Tax issues associated with cross border remote working

The COVID-19 pandemic has accelerated the shift to remote working arrangements, these changes have resulted in more and more employees performing their duties away from their normal place of work.

Where such arrangements involve an overseas jurisdiction, this can have far reaching tax implications.

Firstly, let’s consider a UK citizen who decides to return to the UK but retains an overseas employment. They work mainly from home in the UK but continue to be paid by an overseas employer with overseas payroll taxes deducted.

We need to consider whether the individual is UK tax resident under the Statutory Residence Test (SRT) along with consideration of the Double Taxation Agreement (DTA) held between the two countries. This will help determine who has the taxing rights over the income.

On the assumption they are UK tax resident and undertake their duties in the UK then it is likely that UK income tax and National Insurance Contribution (NIC) are due.

Where an overseas entity, without a UK tax presence employs a UK resident individual, then it is possible the tax reporting obligations are the responsibility of the employee and potentially no employer NIC liability arises.

It is likely that the local payroll taxes being deducted by the employer should stop, but this of course depends upon the specific facts. It should not be assumed that HMRC will automatically allow a deduction for overseas tax suffered against a UK liability.

Where an overseas employer insists that payroll deduction must be made then a modified payroll can be operated such that an individual does not suffer double tax deductions from their salary.

Alternatively, an employee may ask their UK employer if they can relocate to another country and work remotely.  On the assumption they are employed by a UK entity, it is likely that UK PAYE must still be operated. However, payroll obligations in the other country must also be considered.

On the basis that the individuals tax residency moves from the UK to the overseas territory then HMRC may issue an NT tax code such that no UK income tax is deducted from the salary under PAYE.

The NIC position does not automatically follow the income tax treatment. The rules on NIC differ depending upon whether there is an agreement between the UK and the overseas country in question.

In some cases employment duties may need to be performed in both jurisdictions as such consideration should be given to whether payroll is attributed to the respective workdays in each country. The country of tax residence is still likely to expect the full income to be reported annually on a tax return.

The activities of an employee in an overseas jurisdiction can create a taxable presence or permanent establishment (PE) for the UK entity in that territory and an associated tax liability for the UK business. The relevant double tax treaty helps in determining whether a PE has been created.

It is imperative that tax advice is sought in both jurisdictions when cross border working arrangements are being considered. At Lovewell Blake we work closely with our colleagues at HLB International to fully understand the respective tax implications in the UK and overseas.

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