely for the U.K. business and to be employed in accordance with a U.K. employment contract, the employer would continue to have the same obligations to the employee as it would if he or she were working in the U.K., including those relating to health and safety. The employer should be mindful that, if an employee lives and works abroad, he or she arguably benefits from local mandatory employment protections, such as holiday entitlements and rights on termination, in addition to U.K. rights, Moore noted.
“When an employee is working remotely from a different country, the employer’s duty of care to that employee remains,” Breda O’Malley, an attorney with Hayes Solicitors in Dublin, emphasized.
O’Malley offers employers the following recommendations to minimize risks arising from these work arrangements:
- Given the pandemic and increasing rise in employee interest in working remotely from other countries, implement a travel policy outlining the employee’s duties as well as the employer’s while the employee is working abroad.
- Ensure that the appropriate tax, social insurance and corporate taxes are paid while the employee is abroad.
- Get detailed tax advice before approving the employee’s move.
- When possible, agree on and document an anticipated return date to avoid a situation where an employee is based abroad for an extended period, generating revenue and creating the risk of establishing a permanent establishment in that country.
- Consider whether an employee is required to isolate upon entering the country and if so, whether this will interfere with performance of his or her duties.
- Be mindful of the processing and transferring of personal data, particularly where the employee is based in a country outside of the EEA.
Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.