The increase in homeworking due to the COVID-19 pandemic is causing many employees to ask whether they can work from 'home' from an overseas country – be that on a temporary basis or indefinitely. Employers should consider a variety of issues – including the tax, social security, immigration and employment law implications – before agreeing to an employee's request to work from home when 'home' is not in the United Kingdom. This article discusses the issues and sets out practical steps that employers can take to minimise risks.
Tax and social security implications
If an employee is working overseas only temporarily, from a UK perspective, the UK employer should continue to deduct income tax under the pay-as-you-earn (PAYE) system in accordance with the employee's PAYE code. Matters start to become more complicated where a stay becomes extended or even indefinite. Employers should always bear in mind the figure of 183 days in a country in a 12-month period – this is generally the tipping point for tax residency, often together with employer obligations to operate withholding (see below). Even before this threshold is reached, there are traps for the unwary.
If it is anticipated that the employee will be working overseas for at least one complete UK tax year, they may apply to Her Majesty's Revenue and Customs (HMRC) for a No Tax PAYE code, which, if issued, will authorise the employer to pay the employee without PAYE deductions. In addition, the employer should continue to deduct employee national insurance contributions (NICs) and pay employer NICs.
It is important to consider whether the employee's stay in the host country – regardless of duration – creates risks of income tax or social security liability in that country, or even the risk that the employer will be regarded as having created a permanent establishment there for corporation tax purposes. In order to understand the position, it will be necessary to establish the rules in place in the relevant host country (see below).
Income tax may be payable in host country
The starting point is that the host country has primary taxing rights over the employment income that the employee earns while physically working in that country. However, if there is a double tax treaty (DTT) between the United Kingdom and the host country, the employee may be exempt from income tax in the host country if certain conditions are satisfied, including that:
- the employee is not a tax resident in the host country under the DTT. If the employee is tax resident in the United Kingdom and the host country under each country's domestic law, their residence status is determined in accordance with the DTT by reference to their personal circumstances; and
- the number of days that the employee is present in the host country over a 12-month period (however briefly and irrespective of the reason) must not exceed 183 days.
The United Kingdom has a DTT with most countries, including all 27 EU countries and most other major world economies. In practice, this means that a short stay abroad in many locations is not going to result in the employee becoming liable for host country income tax.
However, employees who have already spent other periods in the host country in the same 12-month period (eg, visiting family) may reach the 183-day threshold sooner than expected. Further, the full details of the conditions can differ from DTT to DTT (particularly the period over which the 183-day test must be satisfied).
In addition, the employer and employee may still have obligations in the host country even if a DTT applies (eg, the employer may need to register with local authorities as an employer or report on the income that is being paid to the employee). Therefore, it is important to understand the local position.
If the employee becomes subject to tax in the host country but remains a UK tax resident, they will remain subject to UK income tax on their worldwide income but should be able to obtain credit for some or all of the tax that they pay in the host country. However, they will need to complete the appropriate tax declarations, which could be a complex process. Employers will need to decide the extent to which they are willing (or not) to help the employee with this.
Social security position depends on agreements in place
The social security position is complex. The general rule is that employee and employer social security obligations arise in the country in which the employee is physically carrying out their duties. However, there are exceptions.
Where employees are working in the European Union (other than Ireland), there are exceptions for both 'multi-state workers' (ie, employees who are working in two or more countries) and 'detached workers' (ie, UK employees who are temporarily seconded to work in the European Union or vice versa). There had been some uncertainty about the EU social security position after the end of the Brexit implementation period but, early in 2021, the European Union confirmed that all member states will apply the detached workers exception.
Broadly speaking, if a UK employee is sent to work in an EU country after 31 January 2021, UK employee and employer NICs can continue to be paid and no social security will arise in the EU country, provided that:
- the stay will not exceed two years; and
- the employee has not been sent to replace another detached worker.
Depending on the circumstances and subject to local advice, it is likely to be necessary to obtain a certificate of coverage from HMRC confirming the position.
The United Kingdom has negotiated a separate social security agreement with Ireland, which also contains exemptions for both multi-state and detached workers. The detached worker exception under the Irish agreement could potentially be for longer than two years.
The position in Norway, Switzerland, Iceland and Lichtenstein is currently more complex as there are special rules for detached workers in these countries and multi-state workers may not be covered at all (for further details please see "Posting employees from the United Kingdom to the European Union – social security arrangements").
Outside the European Economic Area and Switzerland, the position will depend on whether there is a reciprocal agreement between the host country and the United Kingdom. In countries where there is a reciprocal agreement (eg, the United States, South Korea and Japan), it is possible for an employee to remain within the UK system and not pay local social security contributions for up to five years (depending on the country) if the employee has a valid certificate of coverage.
In other countries where no agreement exists (eg, China, India and Australia), UK employers must continue to deduct employee UK NICs and pay employer NICs for the first 52 weeks of the arrangement. There may also be a liability to pay social security contributions in the host country and, again, local advice should be sought.
In any event, as arrangements become extended or even indefinite, it will always be important for the employer to keep income tax and social security arrangements under review. A point may be reached at which, either by legal compulsion or as the result of a positive choice, it is sensible to transition the employee permanently to the host country system.
Risk of creating permanent establishment
In some situations, there will be a risk that an employee's activities or presence in the host country will create a permanent establishment for their employer in that country. This would be the case if, for example, the employee has a sales or business development role and is habitually exercising an authority to conclude contracts in their employer's name while in the host country. Local rules may also provide for a more expansive definition of a permanent establishment.
Careful consideration should be given to this issue. If a permanent establishment is created, the profits attributable to that establishment would be subject to corporate tax in that country. It would also mean that the income tax exemption in the DTT would not apply. While this may be less of a problem if employers already have established operations in the host country, it could be difficult if they do not.
Assuming that the working-from-home arrangement is only short term, it would be difficult for the tax authorities to argue that a permanent establishment had been created. However, the longer that the arrangement continues, the greater the risk – particularly if the employee routinely negotiates the principal terms of contracts with customers which are simply rubber stamped without amendment by UK employees.
If an employee wishes to work from any host country, their employer must consider what restrictions may be in place. For example, if they want to work in Hong Kong but do not have permission to stay there indefinitely, they should not undertake any work without permission – even for a limited period and even if the employing entity is not a Hong Kong entity.
Advance immigration permission may not be required for business visits, although this will sometimes depend on the employee's nationality and the immigration regime of the host country. Depending on the employee's activities, it may be possible to characterise their stay as a business visit – for example, if their activities are limited to those typically undertaken during business trips (eg, meetings and training). However, restricting an employee's activities in this way is unlikely to be practical for many employees and, in general, the longer that an employee stays in the host country, the more difficult it will be to characterise their stay as a business visit. In most countries, productive work itself is prohibited as a business visitor, but limited exceptions may apply.
Following the end of the Brexit implementation period, British citizens no longer automatically have the right to work in the European Economic Area or Switzerland (unless they are also a citizen of an EEA country or Switzerland). A Schengen visa is unlikely to be helpful in this case as it permits only limited business activities and not 'work'. Accordingly, British employees wishing to work from the European Economic Area or Switzerland will need to apply for the correct immigration permission from the country to which they are travelling. This typically needs to be applied for outside the host country, before the employee travels.
Employers may also need to consider any immigration issues that could arise on the employee's return to the United Kingdom. For example, EEA and Swiss nationals and their family members should consider whether to secure settled or pre-settled status in the United Kingdom under the EU Settlement Scheme before they travel overseas. They also need to understand whether the absence may break the continuity of their residence for acquiring or retaining settled status. All non-British and non-Irish nationals should consider whether their absence from the United Kingdom may affect their visa or their eligibility to apply for other types of status in future where absences are assessed, such as settlement or naturalisation as a British citizen.
An employee's location should not affect the ownership of any intellectual property that they create, provided that their employment contract has appropriate provisions covering this. If, for example, they develop a patentable product or registerable design, provided that their employment contract stipulates that all IP rights in any material developed in the normal course of their role are owned by the employer, the place from which they develop the product or material should not have an impact.
UK legislation generally provides that any intellectual property created by an employee, in the usual course of their employment, belongs to the employer. So, if the employment contract states that the employment contract is governed by English law and is subject to the jurisdiction of the English and Welsh courts, the employer can rely on UK legislation if the IP provisions are not so explicit in the contract.
The situation becomes trickier when no employment contract exists or the contract does not state the jurisdiction and local law that will apply. In these circumstances, the employer may have difficulty if there is a dispute over the ownership of the intellectual property in material which the employee has created while working abroad. The employer may be able to argue that the dispute should be governed by English law and determined in England and Wales, enabling it to rely on the employer-friendly legislation mentioned above. This may be the case if the employer is a UK company and the product or material was for the UK market. However, the employee, or even a third party looking to claim ownership of the intellectual property, may argue that it should be governed by the legislation and jurisdiction of the host country.
It all depends on the circumstances, such as the role of the employee, the material that they have created and how they have developed the intellectual property in issue. For certainty and protection against problems arising, employers should clearly set out in employment contracts that all intellectual property in any material created during the course of the employee's employment is owned by the employer, regardless of from where the employee is working.
One aspect of intellectual property that often gets overlooked is confidential information. Wherever an employee is working from, the importance of protecting information important to a company remains (eg, customer data or trade secrets). In fact, greater practical measures are often needed when an employee is working from somewhere other than their private home or the company's office.
For instance, if the employee is working abroad from a second home, or from a hotel poolside or other public place, they should continuously ensure that their laptop and work are fully password protected and secured. Employers should consider security measures such as laptop privacy screens, minimising (or totally preventing) working in public locations and requiring loose papers to be kept locked away when not in use. This is important not just for the protection of confidential information, but also for practical purposes. If the employee has their phone or laptop stolen, it will not be as easy for the employer to get replacement items to them if they are working in a jurisdiction where the employer has no office or base.
Employment law and data privacy implications
In addition to the tax, social security and immigration implications explained above, there are various other employment law and data privacy considerations.
Mandatory employment protections may apply
If employees live and work abroad, even for short periods, they can become subject to the jurisdiction of that other country and start to benefit from the applicable local mandatory employment protections. These may include:
- minimum rates of pay;
- paid annual holidays; and
- rights on termination.
What protections, if any, an employee acquires will depend on the country in question and the duration of their stay.
If the employee is planning to stay in the host country for an extended period, the employer should consider transferring them to a local employment contract. This approach will ensure that the employer is complying with any local requirements and that important provisions, such as those relating to confidentiality and post-termination restrictions, are fit for purpose.
Be careful about transferring data
If an employee's role involves processing personal data, this could give rise to data protection issues. The employer must be comfortable that it is not breaching any data protection laws by transferring the data to the employee and that it has technical and organisational measures in place to protect the data and keep it secure. This may involve, for example, reviewing the electronic equipment being used by the employee to ensure that it meets the required standards.
Local health and safety protections may apply
UK employers have a duty to protect the health, safety and welfare of their employees, which includes providing a safe working environment when they are working from home. If an employee works from home abroad, employers must ensure that they comply with any local health and safety requirements. For example, in the Netherlands, employers must provide employees with the equipment needed to ensure a safe working environment, which in some cases might involve purchasing or contributing to the cost of relevant equipment.
Employees must also comply with applicable public health guidance (eg, quarantine periods) both in the host country and on their return to the United Kingdom.
For regulated firms, there are additional considerations when deciding whether employees may be permitted to work from home overseas. These can vary across sectors and may depend on the individual circumstances of each case (eg, the nature and seniority of the role being performed).
For financial services firms, key practical considerations will be whether the employee can carry out their role effectively and compliantly from overseas and whether the firm can appropriately:
- monitor, supervise and oversee the relevant employee;
- comply with its internal policies and procedures; and
- continue to satisfy its regulatory obligations.
Further, as part of their conditions for authorisation, financial services firms must:
- be capable of being effectively supervised by their regulators, which includes consideration of the way in which the firm's business is organised (eg, structure and geographical spread);
- have appropriate non-financial resources (including sufficient human resources in terms of quantity, quality and availability); and
- be managed in such a way as to ensure that their affairs will be conducted in a sound and prudent manner.
As well as these high-level requirements, financial services firms will have in place policies and procedures implementing a range of more detailed requirements ranging from overarching systems and controls to business specific requirements. During the recent pandemic, the Financial Conduct Authority highlighted the importance of requirements in the following areas:
- market trading and reporting – the need for all relevant communications, including voice calls, to be recorded when working outside the office and for all steps to continue to be taken to prevent market abuse; and
- information security – the need to ensure that adequate controls are in place to manage cyber threats.
Against this backdrop, it is perhaps unsurprising that financial services firms tend to be particularly resistant to requests relating to overseas remote working arrangements.
UK solicitors working overseas can raise similar issues. For example, law firms must ensure that they can demonstrate how their professional and regulatory obligations are being met, particularly as regards supervision. Following the end of the Brexit implementation period, under the UK-EU Trade and Cooperation Agreement, UK solicitors may be entitled to provide services in certain EU member states on a temporary basis using their home country qualification, but individual solicitors and those employing them will always need to check the position in the relevant EU member state to ensure that they are complying with applicable national law. In addition, law firms should ensure that they have appropriate professional indemnity insurance in place to cover advice being given from outside the United Kingdom.
Undoubtedly, the COVID-19 pandemic has brought about a major culture shift when it comes to the location from which work is done. Employers are increasingly opting to be flexible and seeking to accommodate requests to work from home overseas. Nonetheless, they will also want to minimise the risks as much as possible.
Depending on how many requests an employer expects to receive, it might even consider developing a short policy to ensure that these situations are dealt with consistently and fairly. Employers are likely to receive more requests of this kind in future, as employees look to take advantage of increased remote working opportunities by asking if they can work abroad for a short, medium or long-term period on a regular basis.
The key practical steps for minimising the risks are as follows:
- Employers should only accept requests if the employee's role can be effectively performed remotely and carried out lawfully from the country in question.
- The shorter the period the employee is working abroad, the smaller the risks are likely to be. Employers should consider approving only requests for a short, time-limited duration where the employee's expected return date is clearly documented.
- Employers should always take expert local advice on any tax, social security, immigration and employment obligations that they may have in the host country. Employees may also need their own advice.
- Employers should be aware that an employee's ability to participate in company benefits (eg, pensions, private healthcare, income protection and life assurance) may be adversely affected by a move abroad and should address this upfront with them.
- Much will depend on the identity of the host country and the employee's nationality.
- Employers should check what data processing the employee will be doing and that this can be carried out lawfully in line with their usual policies.
- Employers should check relevant insurance policies, such as those covering employees if they have a work-related accident or any company property that is provided to employees (eg, laptops and phones), and determine whether these are adequate or whether they need to take out more extensive cover.
- Employers should agree the terms of any overseas working arrangement and record them in writing. Ideally, these should clarify that:
- the employee will be liable for any additional income taxes or employee social security which may be charged because of their decision to work for a period overseas (with the employer being authorised to make additional deductions or seek reimbursements, if necessary, for this purpose);
- the employee will be responsible for any personal tax declarations that may need to be made;
- the employment contract remains subject to UK law and jurisdiction (subject to a possible review date for longer-term arrangements at which the employer might consider transitioning the employee to a local contract);
- the employee is continuing to work solely for the UK business;
- any intellectual property created by the employee will be owned by the employer;
- the employee does not have the authority to enter into contracts with local customers while in the host country and should not hold themselves out as having such authority;
- the employee takes responsibility for ensuring that they have the necessary technology and arrangements in place to enable them to work effectively;
- the employee accepts that they are working from home at their own risk and that the employer will not be liable for any loss which they suffer due to their request being approved; and
- the employee must comply with all applicable public health guidance, both in the country to which they travel and the United Kingdom.
In some cases, it might be appropriate to engage the services of a professional employer organisation (PEO) or an employer of record. This is a third-party organisation, akin to an employment business, which takes on the formal responsibility of employing the employee while overseas and accounting for tax, social security and other applicable local filing requirements. Using a PEO or similar can be a way of minimising or mitigating the risks faced by the employer, and these types of arrangement are becoming increasingly common.
However, employers considering this option should carefully scrutinise the proposed engagement terms to understand exactly what protection is being offered and assess what gaps might still exist in the event of a dispute. For example, an employee might still be able to sue you in a local labour court or tribunal in the event of a breach. Employers must also consider whether the arrangement allows them enough control over someone who they regard as their employee: the absence of such control may make the arrangement less attractive for some organisations.
