Working from holiday – your employer may not thank you

Research from RSM UK’s ‘The Real Economy’ report found that 33% of organisations are responding to staffing challenges by allowing employees to work remotely outside of the UK, in a bid to combat recruitment and retention issues in a tight labour market. 

While many employers look to encourage workers back into the office to increase productivity, our research also found that 88% of businesses are finding employee turnover an issue, meaning employees have more influence on what their employment package looks like. However, despite businesses’ best intentions to keep their people happy, they must also consider the tax risks this poses.

There are significant corporate tax implications if an employee working abroad has created a ‘permanent establishment’ for the employer in the host country. This is a particular risk if the employee is in a sales role that includes concluding contracts, which are simply agreed by UK staff without amendment. The existence of a ‘permanent establishment’ means that the profits attributable to that establishment would be subject to local corporation tax, which in some countries is charged at a considerably higher rate than in the UK. It could also affect the way bilateral double taxation treaties would apply.

A UK employer is responsible for operating PAYE on employees’ remuneration, deducting and withholding amounts in respect of income tax and National Insurance contributions (NICs). However, if an employee works abroad, overseas income tax and social security may also be due. Therefore, there may be a payroll obligation in the host country for the employer too. The question of who pays NICs or social security contributions must also be considered and will depend primarily upon what agreements the UK has in place with the host country. This is complex and rules differ between countries, depending on the agreements in place.

In addition, employers should be aware that an individual who works abroad, even for a short time, can obtain protection under the local employment rights of their host country (known as mandatory laws) in relation to holiday, minimum pay and on termination. Many countries, particularly in Europe, afford individuals greater protection against dismissal than they are entitled to in the UK and it is possible for employees to seek to rely on those enhanced rights if they are conducting their work abroad and their employment is terminated.

Companies should also be clued up on immigration rules, as it is a common misconception that individuals may enter a country as a ‘visitor’ and work remotely from a country without first obtaining a work visa. Employers need to undertake a ‘Right to Work’ compliance check and may need to make local filings regarding individuals based in that location. There are significant consequences for both individuals and businesses if they get this wrong.

There are further health and safety risks which arise from working abroad, and UK employers are under a duty to protect the health, safety and welfare of the employees, irrespective of where they are working, including when they are working from home. If individuals are working abroad, employers must ensure they are compliant with local health and safety laws.

While employers may be focused on recruiting and retaining their workforce through overseas working offerings to mitigate labour challenges in the short term, the complexity of the tax, administrative and legal issues which may arise should be carefully considered before permitting such arrangements.