It is important to take advice on tax and social security implications in both the UK and the host country where an employee is working abroad, even for a temporary period. The fact that the employee is remotely connected with their UK base, and is working entirely in a virtual environment, does not mean that there are no overseas tax risks.
The taxation of internationally mobile employees is a complex area and should be looked at on a case-by-case basis, taking into account the individual facts and circumstances of each employee’s overseas working arrangements.
There are also immigration, regulatory and wider management issues to consider when an employee of a UK-based employer is working abroad, which are outside the scope of this note.
UK income tax
Whether and to what extent the employee will remain subject to UK income tax depends on whether the employee will remain UK tax resident while working overseas:
- generally, an employee will usually be considered UK tax resident if they spend 183 days or more in the UK in the relevant tax year
- if the employee spends less than 183 days in the UK, then it is necessary to apply a much more complex test, taking into account a number of other factors personal to the individual to determine residence broadly speaking
- UK tax resident individuals are liable to pay UK income tax on their worldwide earnings as they arise (although, in some cases, non-UK earnings are only taxed to the extent that they are remitted to the UK)
- individuals who are not tax resident in the UK are only subject to income tax on earnings from duties performed in the UK
UK National Insurance Contributions (NIC)
The applicable rules must be checked to establish whether UK NIC can or must continue to be paid while the employee is working overseas.
The rules differ depending on whether the employee is going to work:
It may be necessary to apply for a certificate from the relevant tax authority confirming where social security contributions should be paid.
In relation to EEA countries and Switzerland, the EU/UK Trade and Co-operation Agreement and associated agreements include exemptions for some temporary employment arrangements (known as the “detached worker” provisions) which avoid the possibility of these workers having to pay UK NI as well as social security contributions in the jurisdiction in which they are working for a limited period.
Where UK income tax or NIC continue to be payable, the employer has a duty to continue to operate UK PAYE.
It may be necessary for the employer to apply to HMRC for a special tax code or direction, if employees are not subject to UK income tax on all of their earnings.
If an employee is mainly working abroad but sometimes visits the UK, their employer may not be able to reimburse them for their costs of travel and any temporary accommodation without triggering income tax liabilities. All of the relevant facts will need to be examined, including the reason they are abroad and the purpose of their visit.
Overseas tax risks in the host country
Advice on the specific risks under local law in the host countries and advice should be taken in the relevant jurisdictions.
Examples of potential risks include:
- an obligation for the employer to withhold and pay any income tax or social security contributions due in the host country
- a requirement to register as an employer with the local tax authorities in the host country or report on the income paid to the employee
- a risk that the employee’s presence or activities in the host country will create a permanent establishment of the employer in that country, which could give rise to corporate tax liabilities for the employer in the host country
- similarly, and again dependent on the employee’s activities, liability to register and/or account for local VAT or its equivalent.
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