Working from home on a virtual basis – what does this mean from a tax and social security perspective?

With Covid-19 having shown that ‘work anywhere’ is a genuine possibility in many roles, many employers have allowed their employees to work on a hybrid or virtual basis – either on a formal, approved basis or through more ‘ad-hoc’ arrangements, where greater flexibility has been granted to at least some staff (e.g. based on the attitude of department managers, for example).

Employees (and the self-employed) – and their accountants / advisors – also need to be aware of the issues that can arise from such flexible working arrangements. If they are not careful, they may suddenly find that they are – at the very least – suffering significant cash flow implications because of ‘duplicate tax liabilities’, for example, and in many cases actually suffering much higher tax (or social security) costs which they did not anticipate.

Home Working in the UK?

Employees working and living in the UK may automatically assume that there is no tax implications for them from flexible / virtual working within a UK context – after all, the UK is ‘one country’ and has common tax rules – correct? Sorry, but that isn’t the case.

Specifically, many people in England (and probably Wales and Northern Ireland too), don’t realise that Scotland has separate income tax rates. Moreover, these Scottish tax rates differ significantly from those in the Rest of the UK and can result in people on relatively modest incomes paying much higher taxes in Scotland than in other parts of the UK.

For example, someone on say £50,000 per annum would have the following income tax liabilities depending whether they are resident in Scotland or the rest of the UK:
Scottish tax liability – £9,034.70 / Net income (exc. NICs) – £40,965.30
Rest of UK liability – £7,484.20 / Net income (exc. NICs) – £42,515.80

In the first instance, it is the responsibility of the taxpayer to assess whether they are Scottish tax resident and to notify HMRC that they are liable to Scottish tax rates (which will then result in a change to their PAYE code), though clearly as an advisor / accountant you should be helping them assess their status in this regard. If the Scottish rates of income tax have not been accounted for via the PAYE system, such individuals would be obliged to file a tax return annually, to ensure that the correct taxes are calculated and paid.

Travelling to the Office?

Employees who are working virtually also need to understand that just because they ‘typically’ work from home in the post-Covid world, this doesn’t mean that any costs they incur in travelling to the office will automatically be ‘qualifying business expenses’ (that is, business expenses which may be eligible for UK tax relief).

The reality is that many home workers at the present time are simply working from home through their personal choice – i.e. it is not something which is specifically required or expected from their employer. In this scenario, the costs that the employee incurs in travelling into the office are likely to be regarded as ‘ordinary commuting costs’ and not something which qualifies for any tax relief.

So whilst the individuals may benefit from ‘nicer surroundings’, for example, if they live a long way from their office or (potentially) cheaper housing (at least if they are not living in London or the South East), are they comfortable that they have the money available to cover any office visits which the employer still requires?

The International Angle

Alternatively, if you have UK-based employees (or self-employed individuals) who have moved overseas, you also need to realise that such individuals can have some tax surprises, which can be nasty and costly if they are not prepared. Whilst clearly each situation and scenario should ideally be reviewed and assessed based on those specific circumstances, it is worth highlighting some of the risks and problems which can arise.

For example, whilst the employees may be eligible for ‘digital nomad’ visas, for example, which may allow the employee to work in that jurisdiction, such digital nomads may be:

• Liable to income taxes in that jurisdiction (which may, in some circumstances, be higher than the UK income tax rates); or
• Liable to social security costs in that jurisdiction (and in some circumstances, the individual may be liable to both UK and foreign social security costs with no ‘off-setting’ or credit arrangements in place for these costs).

Moreover, even where the tax rates in the foreign country are relatively favourable (and there is no social security due, for example, or the UK has a ‘social security agreement’ with the country concerned, so that there is no risk of double social security charges), it is still possible for individuals to be ‘shocked’ from a tax perspective. An easy example is with regard to pension contributions – you may well find that the individual’s personal contributions to a UK pension scheme (e.g. through pensions auto-enrolment) are not relievable in the other country, whilst the employer’s pension contributions are regarded as additional taxable income.

In addition, the fact that different countries have a different ‘mix’ of income tax and social security contributions compared to the UK can cause problems, where people are commuting to the UK from that overseas jurisdiction (e.g. France). In very simple terms, and just looking at the situation between the UK and France, you have the following tax / social security breakdown in these two jurisdictions:

• The UK has relatively high, income tax rates but (relatively) low NICs for employees (or the self-employed); whilst
• France has relatively low, income tax rates but much higher employee social charges.

As such, where you have someone who is a cross-border worker between the two countries, but lives, for example, permanently in France and spends at least 25% of their working time in France (say 2 days per week in France), you have the following basic position from an income tax / social security position:

• They will be liable to (high) French social security contributions on their total salary / wages;
• No NICs should be payable in the UK under the UK / EU Trade & Cooperation Agreement (as NICs / social security is only payable in one jurisdiction when we are dealing with EU states);
• They will typically be taxable in the UK on the 60% of the employment income which relates to UK workdays;
• They will be 100% taxable in France and France will accept a ‘tax credit’ for the income taxes which have been paid in the UK-on-UK workdays; but
• The French income taxes payable will often (and it can depend upon exact family circumstances and income levels, for example) be lower than the UK PAYE which has been paid – and the French tax credit will be limited purely to the French income tax payable on the doubly-taxed income; and
• The individuals therefore end up with:

• A high(ish) UK tax charge on their UK workdays (which fully covers their French income tax liability on that share of their income);
• A relatively low French income tax charge on the French workdays;
• High French social charges on the total earnings; and
• A cumulative tax / social charge liability which exceeds – potentially quite substantively – what they would have paid by simply working in one jurisdiction.

In Conclusion

The reality is that flexible working and global teleworking is realistically here to stay. Moreover, it will be something which may quite possibly be increasingly attractive to employees and the self-employed, given that it can provide real benefits – e.g. in terms of living costs and an overall ‘qualify-of-life’ perspective. However, as with anything tax and social security-related, it comes with significant potential risks. As such, this is really a situation whereby the taxpayer (and their advisors) need to be fully aware of the potential hiccups and problems which can arise and ensure that these factors are considered on a timely basis.

Would you like to know more?

If you would like to discuss the above matter please get in touch with your usual Blick Rothenberg contact, or Robert Salter using the form below.