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PAYE and Corporate Tax Residence: Issues to consider when international workers work from home in the UK

Posted on 28 May 2021

If an employee of an overseas employer is working in the UK, this can give rise to altered PAYE obligations for the employer and employee, and in certain cases could make the employer's profits taxable in the UK.

PAYE

Usually, employers in the UK with even just one employee must operate a "Pay As You Earn" (PAYE) system to pay employees their net earnings, after deducting income tax and national insurance contributions (NICs).

In contrast, overseas employers may not have to operate PAYE if they have no "tax presence" in the UK. In certain cases, an employee's home could be viewed as a UK "tax presence". Furthermore, if the employer is not resident or present in the UK and has no registered office or place of business in the UK, they should not be liable to Employer's NICs. There are exceptions, for example, under the agency rules, and for employers resident in an EEA member state, the Isle of Man or Switzerland.

Employees who work in the UK and abroad, can sometimes reduce their liability to income tax and employee's NICs by claiming reliefs such as "overseas workday relief" and double tax relief.

Corporation tax

If the employing company is incorporated overseas, but "managed and controlled" in the UK, it will be treated as UK tax resident. In that case, the company would be liable to UK corporation tax on its worldwide profits (currently levied at 19%, but rising to 25% in 2023 for certain companies). Therefore, if the employee of the overseas employer has a key role in making the strategic decisions for the company, his presence in the UK could bring the company's profits into the UK tax net. This may also trigger PAYE and VAT obligations for the employer.

The employee could also inadvertently create a UK "permanent establishment" (UKPE) for the overseas employer, in which case profits generated through trade via that UKPE would be subject to UK corporation tax. A UKPE is a fixed place of business in the UK (which can sometime include a home office) or a "dependent agent" in the UK.

The issues are dependent on the facts of each case – but with more and more people working from their UK homes in light of the COVID-19 pandemic restrictions, and the expected continuation of working from home (at least partially), it is more important than ever to be prepared for these issues.

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