In recent years, arrangements involving employees in one country remote working for an employer in another country and international secondments have become far more common. However, these developments throw up complicated tax and social security issues for both employees and employers, involving the interaction of different sets of rules in the jurisdictions concerned. This short guide highlights some of the UK tax considerations associated with internationally mobile employees and cross-border arrangements.
In principle, the first enquiry is whether an employee is or has become a UK resident. Their residence status is fundamental because it determines the extent of their liability to tax in the UK. An employee who is or becomes a UK resident is liable to UK income tax on their worldwide income, while a non-resident is only liable on their earnings for work done in the UK. With a UK income tax rate of up to 45%, being unexpectedly caught in the UK tax net can be extremely costly.
On the employer side, the UK has an onerous system for deducting tax at source from remuneration known as pay-as-you-earn or PAYE. The PAYE obligations can be engaged whenever an employee works in the UK, provided the employer has sufficient tax presence in the UK. An overseas company is likely to have a sufficient presence if it has a branch or agency in the UK, but even less than that could still amount to a sufficient presence.
In the UK, social security obligations take the form of employees and employers being required to pay National Insurance contributions (NICs). An employer must deduct employee NICs under the same PAYE system used for tax. But in addition, employers must account for their own employer NICs. These obligations arise if the employee is physically working in the UK provided the employer is resident or has a place of business in the UK. Following Brexit, EU social security legislation has ceased to apply in the UK. Nevertheless, the EU-UK Trade and Cooperation Agreement (the TCA) in effect retains much of the previous legislation. The general intention is that social security cross-border cooperation should continue broadly as before. As a general principle, an employee working within the UK or EEA is subject to the social security legislation of only one state at any one time. That state will generally be where they physically work, irrespective of the employee or employer country of residence. However, in some cases, a non-UK employer can also be deemed present in the UK for social security purposes with the effect that the employer has the same obligations as an employer established in the UK.
Double Tax Treaties
Sometimes UK tax law can be overridden for nationals of a country by a tax treaty between the UK and that country. There are usually specific provisions in double tax treaties that help protect an internationally mobile employee against potential double taxation. Others aim to prevent the employee from avoiding taxation by exploiting differences between the tax systems. The UK has double tax treaties with over 130 countries closely based on the OECD Model agreements. These treaties often provide that an employee who comes to work in the UK on a short-term basis is taxed only in their home country. A short-term basis generally means less than 183 days in the tax year or any period of 12 months. In addition, two other conditions typically need to be satisfied. The first condition is that the remuneration is paid on behalf of an employer not resident in the UK. The second condition is that the remuneration is not borne by a UK permanent establishment of the overseas employer. Since the employer cannot anticipate the double tax relief (except by making a special agreement with HMRC), the safest course of action for employers is to avoid agreeing to pay an employee gross.
Share Options and Incentives
Employees may receive shares or share options as part of their remuneration package. Employers should consider whether their share plan needs to be adapted to meet the qualifying conditions for UK tax-advantaged schemes. In any event, tax charges can arise for an employee or director on the acquisition, ownership or disposal of shares and share options. Some or all of the returns may be taxed as employment income. There are rules intended to limit the proportion of income that is taxable in the UK. However, there could still be mismatches between the UK tax system and a foreign tax system with the timing or amount of the tax liability. The taxpayer may need to claim relief under a double tax treaty. For example, the UK/USA double taxation convention provides for the taxable gain on a share option to be apportioned between the two countries based on residence in the period between grant and exercise. Therefore, the taxpayer may sometimes be in a better position by claiming relief under the double tax treaty. The associated NICs liabilities can be quite complex as it will depend on both the vesting period of the options and the employee's broader social security position.
Many businesses with cross border operations lack a physical branch or overseas subsidiary in that jurisdiction. They may rely on their internationally mobile employees to maintain relationships with their overseas customer bases. If these employees are regularly conducting business in other jurisdictions and contracts are concluded with customers in those jurisdictions, there is a real risk that those activities could create a permanent establishment of the company. If a non-UK resident company has a UK permanent establishment, then the business profits attributable to that permanent establishment are chargeable to UK corporation tax. The permanent establishment rules in many jurisdictions reflect the OECD guidelines and are broadly similar to the UK rules. However, there may be significant local differences, so it is vital to monitor permanent establishment risks, to avoid unintended and possibly onerous tax liabilities.
Whether an employee's home office constitutes a permanent establishment of the employer will depend on the facts and circumstances of each case. So, the carrying on of business activities at an employee's home may be so intermittent or incidental that the home will not be considered a location at the employer's disposal. But a home office may be used continuously for carrying on business activities for an employer. If it is clear that the employer has required the individual to use that location to carry on the business (e.g. by not providing an office to an employee where the nature of the employment requires an office), the home office may be considered to be at the disposal of the employer. This would be a strong indicator that a permanent establishment had been created in such cases.
If an employee is mainly working abroad but sometimes visits the UK, their employer may want to reimburse them for their travel costs and any temporary accommodation. All relevant facts will need to be examined, especially the purpose of their visit. Employers will need to determine whether this could trigger income tax liabilities in the UK.
A common area of difficulty is short business trips, such as for directors who must attend board meetings in the UK. Under UK tax law, non-UK residents can be liable to UK tax if they work in the UK – even if they usually work outside the UK – because they have UK source income. However, if the employment is in substance performed abroad, there is a special rule that any work done in the UK that is "merely incidental" to work done outside the UK can be disregarded. So, a director could come to the UK for a board meeting without having UK income tax consequences. HMRC consider the quality and not the quantity of duties performed in the UK to determine whether they are "merely incidental". HMRC afford special significance to board meetings and matters related to a company's management. In their view, when a director attends a board meeting, they perform a fundamental duty that is not merely incidental to other duties. There is, therefore, a real income tax risk for directors and senior executives attending meetings in the UK. Non-UK resident directors of UK companies do not usually have to pay NICs in the UK if their fees are for attending a UK board meeting, provided they attend no more than a limited number of board meetings in the UK and their visits are of limited duration.
Other issues to consider
Taxes other than employment taxes must also be considered. The costs of employment are ultimately a deduction against the employer's profits. Accordingly, group tax planning issues are relevant. Depending on the earnings of each part of the group and the corporation tax regime in the countries concerned, it can be appropriate to base the employee in the UK for tax purposes. However, the implications of any cost recharging arrangements must also be considered, including possible transfer pricing issues and VAT. Administrative issues are also relevant. For example, if the attachment abroad is likely to be relatively short term, it is probably better to keep the employee on the existing payroll. If, on the other hand, the transfer is likely to be of longer duration, it may make sense for all obligations to be transferred overseas to reflect the greater permanency of the arrangement.