Employees working abroad? Tax implications for UK businesses

If you have staff working outside of the UK for more than 183 days, there are significant risks in failing to consider all relevant local taxation laws.

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The pandemic-induced boom in employees benefiting from flexible work options. Being able to work remotely across multiple territories has proved to be the dawn of a new era of borderless business. In a competitive market, fast-growth UK SMEs and tech startups in particular have embraced flexible working in order to recruit and retain the best talent.

However, while companies may have relaxed attitudes towards these ‘digital nomads’, the tax authorities across the continent have not. Many business leaders fail to understand that they could be liable to pay tax on employees working abroad.

Whether it’s a DevOps Engineer in Romania or a Data Analyst in Germany, grey areas around intellectual property mean businesses could owe large amounts to domestic tax authorities.

There has been a plethora of cases around this issue in America due to the different tax laws across various states – and we are likely to see the same in Europe over the coming years as the tax authorities get up to speed.

The tax implications of employing ‘digital nomads’

According to RSM UK’s ‘The Real Economy Report’, a third (33%) of businesses have allowed existing employees to work remotely outside of the UK in response to staffing challenges – with well over three quarters (88%) of businesses finding employee turnover a challenge.

Yet there are several questions which should be at the forefront of business leaders’ minds when considering employees working abroad. For instance, does the employee need a work permit to carry out work in their country of choice? How will they be paid? Does their presence in a country impose additional taxation on the employee or their employer?

Fast-growth startups in the UK need to be particularly wary of the potential threat posed by European countries hitting both their businesses and remote employees with separate tax bills for work done in their jurisdictions.

Not only would this be a tax bombshell for future profits, but could also inhibit future expansion plans as well.

Host country rights over taxing income

Host countries have primary taxing rights over the income that any employee earns while physically working in that country. However, under certain conditions, a double tax treaty (DTT) between the UK and the host country may mean that the employee is exempt from income tax.

As with many tax situations, the devil is in the detail if businesses are to avoid an unwelcome bill or even reputational harm to your business.

The 183 day rule

Most double tax treaties with the UK include a clause that will protect the employee and employer from paying employment taxes in a foreign jurisdiction where the employer is not physically present in that country for 183 days or more, and the cost of their employment is not borne by a business in that country.

Beyond this, the employee may not be designated as a tax resident in the host country under the DTT. Individual circumstances can affect this status in accordance with the DTT should the employee be a tax resident in both the UK and in the host country under each country’s domestic law.

As such, It’s important that employers are not just vigilant about the amount of time employees spend working abroad, but also take responsibility for due diligence around their own tax circumstances.

Permanent establishment

Where a UK business has employees working overseas, it may create a permanent establishment (PE) in that country.

In these situations, that country may have a right to tax profits of the business that are associated with the activities carried out there.

Again, DTT often set the rules as to how to allocate profits. But, any business that has employees working overseas needs to be mindful of creating a permanent establishment,. Failure to file and pay taxes in that country can attract significant penalties (in the US for example, failure to file certain returns can attract fixed penalty notices of $25,000).

And all this is before we approach the debate around intellectual property…

Protecting intellectual property

The location of intellectual property (IP) is critical to which jurisdiction has taxing rights over its exploitation.

If IP is designated in another country, an exit tax is triggered which will, in turn, cause complications with any royalties associated with it and can even impact the provision of certain reliefs, such as R&D, on its creation.

This has been a hot topic in the US and, although the situation is different in the UK, it is a debate that will be relevant across other territories.

UK vs local legislation over IP

UK legislation generally stipulates that any IP created by an employee, during their employment with the company, belongs to the employer. However, the situation is much more complicated when there is no employment contract, or if the one in place doesn’t explicitly state which local laws will apply.

Employers will struggle to defend themselves in these cases against potential disputes over IP ownership in projects completed by employees working abroad. Even if the product or material was created for the UK market, the host country could still lay claim to the IP unless contracts are water tight.

Again, it all comes down to the individual circumstances. Transparency and clarity is the only way for businesses to be certain that IP is protected, and this means considering all of the variables, including the employee’s role, the material they have created and how the IP was developed.

Business responsibility for tax reporting

To mitigate potential vulnerability, employers need a firm grasp on their responsibilities when it comes to reporting and collecting tax in other jurisdictions. Founders and business leaders should bear in mind that they are accountable for their employees, wherever they might be based.

It is therefore vital to take practical steps to minimise risk. Frank conversations should be had between employer and employee to ensure tax is calculated correctly and the business is protected.

An irrefutable contract should be in place for any overseas working arrangement to safeguard IP and ensure the employee is only working abroad for a short period.

In addition, employers should check whether there are any potential discrepancies around the data processing the employee may be doing. It’s important that this is carried out lawfully and in line with usual policies, as this can often play an integral part in the IP conversation.

It should also be made clear that the employee accepts the terms at their own risk and will be liable for any additional income taxes which may be charged due to their decision to work remotely from another country.

UK businesses must heed the warning shots around this issue in the US. Flexible working policies need to be balanced with strict terms, or startups and their growth plans could be hit by a surprise tax bill.

More on this:

Frequently Asked Questions
  • Can UK employees work from abroad?
    Yes they can – this kind of flexible work request is increasingly common. But, a clear policy must be stipulated by the employer, and the employee mustn't exceed the maximum number of days working from abroad before they are classed as a tax resident of another host country.
  • How long can UK employees work abroad for?
    183 days. If an employee has been working outside of the UK for longer than 183 days, then they are classed as having tax residency in the host country. This has implications both for the employee and for the employer, with penalties for failing to report the correct status.
  • Which countries have double taxation agreement with UK?
    Over 140 countries have a double taxation agreement with the UK, including all major European nations, the US, Australia, New Zealand, Canada, India, Pakistan and the Caribbean region.
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Thomas Adcock

Thomas Adcock is a Tax Partner at Gravita

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