Cross border working: what’s the risk for UK fund managers?

Tax authorities have struggled to keep up with the pace of change. Rules that govern the tax implications of cross-border work require multi-lateral agreements, which take years to agree and implement. This has left us with a complex tax landscape for businesses to navigate.

What are the key risks for UK fund managers?

• Overseas permanent establishment (PE) risk for the UK fund manager: having an overseas PE could give rise to a requirement for the UK entity to file overseas tax returns. If the UK entity is an LLP, a requirement might arise for each LLP partner to file an overseas tax return to report a portion of the profits of the LLP. 
• Overseas PE risk for the fund: if the overseas activities of investment managers are sufficient to create a PE of the fund, there can be wide-reaching consequences for both the fund and its investors. This might include, the requirement for the fund and/or its investors to file local tax returns and/or exposure to tax in the overseas jurisdiction. The fund may also be requirement to meet local reporting requirements in order for investors in certain jurisdictions to invest.
• Overseas payroll obligations: if the activities of an employee or member overseas give rise to a requirement to operate local payroll, failure to do so could result in penalties for the fund manager and the individual, as well as increased scrutiny of the fund manager’s overseas activities.
• Overseas social security: a flexible working arrangement can result in an overseas liability to social security for both the individual and a UK based fund manager. This can be costly, for example if the overseas jurisdiction treats carried interest as employment income, and so subjects distributions to employer social security.

Recommendations

In light of the above risks, UK fund managers should consider taking the following steps:

1. Update policies and guidelines relating to remote working from other jurisdictions, so tax implications can be managed before overseas working commences. It will be important to inform staff about the implications of working abroad, and put in safeguards such as requiring that staff notify the business in advance of commencing any non-UK work.
2. Keep careful records of when an individual began working abroad and how long they have been doing so. Best practice is to maintain a dialogue with staff members concerning their working arrangements – particularly individuals who have strategic roles and those who can contract on behalf of the company.
3. Seek local tax advice where an individual is working outside the UK. Overseas working arrangements are best managed up front, and it may be necessary, for example, to consider incorporating overseas subsidiaries, if there is sufficient interest from individuals to work from another jurisdiction, and/or to consider allocating profit to activities performed outside of the UK.

If you would like to discuss any of the issues raised in this post, please get in touch.