Flexible overseas working raises tax risks, warns RSM

More than a third of businesses might be unaware of the tax implications when allowing their employees to work flexibly overseas

Nearly a third of employees (31%) offering hybrid working have set restrictions on the length of time their employees can work abroad, found the latest the Real Economy report by RSM.

While this suggests that some businesses are considering the tax risks associated with working overseas, it also raises concerns that two-thirds of businesses have no restrictions in place and are less aware of the tax implications.

With labour shortages being felt across the board, many businesses are also looking overseas to source labour, with more than half (52%) increasing their amount of international hires over the last year.

Some cross border workers might not understand what they’re signing up for, RSM warned, with many potentially entering a ‘tax minefield’.

Risks associated with permanent establishment rules for non-resident companies remained widespread, meaning that businesses may be subject to hefty corporation tax bills when they source workers overseas.

In such cases, companies need to consider whether their employees working from a home office in another country could be creating a taxable presence, and the potential tax costs.

Joanne Webber, global employer services partner at RSM UK, said: ‘It’s clear businesses recognise the importance of offering flexible working to attract and retain employees, and the pandemic has proved that this new way of working is possible, depending on the sector and role.

‘Current labour shortages are a real concern for businesses, so looking overseas may be their only option. But it begs the question of how many of these workers are relocating to the UK or staying in their home country, as this could mean a tax loss to the UK economy.

‘There will be different tax rules depending on the country an individual chooses to work from, so employers venturing into ‘work for anywhere’ arrangements need to set parameters for staff and have a clear company policy in place, so everyone understands the risks.’

UK companies which have employees working outside the UK will need to consider the local rules, treaties and local tax authority approach in each – which will often differ from country to country.

Under UK law, permanent establishment means that profits can be potentially taxable in two countries, and often, consideration must be given to whether there is a double tax treaty (DTT).

The UK has more than 130 double taxation agreements with countries around the world, with each containing differing tax treatments and rules.

Businesses will need to balance their commercial needs and objectives with the tax risks of employees working overseas or in their home country.

Internationally mobile employees could suffer from deductions for tax in each country and be left with considerably reduced take-home pay as a result. Alternatively, an overseas individual who is seconded to the UK for a short period may suffer PAYE in real time on their UK earnings and be asked to complete a self-assessment tax return, only to learn that because of personal allowances, no UK tax was due after all and receive a refund after the tax year ends.

Both of these situations place a heavy burden of administration on the employer, in monitoring employee movements, record keeping, payroll processing and real time information (RTI) reporting and create considerable financial inconvenience for the employees concerned.

According to RSM, local advice should always be sought on the global tax risks associated with overseas working.

Thomas Pugh, economist at RSM UK, said: ‘The labour market looks set to remain tight for the foreseeable future, as high sickness levels and a challenging demographic outlook combine to reduce labour supply. One way firms are dealing with this is by recruiting more labour from overseas, but this will be difficult for many industries.

‘Firms will have to concentrate on upskilling their current employees and creating effective incentive schemes to retain staff. In addition, businesses that invest in productivity-enhancing automation will find themselves in a much more competitive position once the economic upturn comes in 2024.’

The research was carried out by The Harris Poll for RSM and surveyed 411 senior executives from UK missile market businesses, with a turnover between £10m and £750m.

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