The Office of Tax Simplification (OTS) has released an open consultation on the emerging trends and tax implications of hybrid and distance working. The consultation invites individuals, businesses and advisors to submit comments on working arrangements for both employed and self-employed workers.

Covid-19 accelerated the pace at which businesses and workers adopted flexible working arrangements, and the legislation that governs these types of arrangements has struggled to keep up.

Tax risk

The two key tax concerns for companies are:

1. the risk of inadvertently creating an overseas presence for corporation tax purposes; and
2. the risk that staff working abroad become liable to income tax and social security outside of the UK.

These are material concerns for UK employers with staff working abroad. As well as potentially creating compliance burdens (for example, a company may be required to file corporate tax returns or operate payroll outside of the UK), there may be additional tax and employer social security liabilities. The factors that impact the potential for these issues to arise vary depending on: a) the seniority of the staff working abroad; b) the overseas jurisdiction; and c) the length of the overseas working arrangement.

Alongside the tax risks, employers will typically be concerned that extensive periods overseas may give employees local employment law rights and protections on which UK-based HR teams are ill-equipped to advise.

Proactive management is crucial to mitigating the employment and tax implications of any international working arrangement. In the aftermath of the pandemic companies had to be reactive to these types of working arrangements. With home working (or at least non-office based working) becoming the norm, we are seeing a range of approaches being adopted to manage the balance between i) a desire to be flexible and accommodate remote working arrangements; and ii) managing tax risk.

What are companies doing?

On one side of the spectrum, Airbnb has a widely publicised “live and work anywhere” policy. This is an ambitious remote working policy that we have not seen replicated widely.

The other end of the spectrum are companies that require permission to be sought before any non-UK work can be performed. This is often driven not just by tax risk, but by other factors such a regulatory restrictions, or the ‘norms’ in certain industries.

In the middle ground (and the most common approach we are seeing) is to set general boundaries, often by way of an agile working or hybrid working policy. For example, permitting up to four weeks per year to be spent working abroad, but for no more than two weeks in any single location. These are broadly arbitrary thresholds, but seek to manage risk without burdening internal HR, finance and tax departments with endless requests for permission to check emails from the beach during the holidays.

The OTS consultation invites the views of business across industry sectors. If you would like to contribute to the consultation, or would like to discuss any issues arising from hybrid working arrangements, please speak to your usual Macfarlanes contact.