February 24, 2022
One of the brilliant things about the modern age is that we truly are a global community. It is hard to think of a location where, with the right bit of kit, someone wouldn’t be able to connect to the internet and log in. That’s why there is a whole host of benefits when it comes to hiring overseas. When it comes to remote working, some examples include the ability to cater for flexible working, reduced spend on office premises and accessing a worldwide talent pool.
But what are your options and the potential stumbling blocks when hiring someone based abroad? Once you have found the best person for the job, what happens next? Or, what if you already have the perfect person working for you but they want to move to another country? Is it just a case of having them sign a contract, or are there other risks to be aware of?
Stephenson Law have teamed up with Evelyn Partners, accountants extraordinaire, to help answer these questions. That’s right, minor spoiler alert, there are serious tax considerations when your staff are living overseas.
There are three main ways in which a UK business can hire a person living in another country where they do not have a subsidiary. You can engage them as:
When it comes to the first two options, the main distinction is whether that person is classed as self-employed or your employee. We’ve previously discussed the differences between types of employment status, but for hires based abroad in particular let’s highlight the key legal considerations:
It might be simpler to quickly categorise all these risks as – it’s a foreign country and you don’t know the laws of the land! While it might be expensive, you can see why you might sleep easier at night having obtained advice from local experts (whether a tax advisor, accountant or lawyer).
“There are a number of things to think about from a tax perspective when considering a non-UK hire for your UK business, including the individual’s employment status in both the UK and the overseas territory, their tax residence and income tax position, payroll reporting and withholding requirements, and the social security position.
If the individual is engaged as an employee, a key consideration will be the need for the business to deduct tax and national insurance (as well as potentially student loan deductions and pension contributions) from the employee’s earnings and pay this directly to HMRC on their behalf If the individual is tax resident in the UK, or undertakes any work duties in the UK, there is likely to be a requirement to make these deductions (called “Pay As You Earn”).. If the individual is not resident in the UK and doesn’t spend any time working in the UK, then UK PAYE may not be needed but you will need to consider whether you have an obligation to set up and operate a payroll in the territory where the individual is working. This might be needed to pay across any local income taxes that may be due.
As for social security, the key point here is that the social security position does not always follow the income tax position and so needs to be considered separately. If the individual is an employee there is likely to be an obligation to pay social security contributions either in the UK or in the country where the individual works. Typically, social security contributions are payable only in one country but this isn’t always the case. Employer contributions must also be considered and these can often be due in the country where the individual works. In countries with higher social security rates than the UK, this could represent an additional cost to the business. Careful planning should be undertaken to ensure that the social security position is managed effectively.
If the individual is a genuine self-employed contractor (ie not an employee, or deemed employee), it is likely that the onus will be on them to ensure that the correct tax and social security is paid in each country. The amount of tax may impact the market rate for that individual, for example if there is a high level of local tax, the market rate for the individual is likely to be higher.
It is important for the business to consider whether the activities to be undertaken abroad by the employee or self-employed individual could trigger a Permanent Establishment (PE) in that country for corporate tax purposes. Broadly, if a PE is triggered, you are likely to need to register a corporate presence and pay some local corporation tax. Whether or not this applies will be determined based on the nature and extent of the work being undertaken by the individual working for you. Some exemptions are available and so it is important to consider these as part of engaging an overseas hire.”
Employers of Record (or EORs), also known as Professional Employer Organizations (PEOs) or employee leasing companies, are where your business pays a fee to another company so that that company becomes the legal employer. The idea is that the EOR is familiar with the requirements of the country or state in which your new hire is located and they’re already set up to deal with local law, compliance and tax admin. You’ll still cover the costs you’d need to pay if the individual was employed by you directly and be responsible for providing them with work, but you pay the EOR a fee to manage the payroll (and sometimes HR support) and step into the shoes of the legal employer, with the reassurance that everything is compliant.
At least in an ideal world anyway. The potential risk with EORs is that, as a new concept in most countries, there is not yet much legal clarity on where they fit in. There is no case law or legislation yet which confirms how responsibility can be allocated between you and the EOR. Even in the USA, where the practice has been around since the 1960s, the IRS Guidance notes that some of the terms commonly used by EORs, such as “co-employer” are not recognised under federal tax law.
Like all new things, someone has to be the forerunner and the ground-breaker. The solution that EORs promise is very appealing indeed and removes a lot of the red tape and (hopefully) the risk in hiring overseas. So, what are some of the things you should consider with an Employer of Record?
So while Employers of Record are certainly attractive, they are by no means a silver bullet to the overseas hiring issue. You should consider the 3 options on a case-by-case basis, as what is suited for one scenario may not be the best choice for another. Similarly, one Employer of Record may be the perfect solution for a hire in one country, they may not be able to offer the same protection in another territory. And the services Employers o Record offer and the degree of protection they give can differ from company to company, so do your due diligence.
And final thoughts from our tax wizards at Evelyn Partners?
“It is also important to note that the EOR option is unlikely to provide protection from the risk of triggering a permanent establishment since this is based on the nature of the work being undertaken by the individual and who ultimately benefits from this work, rather than the status of their legal engagement. This is a key consideration and should always be considered when seeking to hire overseas.
Where you are hiring staff and they are moving to a foreign country, the individual is likely to want to understand the personal tax obligations.”
So, while hiring overseas is a venture with bountiful possibilities, it’s not without legal and tax considerations. Fortunately for you, it can be done, and with the right knowledge, you can prepare for and protect against, legal hiccups and hidden tax bills.
Not sure where to start? You can contact us here for your legal quandaries, and to conquer tax considerations, you can contact Evelyn Partners here.
Our employment lawyers are experts in making the world of work, work for you. Find out more about our employment law offering here.
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