The pandemic has changed the way many businesses operate, not least with respect to remote working. For many employees and directors ‘Working from home’ has become the new norm and days at the office are becoming more infrequent. However, there are potential tax risks that should be considered with this shift to remote working.
Consider, for example, a sales director, who used to occasionally work from her UK home and now starts to spend increasing amounts of time working remotely. Unless specifically told otherwise, the general assumption would be that she is simply spending more time working from home and from a productivity and communication standpoint no red flags have been raised. As it turns out the sales director has a second home overseas and it is from here that she has recently been performing a substantial part of her role.
Surely it doesn’t matter where she is so long as she does her job well?
The issue here is that the sales director may have inadvertently created a Permanent Establishment in the country where her second home is located. If this is the case then the tax authorities in that country can declare that sales made whilst she was based there should be liable to their tax rules. There may also be registration and VAT implications and potential penalties for non-compliance.
Decision making is another key area that could invoke a tax presence in another country. For UK companies, a majority of the directors attending Board meetings should always be present in the UK for those meetings to avoid any decisions being deemed to have been made overseas thereby creating a tax presence.
Does this mean we all have to return to office working? Not at all. However, companies do need to be aware of the locations that their workforce is operating from. An audit of roles to see which may give rise to a PE if performed overseas would be a sensible starting point. Further discussion can then take place to consider the types of limits that may need to be applied to affected employees. These may take the form of geographical limitations or an agreement that the employee will not engage in certain activities whilst out of the UK.
With appropriate action and safeguards in place, businesses can hopefully continue to reap the benefits of remote working without creating unforeseen overseas tax issues. At Allegro Tax, we can help by reviewing your business’s working arrangements to assess risk and by providing advice on how these risks can best be managed.
