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The Post-Pandemic World: Considerations For Employees Who Work Abroad

The COVID-19 pandemic brought about significant changes in working patterns with many employees choosing to work remotely, including from abroad. However, such changes must be navigated carefully from both a legal and tax perspective. Indeed, this was something highlighted by the (now dissolved) Office of Tax Simplification in its final report in December 2022. This article touches on only some of those potential complexities for employees.

Non-UK tax resident employees working abroad

Spending a few days working overseas is unlikely to trigger any unexpected tax liabilities. If the move is longer (or permanent), then it may be the case that employees working abroad relinquish UK tax residency altogether. In such circumstances, the employee will need to consider the following:

Becoming non-UK resident

Employees must remember to apply the statutory residence test (SRT) to each whole UK tax year to determine their residence for UK tax purposes. This is the case unless they can claim ‘split year’ treatment, the rules surrounding which are complex and not discussed here.

There are three parts to the SRT. The first two tests assess whether an individual is automatically overseas resident or automatically UK resident. If the individual does not satisfy either test, the ‘sufficient ties test’ is applied. In short, the more ties an individual has with the UK, the less time they can spend here without becoming UK resident.

One of the tests for automatic UK residence looks at working in the UK. The rules surrounding this are complex and involve looking at the hours worked overseas and in the UK in the tax year, as well as the previous tax year. If the rules are not carefully followed, there is a risk that the employee may inadvertently become a UK resident.

Even if an employee can avoid automatic UK tax residence, employment arrangements continue to have a bearing on an employee’s tax residence under the sufficient ties test of the SRT. An individual has a ‘work tie’ to the UK if they work (for more than three hours) in the UK for at least 40 days in the UK in the year. The meaning of ‘work’ is broad and includes self-employment. This may limit the days that the employee can spend in the UK in a given tax year.

If an employee has a settled lifestyle or strong roots in the UK, they will need to think carefully about the lengths to which they are prepared to go (including limiting the number of days they will spend in the UK in each tax year) to become non-UK tax resident. If non-UK residence is established, that individual will only be liable to UK tax on employment income insofar as duties are performed in the UK. These rules apply whether the employer is based in the UK or not and are subject to any applicable double tax treaty.

The territorial scope of UK taxation

Employees leaving the UK to work abroad should remember that non-UK tax residence does not mean total exclusion from the UK tax net. Direct or indirect disposals by non-UK tax residents of UK property or land are subject to capital gains tax in the UK. Similarly, those individuals receiving UK rental income who live abroad for six months or more per year are classed as non-resident landlords by HMRC (the SRT does not apply in this regard). Income tax at the basic rate will be deducted from rent received (after allowing for expenses paid) unless the non-UK resident applies to receive the rent in full under the Non-Resident Landlord Scheme (and then pays income tax on the rental income through self-assessment).

Employees choosing to become non-UK tax resident and work abroad for a defined period will also need to be wary of an anti-avoidance rule directed at those who are temporarily non-UK tax resident. This rule provides that disposals by a non-UK tax resident and certain types of income received during a period of non-UK residence may be brought back into charge for UK purposes unless (typically) the individual is non-resident for six complete UK tax years.

Other considerations

Often the concept of 'residence' has a different meaning in tax law than it does for immigration purposes. Employees working abroad must be sure to take advice in the overseas country and familiarise themselves with the visa requirements for residence in that jurisdiction. It’s also important that employee rights and benefits comply with the laws of the relevant overseas country.

Trusts and companies

If the migrating employee is a trustee of a trust or the director of a UK resident company, they should consider whether their move abroad could cause that entity to become non-UK tax resident, potentially triggering exit charges to capital gains tax and corporation tax, respectively.  

UK tax resident employees working abroad

Some employees working from abroad for defined periods may remain UK tax resident. In such circumstances, the employee will need to consider the following.

•    Arising basis taxpayers - The basic rule is that if an employee is UK tax resident and does not (or cannot) claim the remittance basis of taxation, they are taxed on all their worldwide earnings. This means that employees who remain UK tax resident, but choose to work from abroad, may be subject to income (or other) tax exposure in both the UK and the foreign country. Careful consideration will need to be given in relation to double tax treaties to alleviate any double taxation where possible. 

•    Overseas workday relief - Non-UK domiciled employees who claim the remittance basis of taxation may also claim overseas workday relief (OWR) for the first three UK tax years in which they are UK tax resident. This keeps an employee’s foreign earnings outside the UK tax net and they will only be liable to UK tax on earnings in respect of duties performed wholly or partly in the UK (whether or not they are brought to the UK), as well as their earnings in respect of duties performed wholly or partly outside the UK that they remit (i.e. bring) to the UK. The employee will need to identify which part of their employment income arises in respect of duties performed outside the UK and ensure that they are paid the non-UK part of their earnings outside the UK (and not remit those to the UK).

•    Chargeable overseas earnings - Where OWR does not apply, it may still be possible for a non-UK domiciled individual to secure the remittance basis on earnings which fall within the definition of ‘chargeable overseas earnings’ so that they only become taxable when remitted to the UK. Among the conditions, the duties of employment must be performed wholly outside the UK (unless those duties are incidental) and, unlike OWR, the employer must be non-UK resident.

This is a complex area and care needs to be taken. It is important that employees are aware of the tax risks of overseas working and plan accordingly. Advice should be taken not only in the UK, but also the foreign country concerned to ensure legal compliance in a world where cross-border working is considered business as usual.