Tax considerations of working remotely from overseas

The wonders of modern technology and increasingly flexible working practices – especially since the Covid-19 pandemic – have led to a significant rise in the mobility of the global workforce, as employers strive to recruit and retain the best talent, and individuals seek the perfect work/life balance.

The rising popularity of ‘digital nomad’ visas are allowing individuals the opportunity to work remotely from overseas using technology to stay in touch with their employer or business, whilst enjoying the climate, lifestyle and culture offered by other regions. Countries that offer the opportunity to work in this way include Spain, Costa Rica, Barbados, Italy and Greece amongst many others.

But aside from the legal right to live and work in another country, there are potential tax implications for business owners and their employees from working from overseas, which should be carefully considered.

Here we look at a couple of case studies which illustrate some of the considerations for UK workers who are logging on from sunnier climes.

Jack runs a consultancy business through a UK limited company and normally does this from his home in Somerset. His work is all undertaken online and he has no face-to-face meetings. As the weather hasn’t been great in the UK so far this year, he’s planning a trip to Spain for 3 months. What are the tax consequences of doing this?

• Assuming he has no other significant absences from the UK during the year, Jack’s trip is not long enough for him to become non-resident for tax purposes in the UK.
• As a UK tax resident, Jack will continue to be liable to UK income tax on his business income, whether drawn as salary or dividends, and will be subject to PAYE withholding via payroll.
• Jack will need to take advice from a Spanish tax advisor to determine whether he is considered tax resident in Spain for the period that he is there. Other trips made to Spain in the year may be relevant in assessing this, as may be his home situation and other personal factors.
• The UK/Spain Double Tax Agreement (also known as the ‘treaty’) will dictate whether any of Jack’s income is taxable in Spain, and if so, will be used to alleviate any double taxation between the UK and Spain.
• Even if there is ultimately no tax payable in Spain, there may be employer registration, reporting and/or withholding tax obligations arising for the company, and Jack should discuss these with his Spanish advisor.
• Jack will continue to be liable to National Insurance Contributions in respect of his income and the company will need to apply for a Form A1 from the UK NIC Office to certify his exemption from Spanish social security.
• Although only in Spain for a short period, it is possible that there may be consequences under Spanish tax law for the limited company, as it will be managed and controlled from Spain whilst Jack lives there. A Spanish advisor will be able to comment further on the risks of this in practice.

Diane runs a marketing business and one of her employees has asked if they can work from home for 6 weeks over the school summer holidays. Diane knows the employee has children and she is happy to allow this request as she is confident that he will be able to complete his work as normal. She has however now ascertained that the employee is actually planning to spend the 6 week period abroad. What are the tax consequences of this for Diane as the employer and for the employee?

• Diane’s employee is not leaving the UK for long enough to become non-resident, and as such his earnings will continue to be taxable in the UK. The payroll should therefore continue to be operated in the usual way.
• Whether the employee creates a personal income tax exposure overseas depends upon the country in which they are staying. The UK has double tax agreements (treaties) with most foreign territories, but there are some notable exceptions (e.g. Brazil), and in the absence of a treaty the employee may be taxable on their earnings from workdays in that country from day one.
• Even if he is exempt from income tax overseas under a treaty agreement, there may still be employer registration, reporting and/or withholding tax obligations arising for the company which could be effective from day one. Diane should take advice on this from an accountant in that country to ensure that the company is compliant.
• Diane’s employee will continue to be liable to National Insurance Contributions in respect of his income and Class 1 employer and employee deductions should continue. However, there is possible exposure to social security in the host country, and the action required to manage this will vary depending upon the country (whether in the EEA, a country with which the UK has a social security agreement, or another location). Diane should take advice on this to ensure that the correct paperwork is in place in this respect.
• Depending on the level of seniority of the employee, there may be a corporate tax exposure in the host country. This is especially the case if the employee is concluding contracts on behalf of the company, and Diane should take advice in the overseas location on this point.

In practice, the risks to employers or business owners of tax or administrative compliance obligations arising from very short-term visits to foreign locations is relatively small. However, the longer the stay the greater these risks become. As soon as taxpayers spend 6 months overseas, they are almost certainly taxable there, and often this obligation will be triggered much sooner. It is always important – even with short trips - to take advice in the host country, if only to confirm that no further action is required.

Our tax team can connect you to advisors in most overseas locations via our global alliance (‘Praxity’) and are also on hand to guide you through the UK implications of any international moves that you or your employees may be planning – please don’t hesitate to get in touch to discuss these further.