Tax and social security implications
Employment law and data privacy implications
How to minimise risks
COVID-19 is causing many employees to ask if they can work from home for an extended period overseas (eg, because it is their home nation or because their family is based there). Employers should consider a variety of issues – including the tax, social security, immigration and employment implications – before agreeing to an employee’s request to work from home when home is not in the United Kingdom. This article discusses the issues and sets out practical steps that employers can take to minimise risks.
Tax and social security implications
From a UK perspective, unless the anticipated duration of the stay is so long that it may affect tax residency (see below), UK employers should continue to deduct income tax under the pay-as-you-earn (PAYE) system in accordance with the employee’s PAYE code, notwithstanding that the employee is temporarily working overseas. In addition, employers should continue to deduct employee national insurance contributions (NICs) and pay employer NICs.
However, employers will need to consider 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 will be regarded as having created a permanent establishment there. Several tax authorities have issued concessions in light of COVID-19, but not all have, and it will be important to establish the rules in place in the relevant host country.
Income tax may be payable in host country if employee becomes tax resident
The host 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 United Kingdom and the host country, the employee may be exempt from income tax there if certain conditions are satisfied, including that they are 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 that they are present in the host country over a 12-month period (however briefly and irrespective of the reason) exceeds 183 days.
The United Kingdom 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.
However, employees who have already spent other periods in the host country in the same 12-month period (eg, visiting family) may reach the 183-day threshold sooner than expected. Further, 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 employee may still have obligations in the host country even if a DTT applies (eg, the employer may need to register with local authorities as an employer or report on the income that is being paid to the employee). Therefore, it is important to understand the local position.
If the employee becomes 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 of the tax that they pay in the host country. However, they will 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 and Switzerland, there are exceptions to this general rule which allow UK employees and their employers to continue to pay UK NICs and not pay social security contributions in the host country if certain conditions are satisfied. An A1 (or E101) certificate from Her Majesty’s Revenue and Customs (or the social security authorities in the employee’s country of residence if different) must be obtained. 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 United Kingdom and the European Union which will replicate any of these features.
Outside the European Economic Area and Switzerland, the position will depend on whether there is a reciprocal agreement between the host country and the United Kingdom. In countries where there is a reciprocal agreement (eg, the United States or Japan) an employee can 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, UK employers 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 United Kingdom.
Risk of creating a permanent establishment is low but should be considered
In some situations, there will be a risk that an employee’s activities or presence in the host country will create a permanent establishment for their 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 their employer’s name 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. Moreover, the income tax exemption in the DTT would not apply. While this may be less of a problem if employers already have established operations in the host country, it could be difficult if they do not.
Assuming that 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. However, the longer that the arrangement continues, 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 permission is generally not required for business visits. Depending on an employee’s activities, it may be possible to characterise their stay as a business visit – for example, if their activities are limited to those typically undertaken during business trips (eg, meetings and training). However, restricting an employee’s activities in this way is unlikely to be practical for many employees and, in general, the longer that an employee works without permission, the more difficult it will be to characterise their stay as a business visit. In some countries, work itself is prohibited even as a business visitor.
At present, if the employee is a UK or EEA national, they have the right to live and work in an EEA country (although this position will change for UK nationals from 31 December 2020 when the current Brexit implementation period ends).
If an employee is not an EEA national or wishes to work from a non-EEA country, employers must consider what restrictions may be in place. For example, if they want to work in Hong Kong but do not have permission to stay there indefinitely, they should not undertake any work without permission, even for a limited period and even if the employing entity is not a Hong Kong entity. As with tax and social security, some countries have implemented emergency COVID-19 legislation that will affect the normal immigration position, but this is not the case everywhere.
Employers may also need to consider any immigration issues that could arise on the employee’s return to the United Kingdom. For example, EU nationals should consider whether to secure settled or pre-settled status in the United Kingdom before they travel overseas. Other non-British nationals should consider whether their absence from the United Kingdom may affect their visa or their eligibility to apply for other types of status in future where absences are assessed (eg, indefinite leave to remain, permanent residence or naturalisation as a British citizen).
Employment law and data privacy implications
On top of the tax, social security and immigration implications explained above, there are various other employment law and data privacy considerations.
Mandatory employment protections may apply
If employees live and work abroad, even for short periods, they can become subject to the jurisdiction of that other country and start to benefit from the applicable local mandatory employment protections. These may include:
- minimum rates of pay;
- paid annual holidays; and
- rights on termination.
What protections, if any, an employee acquires will depend on the country in question.
Within the European Economic Area, there is also the Posted Workers Directive (PWD) to consider. This applies where an employee is posted from one undertaking or establishment to another cross-border within the European Economic Area (and, until 31 December 2020, the United Kingdom). Changes to the PWD, which must be implemented by the end of July 2020, mean that employees will be entitled to the same mandatory pay as comparable employees in the host location.
The PWD itself was not designed to cover the situation of an employee working from home temporarily in another EEA country, and it would not be directly engaged unless employers opt for a formal secondment to a local group company or ask the employee to work on a contract for a local client. However, the local implementation of the PWD may nonetheless end up capturing this situation.
For example, in Belgium the local implementation of the PWD requires that all employment, remuneration, working terms and conditions and collective bargaining agreements that have been declared generally binding apply as of day one to any employee working temporarily in Belgium. This is also true of the United Kingdom, where employees have certain minimum statutory rights from day one. This can be a complicating factor, particularly if a dispute or termination scenario arises and the employee asserts that they have employment rights in another jurisdiction.
Be careful about transferring data
If an employee’s role involves processing personal data, this could give rise to data protection issues, especially if the employee is requesting to work from a country outside of the European Economic Area which is not subject to the EU General Data Protection Regulation and other EU data privacy laws.
Local health and safety protections may apply
UK employers must protect the health, safety and welfare of their employees, which includes providing a safe working environment when they are working from home. If an employee works from home abroad, employers must ensure that it complies with any local health and safety requirements. For example, in the Netherlands, employers must provide employees with the equipment needed to ensure a safe working environment, which in some cases might involve making a contribution to the purchase of or purchasing relevant equipment.
Employees must also comply with applicable public health guidance (eg, quarantine periods) both in the host country and on their return to the United Kingdom.
How to minimise risks
Given the current situation, employers will want to be flexible when it comes to accommodating requests to work from home overseas, but they will also want to minimise the risks. Depending on how many requests they expect to receive, they may even want to consider developing a short policy to ensure that these situations are dealt with consistently and fairly. Employers may receive more such requests in future as employees look to take advantage of increased remote-working opportunities by working abroad for a short period on a regular basis.
The key practical steps that employers can take to minimise the risks are as follows:
- Employers should accept requests only if the employee’s role can be performed effectively and lawfully from the country in question.
- The shorter the period that the employee is working abroad, the smaller the risks are likely to be. Employers should consider approving requests only for a short, time-limited duration where the employee’s expected return date is clearly documented.
- Employers should always take expert local advice on any tax, social security, immigration and employment obligations that they may have in the host country, as well as on any COVID-19 concessions that have been issued. Employees may also need to obtain advice.
- Much will depend on the host country and the employee’s nationality. For the time being, working in the European Economic Area is generally more straightforward, but this will change after 31 December 2020 when the Brexit implementation period ends.
- Employers should check what data processing the employee will be doing and whether this can be carried out lawfully in line with their usual policies.
- Employers should agree the terms of any temporary overseas working arrangement with the employee and record them in writing. Ideally, these should clarify that:
- the employee will be liable for any additional income taxes or employee social security which may be charged because of their decision to work for a short period overseas (and that the employer is authorised to make additional deductions or seek reimbursements, if necessary, for this purpose);
- the employee will be responsible for any personal tax declarations that may need to be made;
- the employment contract remains subject to UK law and jurisdiction;
- the employee is still working solely for the UK business;
- the employee has no authority to enter into contracts with local customers while in the host country and should not hold themselves out as having such an authority;
- the employee takes responsibility for ensuring that they have the necessary technology and arrangements in place to enable them to work effectively;
- the employee accepts that they are working from home at their own risk and that their employer will not be liable for any loss they suffer due to their request being approved; and
- the employee must comply with all applicable public health guidance both in the country to which they travel and the United Kingdom.
For further information on this topic please contact Colin Leckey or Rosie Moore at Lewis Silkin by telephone (+44 20 7074 8000) or email (email@example.com or firstname.lastname@example.org). The Lewis Silkin website can be accessed at www.lewissilkin.com.
Till Hoffmann-Remy, partner (Kliemt, Germany), Marco Sideri, partner (Toffoletto De Luca Tamajo e Soci, Italy), Gisella Rocío Alvarado Caycho, lawyer (Sagardoy Abogados, Spain), Sophie Maes, partner (Claeys & Engels, Belgium), Ilse Baijens, associate (Bronsgeest Deur, Netherlands), Catherine Hayes, senior associate (Lewis Silkin, Ireland), Kenneth Leung, consultant (Lewis Silkin, Hong Kong), and Katy Lee, legal assistant (Lewis Silkin, Hong Kong), assisted in the preparation of this article.
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