Partner Leigh Sayliss discusses the OTS’s hybrid and distance working report

What was the scope of the OTS review?

The OTS carried out a high-level review of how developments in remote working may make compliance with the tax system more complicated, specifically in relation to income tax, social security contributions and corporate tax—and possible ways in which the system could be improved. The OTS did not cover areas in which there are long-standing rules and guidance, such as permanent ’work from home’ arrangements or temporary expatriate working. Instead, the OTS focussed on two areas that had experienced the most change and caused significant issues:

• hybrid working—where employees split their working time between their employer’s workplace and home, in some cases, overseas, and
• overseas distance or remote working—where the employee works permanently in a different country to the business location

What were the OTS’s findings in respect of domestic hybrid working?

The main issues in relation to domestic hybrid working related to the tax treatment of expenses and benefits.

Examples included:

• uncertainty in determining whether certain expenses are, or are not, deductible for employees and employers
• relaxing some conditions for existing reliefs—for example, to avoid a taxable benefit an employer may have to recover (and then scrap, possibly to landfill) redundant equipment provided to an employee, potentially with a new employer then providing replacement equipment similar to that which had been scrapped
• difficulties in identifying whether an employee’s workplace was ’permanent’ or ’temporary’when considering subsistence allowances and whether travelling expenses could be claimed
• inconsistent treatment of some costs and allowances (such as the £6/week working from home allowance) depending on whether the employer incurred the costs directly or reimbursed the employee, and
• benefits, in particular the cycle to work scheme and workplace nurseries, where the taxability is based on more traditional office-based working

What were the OTS’s suggestions in respect of tax policy and administrative changes?

The main suggestions were:

• better HMRC guidance, including decision trees, to help businesses correctly identify the treatment of various expenses and allowances
• equal tax treatment for employer-funded expenses regardless of whether they are paid directly by the employer or reimbursed to the employee
• matching reliefs to other policy objectives such as revitalising city / town centres and reducing the adverse environmental impact (heating, lighting etc) of spreading employees across multiple domestic workplaces rather than a single office building
• removing some of the impractical blocks to reliefs, and
• additional allowances in respect of expenses that disincentivise office working, such as an allowance for commuting costs (as is done in some other jurisdictions)

It was noted, however, that any cost to the Exchequer makes additional allowances unlikely.

What were the highlighted cross-border issues?

The report considered three areas of relevance:

• income and payroll taxes—these are generally based around an individual’s country of residence. The UK has a statutory residence test and tax treaties with many other countries that resolve which country has primary taxing rights where the individual is resident in both jurisdictions
• National Insurance/social security contributions—the UK has a wide network of social security treaties that mean that contributions are only paid in one ‘home’ jurisdiction, and
• permanent establishment—in additional to the personal tax issues above, an employee working overseas may create a permanent establishment for the employer which could bring business profits into tax in the jurisdiction in which the employee is working

The existing residence and social security rules apply equally for hybrid and remote working and are generally well understood in the context of short-term overseas working. Similarly, a short period of working overseas is unlikely to create a permanent establishment for an employer overseas.

However, the report identified certain issues that could be better addressed.

• income and payroll taxes

The current rules work satisfactorily for short-term overseas working and many employers impose restrictions on the number of days in any year during which employees may work overseas. However, even here, the OTS identified that some employers have encountered administrative and compliance difficulties. These include the requirement for pre-approval from HMRC for split treatment and difficulty in keeping clear records of where employees are working (an issue not raised by the OTS was the question of whether employers will always know where their employees are located—the use of an artificial background for a video call means that the employer may have no indication of where the employee is at the time of the call).

Long-term overseas workers raise more significant new issues and are likely to increase the extent to which employers are going to have to engage payroll agents in other countries to manage payments to their remote workers.

• social security contributions

Social security rules allow for an employee to remain within a home jurisdiction for longer periods of working overseas than apply for income taxes. These reduce some of the more detailed requirements for determining the time during any year that an employee spends working overseas.

However, the treatment of temporary workers is designed around the concept of a traditional ’secondment’ and is less clear in respect of medium-term and long-term remote workers who spend more time in a different country to that of their employer. This leads to difficulties in interpreting the rules and in compliance issues.

• creation of a permanent establishment for the employer

Having an employee working in an overseas jurisdiction risks creating a permanent establishment for the employer. Short-term overseas working, for example less than 60 days, may fall within general easements, and the work of some ’back-office’ employees may fall within the ’preparatory and auxiliary’ exclusions from creating a permanent establishment. However, the position is more complicated for longer periods of overseas work, especially where the work involved is more critical to the business and the employee can exercise authority on behalf of the employer.

Although the amount of tax at risk overseas may be low, the administrative burden for employers could be high. In resolving these issues, not only is it necessary to consider the UK tax position but also that of the domestic law in the jurisdiction in which the employee is living.

What are the next steps?

The OTS did not expressly set out its own proposals for the next steps, resorting to reporting suggestions from respondents to the review—but this may have been related to this being the final report prepared by the OTS before it is closed.

Domestically, the emphasis was on HMRC publishing clear and easily accessible guidance bringing together all the different areas that need to be considered where employees work remotely either on a short-term or longer-term basis. There was also a desire to relax some of the restrictions on employee benefits that distort behaviour, and possibly widen the availability of some benefits in line with policy objectives. However, it was recognised that properly aligning benefits and reliefs with policy objectives for the new working environment is likely to have significant costs that would not be acceptable in the current economic environment.

In the context of international working, suggestions focused on simplifying administration and
compliance such as by:

• implementing a threshold for short-term presence in the UK (such as 60 days in a given period) below which tax, PAYE, social security and permanent establishment issues would not be triggered
• allowing a level of self-assessment in relation to apportionment of time where tax is split between different jurisdictions, and
• recognising jurisdictions, with compatible tax regimes, where the risk of tax leakage is lower and so simpler compliance procedures could be implemented

It was recognised that the UK cannot resolve all of the international issues on its own but should work with the OECD to obtain a degree of international harmony, with the UK leading by example.

This analysis was first published on Lexis®PSL on 30 January 2023 and can be found here (subscription required).

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