The Post-Pandemic World: Considerations for employers when employees work abroad
Our previous article on the post-pandemic work balance focused on the tax implications of employees working abroad, but how does this affect employers?
Pay As You Earn (PAYE)
PAYE is an arrangement for the withholding of UK income tax on employment income and employers are legally obliged to operate PAYE if they have a UK place of business and employees. If an employee decides to work abroad, an employer caught by PAYE must continue to calculate and deduct PAYE tax from all payments made to the employee. Where the employee is on an overseas contract, the overseas jurisdiction may look to make tax deductions in a similar way. An employer will need to contact the overseas authority to ensure all necessary obligations are being met in the UK and host country of the employee working abroad.
Employers of employees claiming OWR may also need to agree with HMRC how much income tax the employer should deduct at source to account for the fact that not all the earnings will be taxable in the UK.
National Insurance Contributions (NICs)
The rules relating to NICs where employees work abroad will depend on the specific circumstances of the employee and from which jurisdiction they decide to work.
Where an employee works abroad from the EU, they will only have to pay into one country’s social security scheme at a time (either the host country or the UK). The same applies if the employee chooses to work from Iceland, Norway or Switzerland. Contributions will ordinarily be due in the country where the work is being performed, although for employments starting after 31 December 2020, the rules have changed for postings to Iceland, Norway, Switzerland and Liechtenstein, and temporary presence in a country may mean that UK NICs still apply.
If an employee works in a country that is not in the EU (or Iceland, Norway or Switzerland), but with which the UK has a social security agreement (sometimes called reciprocal agreements or double contribution conventions), the employee will usually pay social security contributions in that country, rather than NICs in the UK.
In some circumstances, the employee may need to apply for a certificate to ensure that NICs are only paid in the country in which they are due or may need to pay voluntary contributions in the UK, and employers should take advice as required.
Creating a permanent establishment outside the UK
Employers must be aware of the potential risk of an employee creating a permanent establishment of the business outside the UK when their employees work abroad. Whilst this is unlikely to happen simply where an employee, working from abroad, carries out their ordinary everyday duties from a foreign country, the risk will be far greater where that employee frequently negotiates contracts in that foreign jurisdiction on behalf of the employer, or takes key strategic decisions from the business in that jurisdiction.
This risk will only increase over time. Establishing a permanent establishment in another country would have significant corporation tax implications for the employer in the UK and/or foreign country from which the employee works. Employers will need to ensure that their employee’s presence abroad does not constitute sufficient activity to create an unintended taxable presence in that jurisdiction.
Other considerations
Employers and employees alike will need to be aware of the legal rights to work in an overseas jurisdiction. Certain countries may also require the employer to sponsor the employee to work there. Employers will need to take the requisite local employment and immigration advice to ensure they are not in breach of any laws in that territory.
Summary
This is a complex area and care needs to be taken. It is important that employers are aware of the processes in managing employees choosing to work overseas and plan accordingly. Advice should be taken not only in the UK, but also the foreign country concerned to ensure legal compliance in a world where cross-border working is considered business as usual.
