Living and working overseas can be an exciting opportunity, both professionally and personally. Hiring remote workers is just as incredible of an endeavor for businesses, which benefit from access to vast new markets and a large pool of talent from around the world.
Of course, there are tax implications to consider when hiring remote workers in another country. Each country has its own laws regarding income taxes, with the United Kingdom standing out for its complexity.
In this article, we'll break down the fundamental concepts behind personal income tax for global independent contractors from the UK, including when and how to calculate them.
The Rise of Remote Work
March 2020 marked a turning point for the world in more ways than one. The global COVID-19 pandemic began to spread rapidly, leaving many countries in lockdown and uncertain futures. Businesses closed their doors, people were laid off, and the economic damage was staggering.
At the same time, proof of human resilience shone through. Families embraced virtual learning, communities began socially distanced outdoor activities, and essential workers took risks to ensure the population had food, shelter, and medical support.
While the virus has since dwindled down, its impression on society remains. This is especially true with respect to remote work; what was originally intended to be temporary, work-from-home arrangements are now the norm for organizations around the globe. It's spurred professionals' interest in taking their talents abroad, whether working for companies based in different countries or freelancing.
The benefits of remote work arrangements are plentiful, from reduced travel and office costs to greater flexibility and improved work-life balance. Companies large and small are recognizing the advantages of virtual teams, not just in terms of cost but also collaboration and morale. And it's not just tech companies leading the way — organizations in industries ranging from HR to finance are investing in and leveraging remote work technology for more efficient, effective workplaces.
However, transitioning from traditional office structures to virtual teams requires careful consideration on behalf of employers. One of the biggest implications is tax liability. Working in a different country can have tax implications for both the employee and the employer, and this is especially relevant for remote employees working across borders. Employers must take into account local income taxes as well as their jurisdiction’s own tax rules that may apply to international remote workers.
In most cases, employers must withhold payroll taxes for remote workers and make social security contributions on their behalf. These requirements vary from country to country, and in many cases, international workers pay income taxes at different rates than local employees.
The Legal Challenges That Come with Remote Work and Taxes for Employers
Employers stand to benefit a lot from hiring global talent. Remote workers bring expertise to the table that is often not available in traditional office settings. They are easy to find and onboard, while the massive pool of potential applicants guarantees a fit for every organizational need. With that being said, the decision to work with individuals from one or multiple foreign countries comes with a unique set of tax challenges.
Freelancers from the UK owe taxes depending on their residence, the type of work they do, and the nature of their contracts with employers. It's completely case-by-case, meaning businesses will need to assess the individual circumstances of each freelancer they hire.
Understanding Permanent Establishment Status
From the United Kingdom to Australia, every nation has its own system to file taxes. Although laws can differ by region, one thing they virtually all have in common is a requirement for income-earning individuals and businesses to pay the government a share of their income each year. Anyone who resides within a country long enough to use its services and infrastructure should pay their dues in the form of taxes.
Permanent Establishment (PE) status defines the threshold at which a business has made enough of an investment in a specific country to be subject to local taxation. This may include exemptions for certain types of income or activities. Still, it generally involves a minimum amount of time in the region and evidence of some sort of financial commitment.
For example, suppose a company from the United States hires in the United Kingdom and meets the requirements for Permanent Establishment status in that region. In that case, they'll be liable to pay taxes on their profits according to UK law. The same is true of any UK-based company operating abroad.
Before the age of the internet, achieving permanent establishment status would entail setting up a physical office or storefront in another country. However, the internet has drastically changed how businesses operate, and it’s now possible to become liable to tax, employment, and payroll laws without being physically present in a given region.
Remote workers are a great example of this. Organizations that employ individuals who have lived abroad for long enough can be liable to pay taxes in the country where that person is based, even if they don't have a physical office there.
Different countries have different reporting requirements and regulations in such cases, so it’s important for businesses to be aware of all the rules before they start employing remote workers. Individuals should similarly make sure they’ve asked themselves the right questions before committing to a remote job in the UK.
Tax Residency
The effect of permanent establishment status on a company's tax and reporting obligations is similar to tax residency. Tax residency is catered towards individuals and determines their tax liabilities in the eyes of a particular country. With it, an individual is considered to be a 'resident' for tax purposes and, therefore can be taxed on their income, whether it's from that region or abroad.
Like permanent establishment status, the criteria for achieving tax residency differ from country to country. Most places allow for short-term expatriate arrangements, whereby an individual can stay in the country for a certain period of time without registering as a resident or paying taxes. After that time limit, though, they must register as a resident and pay taxes.
Remote Work Tax in the UK
The United Kingdom experienced a large shift in the status quo when it allowed employees to work from home during COVID-19. It's estimated that roughly 46.6% of the nation's jobholders worked remotely during April 2020. More than three years later 44% still have a flexible work arrangement.
With this comes the challenge of correctly calculating how much tax is due. All UK residents who earn taxable income must report and pay taxes on it, but those rules differ when individuals work remotely from another country.
For example, suppose an individual has been living and working abroad for more than six months but is still employed by a UK company. In that case, they are considered a UK resident for tax purposes and likely tax residents in the country they are living in as well.
If an individual is only in the country temporarily, however, they may be able to take advantage of the ‘split-year treatment.’ Under this rule, any earnings or tax burdens accrued before and after their stay in the UK are treated as separate entities and taxed accordingly.
Determining Tax Resident Status in the UK
We've alluded to it a couple of times now, but we'll say it again — tax status is a very fluid matter that depends on an individual's circumstances. While the main rule of thumb is that you must stay in the UK for 183 days or more to be considered a tax resident, there are certain exceptions.
The UK government considers a person a 'resident' when they both meet one or more of its own automatic tests or the sufficient ties test.
Automatic Tests
UK tests look at several factors when determining an individual's tax residency status, qualifying them when they have spent the aforementioned 183-day minimum in the country during a tax year.
Remote workers can further qualify if:
- Their only home was in the United Kingdom for a consecutive period of 91 days or more and they stayed at that home for at least 30 days.
- They worked in the United Kingdom for any period of 365 days, with at least one of those days being in the selected tax year.
Sufficient Ties Test
In some cases, a person may not meet the automatic tests but might have sufficient ties to be considered a tax resident in the UK through family, work, or accommodation. Full details are under RDRM11500 - Residence: The SRT: The ties tests: Contents on the UK government website.
Overseas Tests
Overseas tests are another way of determining whether someone's main place of abode is in the UK or abroad. In most cases, remote workers aren't tax residents under this test's criteria if they have either spent less than 16 days in the UK or worked abroad full-time while spending fewer than 91 days in the UK, no more than 30 of which were spent working within a tax year.
Checking Tax Residency Status Online
If everything we just explained about UK tax residency status sounds confusing, that's because it is.
Thankfully, the government has created a residence status checker tool that can help make the process a bit simpler.
The online self-assessment questionnaire asks users about the length of time they've spent working and living in the UK and from another country, any family they have in the UK, and details about their home in the country. It's simple, straightforward, and easy to complete as any other online web form.
Avoiding Double Taxation in the UK
Double taxation refers to the taxation of the same income in two different countries. It often occurs when an individual or business is taxed by their country of origin and their country of residence on either earnings or profits from foreign investments.
In some cases, double taxation can be avoided through tax treaties between countries which stipulate that taxes are only to be paid in one jurisdiction (the treaty partner’s). In other cases, taxpayers may qualify for foreign tax credit, whereby they can claim a credit against any taxes due in their country of residence for taxes already paid in another jurisdiction.
Countries That Have Tax Treaties with the UK
Tax treaties don’t necessarily mean that businesses and individuals can avoid paying taxes altogether – it simply means they don’t have to pay tax twice on the same income.
The UK has double taxation agreements with over 130 countries worldwide, including its most important trading partners, such as the United States, France, and Germany. These tax treaties determine which country will tax each type of income for residents and businesses from both nations.
For instance, the UK-US tax treaty states that U.S.-source income earned by a UK resident is subject to US tax, but the UK must allow a credit against its own taxes for any US taxes paid on the same income - hence avoiding double taxation.
Everywhere is different, though. The OECD Model Tax Convention serves as a guideline for determining tax obligations and the terms of double taxation agreements worldwide.
In Closing
The World Wide Web is full of professional opportunities waiting to be capitalized upon. All it takes is a stable internet connection — and the right guidance.
Borderless AI enables organizations to hire and manage global talent without worrying about underlying tax complexities as an Employer of Record. We make the onboarding process easy, allowing businesses to focus on what they do best – finding and nurturing talented individuals who can add value from any corner of the world. Speak with our team today to learn more.
Disclaimer
Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
