Over the past year alone, I have seen employers engage people across many different countries including France, Germany, Sweden, the US, South Africa, Australia, Sierra Leone, Kenya, China and many more. This trend of hiring overseas has continued and, in some areas, increased during COVID-19.
Most of these new overseas employees will never work in the UK (for any length of time at least) and will normally work for the UK business from their homes overseas.
What are the key questions for employers?
Whilst non-UK labour markets may appear an attractive source of talent, employing people outside the UK can be complex.
The questions that would-be employers of overseas employees often ask include:
- How do we pay the employee?
- Can we make the individual self-employed?
- Can we pay them from the UK payroll?
- Will we need to register a company (e.g. branch or subsidiary) overseas?
- Can they join the UK pension scheme?
- Do we need to operate tax withholding or social security?
Like many international employment scenarios, there are seldom quick answers. However, over the years I have developed an approach that can help to determine the most effective solution for a given scenario.
Before I share some aspects of this, I would like to highlight a few common areas where I often see misconceptions.
Some common misconceptions:
1. Self-employing all our workers is the simplest thing to do
Self-employment may seem like the obvious solution (i.e. you just put in place a consulting arrangement and then pay the individual gross – simple).
In some cases, this may indeed be the right solution. However, caution is required. First, because many countries have ‘status’ rules (similar to those in the UK) whereby the substance of an arrangement is considered to prevail over the contractual arrangements.
An ill-considered ‘self-employment’ could have serious adverse consequences. For example, years in the future, employees could potentially claim that they were always really an employee (and therefore claim retrospective entitlement to pensions and other employment-related benefits).
Similarly, many countries have the equivalent of UK employment status rules when it comes to tax and, potentially, organisations could end up owing years of back-tax withholding and social security. There is also the general principle of whether engaging someone as self-employed is ethically the right thing to do when, in substance, they are really employed (i.e. regular salary, no financial risk, regular paid holidays, etc.) and, potentially, perform the same role as others in other countries who are engaged as employees.
2. Paying employees from the UK avoids an overseas payroll
The location from which an employee is paid very rarely determines the country in which tax and social security are required. I once came across a scenario where the employee wanted to be paid from the UK so he could pay UK tax rather than tax in the country in which he was living and working.
Unfortunately, it is not that easy. If it was, we would all want to be paid from Bermuda or Dubai! The taxation of employment income and tax withholding is normally driven by two things: (i) the country in which the individual is resident and (ii) the country in which the individual is working.
For example, an employee resident, employed and paid in one country may be subject to tax in another country where they perform duties, even if they are non-resident in that country (though there are sometimes exemptions available).
This is because it is the duties that trigger the tax charge rather than the location from which the employee is employed and paid. Conversely, you could have an individual who is resident in a country but performs some duties outside of that country. The country of residence would still normally want to tax the duties performed overseas. You can now see how double taxation arises!
3. Without a company overseas we have nothing to worry about
Even though you may not have a registered presence in an overseas location, the act of engaging an employed or self-employed individual may create a ‘permanent establishment’ for the UK organisation in the overseas location.
What does this mean?
In very simple terms, it means that the UK organisation is deemed to be operating overseas for corporate tax and other corporate regulatory purposes. So, you could find the overseas authorities coming to you and demanding that you prepare accounts, register an entity, file overseas and operate a local payroll.
I once worked on a case in Nepal where one employee triggered a whole host of corporate obligations for the UK-based organisation. This came as a big shock since the cost of setting up and running the operation was almost as much as the individual’s remuneration.
Uncomplicating the situation
Engaging people overseas will always have its challenges and almost always has some degree of complexity where you don’t have a ‘host organization’ in the overseas territory. Sometimes, it can seem difficult to know where to start.
Although not exhaustive, I have listed below some of the key steps which may help you to determine a fit-for-purpose solution. This may seem onerous and will need the input of tax and legal specialists, but missing steps will risk future issues. At the very least, understanding the risks of ‘skipping steps’ is essential, especially where you are employing people across multiple territories.
- Decide on how you will engage the individual – self-employed or employed. Confirm locally that the chosen ‘status’ of the individual will not lead to any future issues and review the contract to make sure it is compliant with local law in the overseas territory. Despite the pressure of time, it is better to understand whether there are any problems now than to wait until the arrangement has been signed and then try to back-track.
- Review the corporate tax position in the host country to satisfy yourself that your new employee/self-employed individual won’t create a permanent establishment in the host location for your UK-based organisation.
- Review the employment tax position to determine whether there are any tax withholding and/or social security obligations. The position in this regard will, to some extent, be driven by the results of steps 1 and 2 above.
- For budgeting purposes (and indeed to determine whether the recruitment is still feasible) establish the ongoing cost of engaging the individual, based on the outcomes of steps 1, 2 and 3.
- Set-up a payroll arrangement (where required) which enables you to fulfil your obligations. For example, if you have a non-UK resident who is working in a country where you have determined that there is no permanent establishment or withholding obligations, you can potentially simplify things by paying the individual gross from the UK (outside of the Real Time Information process (RTI)) and asking the individual to settle their own tax ‘in-country’. In some cases, organisations ask individuals to prove that they are settling their tax bill in the overseas country.
- Keep the position under review. The rules in the overseas territory (as well as your operational modus operandi) may change.
Up-front investment in the process and considering these points carefully can save much time, cost and effort later down the line.
Quick-fix solutions may seem attractive but are often a false economy, in my experience. I have seen first-hand the negative effects of getting it wrong (tax authority enquiries, upset employees, financial penalties, unexpected bills, etc.).
However, with some work, you can establish a framework in many countries which is robust, compliant and as cost-effective as possible.