On 20 December 2022 the UK’s Office of Tax Simplification (OTS) issued a policy paper on the tax implications of hybrid and distance working. This follows a call for evidence earlier in 2022 and consideration of the comments received from respondents.

The report notes that there was an increase in working from home during the pandemic, which involved around 40% of the UK workforce working from home for at least part of the week. As some employees want to continue hybrid and distance working in the future, employers are developing new policies on the issue.

The OTS report covers hybrid working where some time is spent at the employer’s workplace and some of the time elsewhere. The report includes overseas distance or remote working where the employee works permanently from a different country. Working from overseas involves a range of legal and employment issues, and presents challenges for tax compliance.

UK-based hybrid working

The rules on deductions for travelling expenses are based on the principle that commuting costs are not tax-deductible but costs of travelling to a temporary workplace are deductible. As hybrid working involves two or more workplaces, one of which may be the employee’s home, there is an issue around the tax treatment of costs of travelling between a home-based workplace and an office workplace.

One suggestion from respondents is that the government should consider offering a general employment allowance, involving a set amount to cover costs of home working and of travel from home to other work locations. There is also an issue in relation to benefits that are defined by reference to an employee’s permanent workplace, such as the cycle to work scheme. Businesses consider that there is a need for general guidance on tax issues associated with hybrid working.

International

Many large employers have policies that permit employees to work temporarily overseas for limited periods, normally up to 30 working days in a year. Demand for this type of working is expected to grow and there will also be more employees wanting to live permanently overseas whilst working for UK businesses.

Permanent establishment issues

Large businesses and partnerships are concerned about the risk of employees working overseas and creating a permanent establishment for the business in another country. Even if the tax due is small there would be a burden from increased administration.

In the case of longer-term overseas stays, some employees would create a permanent establishment by the nature of their activities, such as concluding contracts. For other employees, there is an issue around the way in which concepts such as fixed place of business may relate to a home office or a hotel room; and whether back-office functions such as HR performed by these employees could be recognised as ‘preparatory and auxiliary’, not giving rise to a permanent establishment.

Income tax and social security

Many businesses understand the tax residence implications of overseas working. The UK’s extensive tax treaty network and the presentation on the government website were regarded as helpful.

Social security issues present more difficulty for businesses. The agreements with other countries are not considered to be well documented. Some businesses want the government to expand its network of social security agreements (reciprocal agreements) and update existing agreements to provide more clarification on the implications for multi-state and hybrid workers.

Short-term visitors

In the case of employees coming from overseas to work in the UK for short-term visits, respondents suggested that a policy could be implemented to ensure that time working in the UK would not give rise to PAYE, social security payments or a permanent establishment if it was under a certain minimum such as 60 days. A policy along these lines would reduce the administrative time for employers and employees.

Guidance

Respondents want clear and accessible general HMRC guidance covering all the different issues that need to be considered when individuals are working remotely abroad for a short or longer time, as well as specific guidance on certain issues.