Home and away when working from home means working abroad

Employers should consider a variety of issues, including tax, social security, immigration and employment implications, before agreeing to an employee’s request to work from home when “home” is not in the UK. We look at each of these issues below before explaining what practical steps you can take to minimise the risks.

Tax and social security implications of working temporarily abroad

From a UK perspective, the UK employer should continue to deduct income tax under the PAYE system in accordance with the employee’s PAYE code notwithstanding that the employee is temporarily working overseas. If it is anticipated that the employee will be working overseas for at least a complete UK tax year, they may apply to HMRC for a No Tax PAYE code which, if issued, will authorise the employer to pay the employee without PAYE deductions. In addition, the employer should continue to deduct employee national insurance contributions (NICs) and pay employer NICs.

You will need to consider, however, whether the employee’s stay in the host country creates risks of income tax or social security liability in that country - or even the risk that you (as the employer) are regarded as having created a permanent establishment there. Several tax authorities have issued concessions in the light of Covid-19, but not all have done so, and it will be important to establish the rules in place in the relevant host country. We briefly outline the issues below.

Income tax may be payable in host country

The starting point is that the host country has primary taxing rights over the employment income that the employee earns while physically working in that country. However, if there is a double tax treaty (DTT) between the UK and the host country, the employee may be exempt from income tax there if certain conditions are satisfied including:   

• The employee is not a tax resident in the host country under the DTT. If the employee is tax resident in the UK and in the host country under each country’s domestic law, their residence status is determined in accordance with the DTT by reference to their personal circumstances.
• The number of days the employee is present in the host country over a 12-month period (however briefly and irrespective of the reason) must not exceed 183 days.

The UK has a DTT with most countries, including all 27 EU countries and most other major world economies. In practice, this means that a short stay abroad in many locations is not going to result in the employee becoming liable for host country income tax.

Remember, though, that employees who have already spent other periods in the host country in the same 12-month period (e.g. visiting family) may reach the 183-day threshold sooner than you think. Also, the full details of the conditions can differ from DTT to DTT (particularly the period over which the 183-day test must be satisfied), and the employer and/or employee may still have obligations in the host country even if the DTT applies. (For example, the employer may need to register with local authorities as an employer and/or report on the income that is being paid to the employee.). It is therefore important to understand the local position.

If the employee does become subject to tax in the host country but remains UK tax resident, they will remain subject to UK income tax on their worldwide income but should be able to obtain credit for some or all the tax they pay in the host country. They will, however, need to complete the appropriate tax declarations, which could be a complex process.

Social security position is complex and depends on what agreements are in place

The general rule is that employee and employer social security obligations arise in the country in which the employee is physically carrying out their duties.

In the European Economic Area (EEA) and Switzerland, there are currently exceptions to this general rule where it may be possible, depending on the circumstances, for the UK employee and their employer to continue to pay UK NICs and not pay social security contributions in the host country. Broadly, the exceptions are if the employee is sent abroad by their employer for up to two years, or the employee is working in two or more countries. Unless local advice confirms it is unnecessary (for example, because a Covid-19 exemption applies in that country), it is crucial to apply for an A1 (or E101) certificate from HMRC (or the social security authorities in the employee’s country of residence if different) confirming the position.

Note that (other than for Ireland where a separate agreement has been negotiated) these rules are due to expire on 31 December 2020, when the current Brexit implementation period ends. Existing A1/E101 certificates which have an expiry date after 31 December 2020 will be honoured, provided the situation remains unchanged. However, the position for new arrangements remains to be seen and will depend on whether there is a trade agreement between the UK and EU which replicates any of these features.

Outside the EEA and Switzerland, the position will depend on whether there is a reciprocal agreement between the host country and the UK. In countries where there is a reciprocal agreement, such as the USA, Korea and Japan, it is possible for an employee to remain within the UK system (and not pay local social security contributions) for up to five years if they have a valid certificate of coverage.

In other countries where no agreement exists, such as China, India and Australia, the UK employer must continue to deduct employee UK NICs and pay employer NICs for the first 52 weeks of the arrangement. Further, there may also be a liability to pay social security contributions in the host country in addition to any contributions that are made in the UK.

Risk of creating a permanent establishment is low but should be considered

In some situations, there will be a risk that the employee’s activities or presence in the host country will create a permanent establishment for the employer in that country. This would be the case if, for example, the employee has a sales or business development role and is habitually exercising an authority to conclude contracts in the name of the employer while in the host country.

If a permanent establishment is created, the profits attributable to that establishment would be subject to corporate tax in that country. It would also mean that the income tax exemption in the DTT would not apply. While this may be less of a problem if you already have established operations in the host country, it could be a real headache if you do not.

Assuming the working-from-home arrangement is only short term, it would be difficult for the tax authorities to argue that a permanent establishment had been created. The longer the arrangement continues, however, the greater the risk - particularly if the employee routinely negotiates the principal terms of contracts with customers which are simply “rubber-stamped” without amendment by UK employees.

Immigration implications of working abroad temporarily

Immigration permission is generally not required for business visits. Depending on the employee’s activities, it may be possible to characterise their stay as a business visit - for example, if their activities are limited to those typically undertaken during business trips (e.g. meetings and training). However, restricting an employee’s activities in this way is unlikely to be practical for many employees and, in general, the longer an employee works without permission, the more difficult it will be to characterise their stay as a business visit. In some countries, work itself is prohibited even as a business visitor.

Currently, if the employee is a UK or EEA national, they have the right to live and work in an EEA country (although this position will change for UK nationals from 31 December 2020 when the current Brexit implementation period ends).

If an employee is not an EEA national and/or wishes to work from a non-EEA country, you will need to consider what restrictions may be in place. For example, if they want to work in Hong Kong but don’t have permission to stay there indefinitely, they should not undertake any work without permission, even for a limited period and even if the employing entity is not a Hong Kong entity. As with tax and social security, some countries have implemented emergency Covid-19 legislation that will affect the normal immigration position, but this is not the case everywhere.

You may also need to consider any immigration issues that could arise on the employee’s return to the UK. For example, EU nationals should consider whether to secure settled or pre-settled status in the UK before they travel overseas. Other non-British nationals should consider whether their absence from the UK may affect their visa, or their eligibility to apply for other types of status in future where absences are assessed, such as indefinite leave to remain, permanent residence or naturalisation as a British citizen.

Employment law and data privacy implications of working abroad temporarily

On top of the tax, social security and immigration implications explained above, there are various other employment law and data privacy considerations.

Mandatory employment protections may apply

If employees live and work abroad, even for short periods, they can become subject to the jurisdiction of that other country and start to benefit from the applicable local mandatory employment protections. These may include minimum rates of pay, paid annual holidays and – perhaps most importantly in the event of a dispute - rights on termination. What protections, if any, an employee acquires will depend on the country in question. 

Within the EEA, there is also the Posted Workers Directive (PWD) to consider. This applies where an employee is “posted” from one undertaking or establishment to another cross-border within the EEA (and, until 31 December 2020, the UK). Changes to the PWD, which must be implemented by the end of July, mean that employees will be entitled to the same mandatory pay as comparable employees in the host location.

The PWD itself was not designed to cover the situation of an employee working from home temporarily in another EEA country, and it would not be directly engaged unless you opt for a formal secondment to a local group company or ask the employee to work on a contract for a local client. However, the local implementation of the PWD may nonetheless end up capturing this situation.

For example, in Belgium the local implementation of the PWD requires that all employment, remuneration, working terms and conditions and collective bargaining agreements that have been declared generally binding apply as of day one to any employee working temporarily in Belgium. This is also true of the UK, where employees have certain minimum statutory rights from day one. This can be a complicating factor, particularly if a dispute or termination scenario arises and the employee asserts that they have employment rights in another jurisdiction.

Be careful about transferring data

If an employee’s role involves processing personal data, this could give rise to data protection issues, especially if the employee is requesting to work from a country outside of the EEA which is not subject to the General Data Protection Regulation and other EU data privacy laws.

Local health and safety protections may apply

UK employers have a duty to protect the health, safety and welfare of their employees, which includes providing a safe working environment when they are working from home. If an employee works from home abroad, you should also ensure that it is compliant with any local health and safety requirements. For example, in the Netherlands, employers must provide employees with the equipment needed to ensure a safe working environment which in some cases might involve making a contribution or purchasing relevant equipment.

Employees will also need to comply with applicable public health guidance (e.g. quarantine periods) both in the host country and on their return to the UK.

How to minimise the risks

Given the current situation, you will no doubt want to be flexible when it comes to accommodating requests to work from home overseas, but you will also want to minimise the risks. Depending on how many requests you expect to receive, you may even want to consider developing a short policy to ensure that these situations are dealt with consistently and fairly. It is possible that you will receive more such requests in future, as employees look to take advantage of increased remote-working opportunities to ask if they can work abroad for a short period on a regular basis.

The key practical steps for minimising the risks are as follows:

• Only accept requests if the employee’s role can be performed effectively remotely and can be done lawfully from the country in question.
• The shorter the period the employee is working abroad, the smaller the risks are likely to be. Consider only approving requests for a short, time-limited duration where the employee’s expected return date is clearly documented.
• Always take expert local advice on any tax, social security, immigration and employment obligations you may have in the host country, and on any Covid-19 concessions that have been issued. The employee may also need their own advice.
• Much will depend on the identity of the host country and the nationality of the employee. For the time being, working in the EEA is generally more straightforward but this will change after 31 December 2020 when the Brexit implementation period comes to an end.
• Check what data processing the employee will be doing, and that this can be carried out lawfully in line with your usual policies.
• Agree the terms of any temporary overseas working arrangement and record them in writing. Ideally, these should clarify that:
  • the employee will be liable for any additional income taxes or employee social security which may be charged because of their decision to work for a short period in an overseas location (and that the employer is authorised to make additional deductions or seek reimbursements, if necessary, for this purpose)
  • the employee will be responsible for any personal tax declarations that may need to be made
  • the employment contract remains subject to UK law and jurisdiction
  • the employee is still working solely for the UK business
  • the employee does not have the authority to enter into contracts with local customers while in the host country and should not hold themselves out as having such an authority
  • the employee takes responsibility for ensuring they have the necessary technology and arrangements in place to enable them to work effectively
  • the employee accepts that they are working from home at their own risk and that the employer will not be liable for any loss they suffer due to their request being approved
  • the employee must comply with all applicable public health guidance in both in the country to which they travel and in the UK.