How changes to working arrangements present new challenges for employer compliance
In light of travel restrictions, temporary changes to the statutory residence test (the SRT), which is used to determine individual taxation, were announced on 19 March (see earlier article). In issuing the guidance, HMRC indicated that it will look sympathetically at any individual cases where the virus has caused specific issues or difficulties. This HMRC guidance is mainly concerned with identifying exceptional circumstances (such as the closure of international borders) in which days unexpectedly spent in the UK are disregarded for the purposes of applying the SRT. This was followed by OECD guidance in April (summary provided), which also allowed for a practical approach to be taken.
Official UK employment taxes guidance for businesses has taken much longer, and it was not until 19 August that HMRC updated their guidance in relation to the operation of PAYE and National Insurance contribution (NIC) withholding for employees working abroad. Despite the long delay, the Covid-19 concessions are niche, and very limited in their application. The concession relates only to NIC withholding for individuals employed by UK companies, forced to return temporarily to work in the UK from a country with which the UK does not have a social security agreement in place, after the first 52 weeks of their assignment. In all other cases, the guidance indicates that the regular PAYE and NIC obligations for employees working abroad apply.
Forced repatriation and travel restrictions
The OECD guidance states that if Covid-19 affects where an individual performs services, an employee’s income should be attributable to the place where the employment “used to be” performed. This is fairly clear for existing employees (especially where time back in a "home" country is temporary/clearly driven by the current climate), but the rules are less clear when it comes to new hires.
Hiring a non-UK tax resident individual to undertake work for a UK business is usually made more straight forward – the new hire is enrolled in to the company payroll, and is subject to PAYE withholding and Class 1 NIC withholding from day 1 (on the assumption the individual is relocating to the UK to commence work).
In cases where a new hire would be commencing work duties in the UK from day 1, but cannot do so as a result of Covid-19 (perhaps less the case now than it may have been in (say) April or May), there is limited guidance. Subject to any applicable double tax treaty (as to which the OECD guidance may be relevant), remuneration attributable to duties of the new employment performed abroad (whilst the new hire waits to be able to travel to the UK) should not be liable to UK employment income tax, if the new hire is non-UK resident or within the overseas part of a split year. Nevertheless, the usual UK PAYE process should apply to the new hire, as he or she will be working both within and outside the UK during the tax year. However, the employer can apply to HMRC for a modified PAYE arrangement to better align PAYE withholding with the employee’s actual liability to UK tax.
However, businesses should be aware of the implications where other jurisdictions are taking a hard line approach to withholding. The UK position for an inbound new hire is (relatively) straight forward – HMRC will always be happy for businesses to be withholding PAYE and NIC but will readily agree to a modified procedure where satisfied by the employer that full withholding will be excessive. The more complex issue may be in the location in which the new hire is based, and hiring businesses should ensure they are aware of any local payroll reporting obligations. If that jurisdiction insists on operating withholding, a UK PAYE withholding could result in a dual withholding (if steps are not taken to mitigate this).
HMRC has not provided any concession in the alternate scenario (a UK individual who cannot start working overseas). The UK employer will have to operate PAYE, because the employee continues (albeit unexpectedly) to work in the UK. However, if the host country is able to tax the remuneration attributable to the UK work (under its domestic law as limited by any applicable a double tax treaty construed in accordance with the OECD guidance), the UK employer should request advance clearance from HMRC to modify the operation of PAYE in line with any available relief against double taxation.
Requests for flexible working arrangements
With the workforce required to work from home over the past few months, requests for more flexible cross-border arrangements are becoming increasingly common.
The tax implications of these arrangements range from simple to incredibly complex. Individuals who retain ties to the UK, or visit the UK for personal reasons, may remain UK tax residents, and so could be taxable on worldwide income in any case. Even in cases where individuals become UK non-resident, any substantive UK workdays will be classified as UK "sourced"’, and so UK taxable (subject to any available relief under a double tax treaty).
In most cases, where an individual’s role (or employment relationship with the UK company) has not changed, the UK company will have a continued obligation to withhold PAYE (and the social security position will generally need even more detailed analysis, based on the travel pattern).
Often more complicated still are the compliance requirements in the second country. A company may be required to take actions such registering as an employer (e.g. nationally or within the local municipality/state), operating payroll and other benefits reporting (and ensure any dual withholding is mitigated), setting up a local pension scheme (which they should ensure does not create any further UK tax complications, such as employer contributions being reclassified as UK taxable income), or filing local tax returns.
Businesses will also need to consider the role of the individual, and the permanent establishment implications of having employees performing their main role in another jurisdiction. Creating a non-UK PE of a UK company can lead to corporate compliance obligations (and potentially a corporate tax liability).
How should businesses approach these challenges?
- Manage working arrangements up front
Often compliance failures can be mitigated if arrangements are known about and advice taken before they are enacted (and there can often be opportunities for businesses to optimise the tax position, which can be beneficial for the business, and the employee). It follows therefore that the sooner the employer’s HR team and tax advisers are made aware of a potential cross-border situation the better and, in addition, employers should be clear in communications to employees that they should not be working internationally without approval or proper reporting to the relevant support teams.
- Seek advice
Businesses should consider the personal tax, employment tax, corporation tax, social security, and payroll implications in both the UK and the overseas jurisdiction (in addition to other factors such as local employment law or regulatory considerations). Furthermore, the overseas jurisdiction may have taxes, and will invariably have other laws, with no obvious equivalent in the UK that could be applicable in a cross-border situation. Good foreign legal advice is, therefore, vital.
- Set clear guidelines
Once flexible working arrangements are in place, businesses should ensure employees (or other managers) notify them if there is any change – even a small change to working pattern or role can have knock on effects.