A common question asked by international businesses looking to hire staff in the UK is: should we hire individuals directly as employees, or under an Employer of Record (EoR) arrangement with a global employment partner?
As a US business, you may be familiar with the Professional Employer Organisation (PEO) model. This creates a co-employment relationship that is not easy to replicate in the UK. In the UK, EoR arrangements allow an individual to be employed by a third party in the overseas country and are often seen as a low compliance alternative to hiring employees directly, particularly if you’re expanding into multiple overseas countries.
EoR arrangements can provide a short-term solution for companies looking to test a new market. And if you’re willing to pay the mark-up to your global employment partner, the flexibility that the arrangement offers if you decide to abort after a few months will be a huge benefit.
But you should not assume that the EoR arrangement will address all tax compliance requirements in the UK. The arrangements are principally designed to manage payroll and employment tax compliance requirements, but you must also be aware of the corporate income tax requirements in the UK.
An overseas business will be liable to UK corporation tax if it has a subsidiary company in the UK, or if its activities in the UK create a permanent establishment. In our experience, the nature of the EoR arrangements means that it is unlikely that the risk of creating a permanent establishment will be fully mitigated, meaning you could find yourselves subject to UK corporation tax even if your UK employees are engaged via a global employment partner.
Tax authorities may be willing to take a pragmatic view if:
- the EoR arrangement is used for a limited number of employees
- those employees have no management responsibility, and
- the arrangement is only in place for a few months to test the new market.
But if your intention is to establish a longer-term presence, then the level of tax risk increases.