Most businesses saw a dramatic shift to flexible working in the pandemic, including international remote working requests. Post-pandemic, employees want this flexibility to continue, but Davyd Fisher explains why employers must be aware of the risks.
During the latter part of 2022, the Office for Tax Simplification (OTS) asked for feedback on how businesses were dealing with the new working landscape. On 20 December, they published their hybrid and distance working report, summarising the experiences and suggestions of 425 people and businesses. The report includes recommendations which have been put to the government, and the initial feedback and suggestions from companies like yours.
What are the challenges and risks with international remote working?
An individual’s tax position is often dependent on where they're living and working, and this often feeds into their employer’s obligations for payroll and social security. Employees who therefore work in a different jurisdiction to their employer risk generating new obligations abroad for themselves and their employer. Due to the big differences between rules, rates, and administration, this can lead to additional obligations for HR, finance, and payroll teams.
Social security rules and agreements differ to tax, adding a separate dimension to the compliance work required. Existing social security agreements (such as with the EU and some other countries) can allow employees who are assigned abroad by their employers to remain within their home scheme, but there's a debate over whether this would extend to an employee-led period of remote working. Not all agreements cover the case of ‘multi-state workers’, who aren't formally assignees but regularly work in more than one jurisdiction (such as frequent business travellers).
Similarly for companies, the activities of their people can affect where they have corporate reporting and payment obligations. Employees working abroad risk creating a ‘permanent establishment’ leading to corporate tax duties.
These concerns spread outside of the world of tax, with other complications being raised, such as:
- immigration requirements
- employment law - different statutory entitlements and labour laws
- data protection and cyber security - rules such as GDPR regulate transfers of data in and out of certain jurisdictions
- employment benefits - are existing medical and insurance schemes still valid? Will the pension allow contributions from someone based overseas?
- software licensing and regulatory obligations - do these extend abroad?
How are businesses responding to international remote working?
All the large businesses the OTS spoke to had introduced policies to allow their staff to work for a short period in another country from their usual place of work. This was driven by employee demand.
While the amount of time permitted to work overseas varied, employers typically permitted overseas stays of 10-30 days per year, with a small number being prepared to consider longer periods of up to 90 days. The most common pattern the OTS observed was up to 20 overseas working days in a year. A year was often a rolling 12 months, but sometimes a calendar or financial year. Many also required that the 20 days be split into not more than two occasions to limit the administrative burden of the policy.
Most employers with overseas workers established a local subsidiary to employ individuals or asked an existing subsidiary to employ them. A small number utilised global employment companies and/or an ‘employer of record’ to hire the individual on their behalf. While some respondents felt these intermediaries provide a useful service, others cautioned that risks would remain with the ultimate engager.
Although it can seem daunting, businesses don't need to wait for fully formed policies, or plans which completely eliminate risk. Great progress can be made just with careful tracking of people working cross border, and a requirement that people seek permission from a central team before working internationally. Different levels of risk can be applied to different groups, based on risk factors such as seniority, income level, duties performed and existing connections to the host country. As experience grows you may get a better sense of your key risk areas or jurisdictions and can then undertake specific detailed review, targeting your advisory spend where it's most needed.
OTS respondents’ suggestions for reform
In the long term, respondents wanted to see international action on this, and were keen for the UK to push this via the Organisation for Economic Co-operation and Development (OECD) and other bodies. This may be difficult initially given the OECD’s work on Pillar I and Pillar II transfer pricing. Base erosion and profit shifting (BEPS) is arguably pulling in the opposite direction due to greater apportionment of profits and taxing rights, not less.
Respondents wanted to see HMRC acting unilaterally to clarify how it would apply the rules on permanent establishment and corporate residence for remote workers, for example by:
- introducing a ‘bright line’ day test for ‘permanence’
- specific exemptions for certainty, such as that a home office couldn't create a permanent establishment, or that temporary accommodation could not create a fixed place of business.
They felt this would also lead the way for other jurisdictions to offer their own simplifications. Requests were made to simplify payroll compliance for cross border workers, including:
- introducing a fixed de minimis for UK short term visits under which there would be no risk of tax, PAYE, social security or permanent establishment
- allowing employers to operate Section 690 and Appendix 5 arrangements once an application has been made by the employer (before approval) and/or improving the approvals process
- extending the Appendix 8 arrangements to allow for relaxation of PAYE up to a higher number of days
- creation of an equivalent EP Appendix 6 for employees who aren't tax equalised (so are responsible for paying their own taxes) and remain on foreign payroll but where PAYE is due in the UK
- confirming the application of international social security agreements to employee-led moves.
International hybrid working - what's next?
We hope that the government will respond positively to the OTS suggestions, which demonstrate simple ways that HMRC could reduce the risks that need to be mitigated and simplify compliance with companies’ obligations. The Spring Budget is scheduled for 15 March 2023 and this is likely to be the Chancellor’s first chance to respond to the suggestions.
In the meantime, companies must continue to be aware of the risks which may arise, and develop an approach that works for them and their employees. Having an international hybrid working policy is a great first step, and developing a quick process to risk assess new requests enables firms to focus their attention on key risk areas or key employees.
The Grant Thornton Global Mobility team has spoken to many companies trying to balance the great benefits of flexibility with efficient processes to mitigate the common risks posed by employees working cross border. This could be companies dealing with their first few requests, aware of the precedents these will create, or they can be proactively creating a remote working policy to enhance their employee offering.
We can help you develop policies and processes for your organisation that reduces the risk of remote hybrid working to acceptable levels.
If you’re interested in discussing how your business approaches remote working requests, or a demonstration on Grant Thornton’s technology solution for managing these complexities, get in touch with Davyd Fisher.