What are the tax implications of working abroad?

28 November 2022


International Tax Planning

Working abroad has never been easier. From remote workers taking advantage of more flexibility to business owners exploring new markets, all you need today is a laptop and an internet connection and you can set up your office anywhere. It’s no surprise therefore that nearly three in five employees plan to work abroad this year. However, earning overseas can also bring complications, especially when it comes to the tax implications of working abroad.

Craig Elliott explains how working abroad can affect the company and the individual involved when it comes to tax, payroll and company structure, as well as how you can mitigate these issues to help your business function anywhere.


What is working abroad?

In our modern, flexible business culture, we’re used to our definition of ‘work’ being more malleable. While answering a few official emails on your phone while lying on the beach on holiday could be considered working, the definitions for tax purposes are more specific.

The most important factor in this is tax residency. At its most basic level, if you has been another country for longer than 183 days, this may result in being considered a tax resident in that other country. In this scenario the employee will be liable for tax in the country where they have established tax residency, as well as local requirements such as social security (national insurance). Furthermore, this may raise tax implications for the employer depending on the nature of the work undertaken in that country.


Why does managing the tax implications of working abroad matter?

When working abroad, the key issue is that if you physically carry out revenue-generating duties overseas then, subject to protection under a double taxation agreement, the country where those duties are performed will seek to claim tax revenue on that income.

For the individual, this can lead to potentially being taxed twice, or paying tax at a less advantageous rate. For the employer, meanwhile, this creates extra work in the payroll process, especially if the employee is working between both countries. Employers need to then manage two tax processes based on the percentage of taxable time and income spent in each tax jurisdiction, managing multiple tax years, which can lead to cash flow issues, and ensuring compliance on a wider geographic scale.


Tax implications for employees

One of the curiosities of foreign tax is that it can be easier to become liable for overseas tax than it is to stop paying tax in your home country. Like many countries, the UK generally taxes its residents on their worldwide income. If you plan to be outside of the UK for less than a complete tax year, then you will usually remain tax resident. However, it only takes over six months to risk becoming a tax resident in another country, meaning that in the absence of a double tax agreement, you will have to manage tax in both places.

In these circumstances, We first have to determine the country of tax residence, and generally, worldwide income will be taxable there. However, the country where the activities are performed may also have taxing rights meaning the employee will likely need to file a foreign tax return. If there is a double tax agreement, it is likely that a credit for the foreign tax will be allowable in the country of residence under the terms of the treaty, and a similar unilateral relief may be available for UK residents who have spent some time working abroad is a country with which the UK does not have a double tax treaty. Generally, the higher liability will be payable.


Tax implications for businesses

One of the key issues for employers is to what extent an employee working abroad could mean that the business becomes liable to corporation tax (or a foreign equivalent) in that country. This comes down to whether the activity amounts to a ‘permanent establishment’ in that country.

This also applies to business owners traveling abroad to generate local business. Even if the situation is as simple as a home office set up in a foreign country, revenue generated could be subject to tax in that locality.

The issue is whether this set up is a temporary or a permanent one - while the global pandemic has led to recommendations for countries to be more lenient in how they define permanent establishments, given the larger numbers of workers contributing from countries other than that in which their employer is established, these arrangements can vary according to country and the type of tax involved.


Managing your international presence with Haines Watts


Remote work isn’t going anywhere, and the ability to hire anywhere in the world is a huge boon for employers looking to find the best talent. This means that employers will increasingly have to grapple with an international approach to tax and compliance. The rules around these issues are complex and highly variable. Without the right processes, businesses can risk losing hours of time managing their payroll, as well as potential compliance failures.

Our team at Haines Watts have helped hundreds of businesses grow beyond their original borders, building workflows and providing advice to keep tax efficient, compliant and smart.


Get in touch with us to find out how you can manage the tax implications of working abroad with ease.