Businesses that are allowing employees to work flexibly overseas could find themselves in hot water if they are not aware of the tax requirements, says RSM UK.

According to RSM UK’s latest ‘The Real Economy Report’, a third (33%) of businesses have allowed existing employees to work remotely outside of the UK in response to staffing challenges. Labour shortages are being felt across the board, with well over three quarters (88%) of businesses finding employee turnover a challenge.

Of those that have offered hybrid working options to attract or retain employees, 31% of businesses have set restrictions on the length of time employees can work abroad. While this suggests that some businesses are considering the tax risks associated with working overseas, it also raises concerns over the two thirds of businesses with no restrictions in place that are perhaps less aware of the tax implications. Further considerations for businesses include employment law, social security, cyber security and immigration rules.

Businesses are also looking overseas to source labour. Of those that have taken on labour from outside the UK due to staffing challenges, over half (52%) have increased the amount of overseas labour that they’ve taken on in the last year. The vast majority (79%) of these international workers have been sourced from the EU.

Commenting on this, RSM UK global employer services partner, Joanne Webber, said: “It’s clear businesses recognise the importance of offering flexible working to attract and retain employees, and the pandemic has proved that this new way of working is possible, depending on the sector and role. Allowing employees to work overseas may seem like a great benefit, but often both employers and employees don’t fully understand what they’re signing up for, and they could be entering a tax minefield. For example, one area that can be easily overlooked when a UK employee works abroad is the individual could trigger a corporate presence (permanent establishment) for the UK company in that country, meaning the business may be subject to corporate tax and associated administration.

“Current labour shortages are a real concern for businesses, so looking overseas may be their only option. But it begs the question how many of these workers are relocating to the UK or staying in their home country, as this could mean a tax loss to the UK economy. Hiring employees from outside the UK and allowing them to work from overseas won’t necessarily be a simple fix to labour shortages, as it will trigger the same risks that apply when allowing UK employees to work abroad.

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“There will be different tax rules depending on the country an individual chooses to work from, so employers venturing into ‘work for anywhere’ arrangements need to set parameters for staff and have a clear company policy in place, so everyone understands the risks.”

RSM UK economist, Thomas Pugh, added: “The labour market looks set to remain tight for the foreseeable future, as high sickness levels and a challenging demographic outlook combine to reduce labour supply. One way firms are dealing with this is by recruiting more labour from overseas, but this will be difficult for many industries.

“Firms will have to concentrate on upskilling their current employees and creating effective incentive schemes to retain staff. In addition, businesses that invest in productivity enhancing automation will find themselves in a much more competitive position once the economic upturn comes in 2024.”