On 20 December 2022, the UK Office of Tax Simplification published a report on Hybrid and Distance Working that explores the tax implications of changing working practices. The report followed a consultation with business and service providers into trends surrounding the changes in working practices since the Covid-19 pandemic and predictions for the future.
A shift towards hybrid working (allowing employees that can work from home the ability to do so for some of their time) was almost universally reported amongst businesses surveyed for the report. Employees have come to expect more flexible working conditions, so having that flexibility as part of a people proposition is vital to attract and retain employees.
Enabling individuals to work abroad for short periods is also considered a crucial business policy to attract and retain staff. Many large businesses have introduced policies allowing their staff to work for short periods in a country other than their usual place of work. Uptake of such opportunities, while not at significant levels yet, is expected to increase in coming years.
When short periods abroad are permitted, the most common pattern observed was for employers to allow up to 20 working days to be spent overseas in a rolling 12-month period, with many requiring that those 20 days be split into no more than two periods of overseas working. Many employers were in the 10-30 overseas working days bracket, with a small number considering longer periods of up to 90 days of presence overseas.
Some employers have enabled small numbers of employees to work overseas on a longer-term basis whilst they continue to perform their role for the UK business from the overseas territory.
Policies governing access to overseas working flexibility generally included commentary on the eligibility of employees, any restrictions on activities that could be carried out and permitted countries from a tax perspective.
In situations where there is a longer-term arrangement, the compliance challenges or requirement for additional supporting infrastructure was noted, with items under consideration including:
The OTS acknowledged that respondents had requested a review of the UK expenses and benefits system as most concepts are geared towards dealing with more traditional working practices. For example, should the costs of travelling between a home-based workplace and an office workplace be tax deductible? Could the troublesome distinction between employer-incurred costs and reimbursed costs be removed?
While the OTS considered that adding additional tax reliefs would carry a significant cost to the Exchequer, it concluded that new ways of working present the government with opportunity to reconsider the approach to employee tax reliefs without necessarily adding to exchequer costs.
It seems more likely that the improved guidance that respondents requested to assist both employers and employees could be achieved: currently there is only limited guidance available on hybrid working situations and the complex social security and payroll implications of cross-border working. More joined-up guidance on how permanent establishment and transfer pricing principles interact with staff choosing to work overseas for longer periods was also highlighted as a key need.
The OTS report observes that when hybrid or remote working takes place in a country other than the main business location, there are a wide range of legal issues (including employment law) to be addressed, and these take employers’ primary attention. Naturally, there are often tax and social security issues and compliance obligations as well, but these can be an “afterthought” for employers – causing problems down the line.
Most of the concerns around cross-border issues revolved around the potential for employees overseas to create a permanent establishment for the business in the overseas location. Whilst the tax impact may be negligible, the administrative burden of the registration and filing requirements is significant. It is important to note that tax and social security withholding are often the employer’s obligation and need to be handled upfront, regardless of the employee’s personal tax position, and cannot be overlooked.
Non-tax issues such as insurance coverage and data security are areas that could be problematic to employers if not considered in advance.
Read more on the risks of international remote working.
In a busy commercial environment, it can be tempting for employers to assume that there isn’t a problem with employees working remotely, until one arises. Sadly, that can be a costly approach.
Our specialist Global Employer Services team can work with you on policy design to prevent hybrid and distance working creating unforeseen problems and help you put practical solutions in place to navigate the compliance complexities that can arise when employees work remotely from overseas.
Stuart Strong
stuart.strong@bdo.co.uk