The way we work with our clients has changed since Covid-19. Working remotely has become a realistic option for many people. Working from home and working from anywhere are not something that employers can simply allow without considering the tax implications.
Employers’ flexibility can help them retain talented employees, but the reality is that taking these measures can prove very costly.
What to consider while working remotely
Employers should be aware that if someone is a ‘home worker’, this does not automatically mean they can pay their employees’ travel expenses tax-free. It is likely that HMRC would actually argue that in many home-working situations, employees have ‘two permanent workplaces’ and therefore, if the employer pays for travel between the ‘home office’ and the ‘regular office’, these costs would be taxable.
Whether someone has two permanent jobs depends on a variety of factors. The employee handbook or employment contract may, however, indicate that employees can work from home or at the office, based on their individual preferences, in the case of ‘hybrid working’ arrangements. According to HMRC, such individuals would have two permanent places of employment and ‘home-to-office’ work; travel reimbursements in such situations would be taxed. You can find more information on HMRC website.
As well as the regular issues of home-to-office travel, working remotely has resulted in increasing numbers of staff working ‘internationally’ – i.e., in a different country from the state in which they are legally employed. For example, people who perhaps live in the Republic of Ireland but work in Northern Ireland or another part of the UK.
In the past, such arrangements – where the employee lived in the Republic but commuted over the border on a daily basis – would not have impacted taxes or social security (NICs). However, with the increase in home office working there are real implications and challenges for employers with regard to:
- Income tax withholding (PAYE or international equivalent).
- Social Security, and
- Corporate tax issues.
- Income tax withholding
It is clear that PAYE is due on 100% of someone’s earnings even if they are formally residing overseas. Employees working partly in the UK and partly in Ireland (or another state) will be liable for UK taxes only on the days they work in the UKs.
Many employers may choose to continue operating PAYE as if ‘nothing changed’ in practice
While such approach is easy for employer, it can provide cash flow and administrative issues for the individual employee. These individuals would realistically need to submit UK tax returns, to ensure that the overpaid UK tax withholding is refunded to them.
Employers also need to be aware that in some cases they could have an obligation to register for income tax withholding in the employee’s ‘home state’. This payroll withholding obligation may arise under those countries’ domestic regulations, even if the employee’s home office working duties are not sufficient to create any formal presence of the UK entity in that jurisdiction,
National Insurance Implications while working remotely
As with PAYE, employer may simply assume that NICs should continue to be withheld on an ‘as per normal basis’, when you have someone working outside the UK from a home office. However, with many things involving tax or NICs, the position is much more complicated than that.
For example, from a social security compliance perspective, employers should really know whether their employee are working in an EU or non-EU state and the exact working pattern of the individual. In addition, employers would need to understand the interaction of the EU social security regulations and our domestic UK NIC regulations.
For example, the domestic NIC regulations would require an employer to continue accounting for NICs (employee and employer) for the first 52 weeks that a UK employee is based overseas. As such, a UK employee, for example, who started working in South Africa would be liable to the UK NICs for the first 52 weeks that they started from their new South African home office. If such an employee also becomes liable to South African charges at the same time that they are paying UK NICs, they would typically just face a ‘double liability’.
In contrast, if that same individual was working, for example, from their personal choice in an EU state on a full-time basis, the UK employer would in the first instance have a legal obligation to account for French or Irish social security contributions on the UK paid salary. If the UK employer didn’t register for the French or Irish social security charges in this situation, the relevant EU authority can ask HMRC to collect the relevant social security charges from, the UK employer.
While the EU/UK social security regulations should ensure that there is no ‘double’ social security liability, as the UK NICs can be automatically switched off as soon as the relevant EU social security contributions are being made, cross-border working can still bring significant challenges for employers. There are additional costs associated with setting up and running a separate payroll in the relevant EU state. Additionally, employer social security costs can be much higher than in the UK (e.g., in France, it can be 40% of the employee’s wages).
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