Covid and internationally mobile workers

With the ability to travel significantly reduced in the current pandemic, UK companies with usually mobile employees or with staff who will be working from home in another jurisdiction may find themselves with new or changed reporting obligations.

We have set out below an example of a typical scenario encountered recently and the issues it raised for the company and their employees.

The Scenario

A UK resident company employed an EU citizen to work on some UK projects.

The proposed working pattern was that the employee would visit the UK for one week each month for site visits with the other three weeks being spent working from home in their home country.

The company would pay a wage in the home country currency and meet travel expenses on behalf of the employee.

Key considerations included (but were not limited to):

• The creation of a deemed presence for the company in the overseas jurisdiction by virtue of the employee carrying out their work in that country;
• The requirement for the company to operate an overseas payroll to withhold local taxes and social security;
• Consideration of the employee’s personal tax residence position

The Outcome

We engaged with a local firm within our international network to take supplementary advice in the employee's home country.

Whenever an overseas jurisdiction is involved, local advice will always need to be taken to ensure that the obligations in the overseas jurisdiction are met.

Working with that local firm we concluded:

Permanent establishment

Due to the employee’s role, the company would not have a deemed taxable presence (“permanent establishment”) in the overseas jurisdiction.

Amongst other factors a permanent establishment can be created where the employee is sufficiently senior to be concluding contracts on behalf of their employer, where the main functions of the employee’s role are carried out in the overseas jurisdiction or where a fixed place of business such as an office exists (and this can include a home office).

If a permanent establishment is created, it may mean that part of the company’s profits fall to be taxed in the overseas country and so must always be considered carefully.

Payroll in an overseas jurisdiction

The employee carrying out their duties in the overseas jurisdiction meant that the company had an obligation to operate a payroll and deduct local taxes and social security.

The local firm were able to set up and operate this for the company going forwards.

Whilst a payroll was required in the overseas jurisdiction, as the employee was also carrying out duties in the UK, it was also necessary for them to remain on the UK payroll.

We were able to assist the company in agreeing with HMRC the correct proportion of the wages to be included on the UK payroll based on the estimated time spent in the UK.

Two permanent workplaces

As a result of the contractual split of the employees duties, it was considered that they would have two permanent workplaces.

From a UK perspective, this impacted the taxation of the employee's reimbursed travel and subsistence expenses.

We were able to advise the company on the implications of paying the employee’s tax liabilities in relation to the travel costs.

Statutory Residence Test

The employee’s personal tax residence position was also considered. Tax residence for UK domestic law purposes is determined under the UK Statutory Residence Test.

After reviewing the employee’s residence status, we were able to support the employee with filing their UK tax returns to report the UK portion of their income.

Key Considerations

As can be seen from the above, what may appear to be quite a simple scenario raised a number of questions and created reporting obligations for the UK company and employee in both jurisdictions.

Before a company takes a decision to hire an employee who will be wholly or partly based overseas, consideration should always be given to the impacts this will have for all parties. 

Bishop Fleming is a member of Kreston, an international network of firms worldwide, and our internal specialists regularly work with member firms within the network to provide planning and support to clients on business and employee residence issues across jurisdictions.

For more information, check out our International Advisory page.

Check out our Business after COVID-19: Transition Knowledge Hub for more guidance and advice on managing the pandemic.