I work for one of the big banks and like my colleagues, have been working from home since March. Now that travel restrictions are being lifted, I was planning on working from our holiday home in France for the summer, but have been warned not to by our HR team, as they say it could have adverse impacts on the tax I pay. I do not remember receiving any guidance like this in previous years, and I have since been told that colleagues at other banks, law and accountancy firms have been issued with the same guidance. What has changed?
Stephen Metcalf, a senior manager in the private client team at Kreston Reeves, says after months of lockdown and enforced working from home the need for a change of scenery is understandable. But working from another country can change the tax landscape too, if you’re not careful.
Generally speaking, employment income is taxed in the country where you are working, while at the same time the worldwide income of an individual, including their employment income, is taxed in the country of residence. If you are heading to your French holiday home for the summer only, it is likely that you will remain UK resident. But, depending on the length of your stay, and given that many of us are unlikely to be returning to the office any time soon, there is a possibility you may be considered a French resident for tax too. The UK, for example, can consider a visitor UK tax resident if staying for as little as 46 days. You would be wise to check French tax residency rules.
In normal times and for many people, where you perform employment duties and where you are resident are one and the same. When this isn’t the case, the prospect of being taxed twice arises.
There is a double tax treaty between France and the UK that resolves which country has taxing rights and directs how relief against double taxation might be given. This will provide some comfort but is complicated and, in some circumstances, the timing of tax payments and relief can still cause significant cash flow issues.
Social security also needs to be considered. These contributions are due in the country in which you perform duties, however it is possible in the case of temporary workplaces for your employer to apply to keep paying the social security in the country of residence.
A further complication for your employer is that your activities may lead to implications for the taxation of the business. If your function involves significant management decisions, such as the agreeing of important contracts, the French authorities may decide that business profits should be taxed locally, arguing that a permanent establishment has been created. In the case of banks, this is likely to present a considerable administrative burden.
All in all, it is no surprise that your employer cautions against this as it can cause headaches for both you as the employee and them as employer.
Liz Cuthbertson, a private client tax partner at accountants Mercer & Hole, says with overseas travel now back on and school holidays upon us, it is no wonder that individuals with overseas holidays homes may want to grab the opportunity to take flight and work from their overseas home for a period of time. In doing so, there are some potential tax traps to avoid for both the individual employee and the employer.
The individual probably does not want to or intend to become tax resident in an overseas country. The local rules of tax residence will determine the individual’s residence position for tax purposes in the overseas territory. The employee should generally expect residence to be determined by how many days he or she spends in the overseas country in a year.
Understanding the local rules and application to his position is essential. It is possible to be resident in more than one country and if the individual is also UK tax resident, he or she could have reporting and tax obligations in both countries. If there is a double tax treaty, that may give relief in the UK for overseas tax paid but not without having the burden of tax filing in more than one country and added complexity.
The employer should also check that the actions of the employee are not going to cause the UK employer to have a “permanent establishment” or branch overseas, for example, if the employee or other officer is signing contracts and deals overseas such as engagement letters and other business contracts. The potential risk is that a “permanent establishment” could be created and, if so, the overseas country will seek to tax the profits attributable to it. That may or may not increase overall tax on business profits depending on tax rates, the availability of a tax treaty and reliefs overall, but it will certainly add layers of additional complexity to the business reporting in both countries.
HM Revenue & Customs issued guidance covering situations where individuals are working in places and under circumstances that are not the norm due to Covid-19 related restrictions. It expressed the view that a permanent establishment in the UK would not be acquired after a short period of time, as permanence is required.
However, whether or not a permanent establishment is formed overseas depends entirely on the laws and interpretation of the overseas country. Overall, I would suggest it is better to err on the side of caution than risk unexpected adverse outcomes. Taking advice in the UK and overseas is recommended.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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