The now-defunct Office for Tax Simplification recently highlighted the need for tax policy to be aligned with modern working practices, including hybrid and remote working from overseas. Susan Ball looks at what employers need to know from a tax perspective.
Hybrid working has become embedded in many organisations as employees look for greater flexibility in their working life. However, tax arrangements have not kept pace with this change, as a recent Office for Tax Simplification report highlighted.
Many large businesses have also introduced policies allowing staff to work for short periods abroad. This may be straightforward for short trips, but where there is a longer-term arrangement, compliance with tax and other legislation can be challenging.
The nub of the problem is that the UK travel and subsistence (T&S) expenses rules have not changed substantively since April 1998 – and working practices have changed dramatically since then.
UK T&S is an area of compliance that can be complex for employers to get right. This is why HMRC has issued a guidance booklet on expenses and travel to explain the rules, and why it focuses on T&S during employer record reviews.
As the OTS report highlighted, employers have requested a review of the UK T&S system because most concepts are geared towards dealing with more traditional working practices, not the hybrid arrangements we see today.
While the OTS, which recently closed, considered that adding additional tax reliefs would carry a significant cost to the government, it also presented an opportunity to reconsider the approach to employee tax reliefs without costing the Treasury too much.
So, will we see better HMRC guidance, possible changes in the budget on 15 March, or at least an announcement on changes in future?
Hybrid working tax issues
For hybrid working, the main issues raised in the OTS report related to UK rules on T&S expense deductions. These are currently based on the principle that ordinary commuting costs are not tax-deductible expenses where the travel is between an employee’s home and a permanent workplace, whereas the costs of travelling between an employee’s home to a temporary workplace are. These terms are given definitions in the tax legalisation which might not necessarily correspond with what employers and employees think.
The report considered whether the rules needed to be changed, so the cost of travelling between a workplace at home and an office would also be tax deductible. It also raised the difference in treatment between costs paid directly by the employer and subject to tax relief; and costs incurred by the employee which are subsequently reimbursed by the employer, where relief is not due, such as equipment to work from home.
It also highlighted areas such as the cycle-to-work scheme, workplace nursery provision and the £6 per week working from home allowance, which has eligibility criteria not well suited to hybrid working situations.
As a minimum employers want HMRC guidance to clarify how travel and home working expenses apply to hybrid working arrangements. Employers can then be clear when a travel and subsistence expense attracts tax relief.”
The general view expressed in the OTS report was that, as a minimum, employers want HMRC guidance to clarify how travel and home working expenses apply to hybrid working arrangements. Employers can then be clear when a T&S expense attracts tax relief.
For travel expenses which are not exempt (depending on the circumstances and subject to a PAYE Settlement Agreement to cover such costs) these either need to be:
- Reported and subjected to tax and Class 1 National Insurance Contributions (NIC) under PAYE at the time of payment; or
- Reported and dealt with at the tax year-end on forms P11D and P11D(b); or
- Reported and dealt with at the tax year-end on forms P11D for tax purposes and subjected to Class 1 NIC under PAYE at the time of payment.
HMRC penalties for non-compliance can be costly. For example, if incorrect P11Ds are filed negligently a penalty of up to £3,000 per form can apply.
Employers may also be liable for any tax and NIC, potentially on a grossed-up basis, plus late payment interest. This can go back four years for tax and six years for NIC or, where reasonable care wasn’t taken, six years for both.
Mistakes can get expensive, and large settlements have been seen on HMRC compliance reviews covering T&S expenses, particularly for large businesses. Settlements are often in relation to travel from home to places not considered by HMRC to be a temporary workplace, where employees have multiple workplaces under the rules, and/or where the 24-month secondment rule has been incorrectly applied.
International working tax issues
Employers have a lot to consider before allowing an employee to work overseas, including:
- What are the payroll and social security obligations in the UK and overseas, and who is responsible?
- Which entity should employ the individual?
- Do they have the right to work in that country?
- What employment legal rules apply?
- Is there a corporate tax risk of permanent establishment creation for the business which impacts its tax position?
- Are there any transfer pricing issues between the UK and the overseas location?
- Are there any insurance and data security requirements?
While many of these are not related to tax, they all need to be considered.
The OTS report stated employers generally understood many of the implications of overseas working, however, social security was more complex. It doesn’t help that there are few social security agreements the UK has with other states, and these require the employee to be ‘posted’ overseas by the employer in order to remain in the home social security system.
According to the hybrid and distance working report, employers are hoping the government will:
- Expand its network of social security agreements and update existing agreements to clarify the position for hybrid multi-jurisdiction workers
- Issue clear HMRC guidance for short visits to the UK by overseas employees from non-agreement countries and “preparatory and auxiliary” situations which would not create a permanent establishment
- Consider making easements available for short-term stays attached to holidays, preventing the creation of a permanent establishment
- Allow employees coming to the UK for short-term visits, possibly 60 days or less, to not trigger tax, PAYE, social security or a permanent establishment
- Make sure HMRC improves its guidance on social security rules for cross-border workers and the various special PAYE schemes for globally mobile employees.
The OTS report features employers’ calls for improvement to the clarity of HMRC’s guidance on many of these issues. This underlines the complexity of existing legislation, and employers should:
- Undertake a review and record where employees are based for HR and T&S purposes
- Make sure that key people in the organisation understand the rules in the context of the workforce
- Make sure policies are clear on all aspects covering working away from the normal base (including tax/social security implications)
- Create a process that considers all areas when employees request to work abroad (even if only for a short period) which covers all risks
- Regularly review patterns of work, ensuring it’s clear what’s happening and whether it meets expectations
- Ensure adequate information is provided, so the correct treatment can be applied.
Ensuring these measures are followed should help avoid costly mistakes.