Over the past six months, large numbers of non-UK nationals have repatriated to their home country to work from home after a period of working in the UK for a UK employer.
Most UK employers have simply continued to payroll such employees in the same way they did prior to COVID-19 (i.e. UK payroll with PAYE and NIC deductions). This is not an unreasonable approach since, when COVID-19 came to the UK, it was widely anticipated that such repatriations would be a few months at most.
However, many individuals employed by UK employers continue to work from their home overseas, even after mandatory lockdown measures have been lifted.
For UK employers with employees in this position, the approach should now be reviewed to prevent future unexpected employer compliance issues.
We outline the key potential issues below.
1. EU Social Security
Whilst there have been COVID-19-related relaxations across the EU, the longer an employee remains working overseas in an EU country, the more likely it is that EU social security obligations will be triggered for UK employers. Where social security is triggered overseas in the EU it is likely to require the registration and set-up of an overseas payroll.
Why is this? Whilst the UK has now left the EU, we are still bound by EU social security regulations, at least until 31 December 2020 and potentially beyond this. This means that, where a UK employer does not have a corporate presence overseas in the EU, it would still be required to register to operate social security and a payroll overseas where the employee triggers a social security liability in the overseas territory.
The rules as to where social security is due is governed by an EU Regulation. The regulation ensures that employees are not subject to social security in two EU countries at the same time on the same income.
In the circumstances where employees work from home in the EU for a short duration, we would normally expect National Insurance Contributions (NIC) to continue where the employee had previously been working in the UK for a UK employer prior to COVID-19. However, if employees continue to work from home overseas in another EU Country and the arrangements are expected to be longer-term, the position should be reviewed since it is possible that social security will become due by the employee and the UK employer in the overseas country.
2. Countries with mandatory payroll obligations
There are some countries, including Canada and New Zealand, that require foreign employers to set-up and operate a payroll in the country, even where the UK employer has no subsidiary or branch in that country.
For example, where a Canadian National has returned to work in Canada from home, Canadian tax withholding is normally required, even where the employee is employed and paid by a company in the UK. If the stay in Canada is for a short duration (normally up to 183 days), it may be possible for the repatriated employee to achieve exemption from Income Tax in Canada under the UK/Canada double tax agreement. However, in such cases, the UK employer would still be required to register with the Canadian tax authorities and request a waiver from the requirement to operate a payroll in Canada.
Given this, UK employers should identify where they may have employees working form home in countries where there are mandatory employer obligations. The financial penalties for non-compliance in this regard can be significant.
3. Payroll required after triggering a non-UK corporate presence
Even where the UK employer has no corporate presence overseas in the country in which an employee is working and that country is outside the EU and has no mandatory employer payroll obligations, payroll obligations may still be triggered by the employee.
How? The activities of employees working overseas could unwittingly trigger a corporate presence (or ‘permanent establishment’) for their UK employer in the overseas territory. This could mean the UK employer being required to register a branch overseas which, in turn, is likely to lead to the requirement to operate a payroll overseas. In addition, the branch is likely to be required to file corporate tax returns and potentially pay non-UK Corporate Tax on any profit deemed to be generated in the overseas country. The risk would normally be low where the employee is only working for a month or so overseas but will increase the longer an employee remains in this position.
4. Impact on UK payroll
Until the position has been reviewed, it is prudent for employers to continue to operate UK payroll as normal, with the appropriate PAYE and NIC deductions. However, this may not be the correct position longer-term given the issues outlined above. The correct UK payroll position will normally be determined partly by the UK rules and partly by the position oversea.
For example, if the employee becomes non-UK resident (which is quite possible the longer the employee remains outside the UK), then UK tax will no longer be due on the employee’s non-UK duties. In such cases, employees may want to consider requesting a No Tax (NT) code from HMRC to have their income paid gross and avoid having to wait until after the UK tax year end to reclaim the tax.
The NT code may become necessary to avoid tax withholding in two countries where there are mandatory withholding obligations overseas (e.g. like in the case of Canada above).
The position becomes more complicated where the employee becomes non-resident but continues to perform some duties in the UK for the UK employer. In this case, employers may wish to consider obtaining a direction from HMRC to reduce the PAYE withholding to reflect the fact that UK tax would only be due on UK duties.
The NIC position should also be considered. For example, if social security is triggered in another EU country per above, then NIC will no longer be required. In these circumstances, and after social security is commenced outside the UK, the employee should obtain Form A1 from the overseas tax authorities in order that NIC may be ceased.
What should employers and employees do?
Whilst the continuation of PAYE and NIC for employees working from home overseas is prudent for the time being, now is the time for employers to review the UK and overseas payroll position to determine if arrangements are still appropriate and/or whether any changes or additional payroll obligations have been or will be triggered.
From a practical perspective, it is important for employees to keep a careful record of the number of days they spend and work in a country, in order that any issues can be more easily identified. Furthermore, we would recommend that employees liaise with their employers to identify whether there are any additional tax obligations for them, arising from their new working arrangements.
For employers, we would recommend that they review their workforce now and begin to identify any cases that may trigger compliance obligations. Whilst we are at the early stages of these new working arrangements, it will be better for employers and employees to get on top of this now, especially for those employers who have many people in this position.