May 23, 2024
Remote work overseas could lead to double tax for firms, employees and digital nomads
The rise of remote work, fuelled by the pandemic, may serve up a hidden danger for employees. Accountants warn that employees who relocate abroad while working for a UK-based company could end up paying income tax in both countries, on top of social security contributions in their host nation.
This situation arises from the increased flexibility offered by many companies. A recent report by RSM, a tax advisory firm, claims that over a third of UK employers now allow staff to work outside the country. While this perk offers freedom and a potential change of scenery, it can lead to a tax nightmare.
Pawandeep Srai of RSM explains, “Remote working has become the norm, but working from a beach in another country isn’t all sunshine and cocktails. There are tax implications for both employees and employers.”
The pressure to retain staff in a competitive job market has prompted more companies to offer remote work options. However, RSM says there may be tax pitfalls for businesses as well. For instance, a sales employee working remotely could inadvertently establish a “permanent establishment” for the company in their host country, triggering local corporation tax obligations.
The complexities don’t end there. Companies are typically responsible for deducting income tax and social security contributions from their employees’ salaries. However, if an employee works abroad, they might also be liable for overseas income tax and social security payments in their host country.
Tax rules for remote workers, also known as “digital nomads,” vary widely. In Spain, for example, employers can obtain a special code exempting employees based outside the UK for the entire tax year from local taxes.
Four years after the pandemic, UK government statistics show that 16% of workers work from home full-time, while another 28% split their time between home and the office. This flexibility extends to the public sector as well, despite calls for a return to in-person work.
Recent data suggests that remote work arrangements are impacting service delivery. Figures obtained through Freedom of Information requests reveal that up to 40% of employees in some regional HMRC centres haven’t been to the office at all in the past year. Similar reports show hundreds of local council staff working remotely from countries like Australia and Dubai.
HMRC acknowledges the importance of remote work for attracting and retaining talent, stating that it aligns with practices in many private and public sector organisations.