Hiring a UK worker from overseas
Written by Ray Coman
The extent to which activities of a worker amount to a presence in the UK can have significant tax implications. It is a concern for overseas businesses establishing a UK presence in the assessment of exposure to tax.
Any business incorporated in the UK is liable to UK corporation tax. As a simple anti-avoidance measure, it is not possible to avoid taxation by simply registering an entity in a low tax jurisdiction. Where the “central management and control” is operated through the UK, company profits are taxed in the UK regardless of where the entity is incorporated. The residency status of its directors is the first test to establish the whereabouts of control.
A company which is UK resident is liable to tax on worldwide profits. A foreign tax credit is typically available to prevent a company from being taxed on the same profits in two tax territories.
An overseas company can have a “permanent establishment” in the UK (such as UK sales office or sales representative.) An entity which has a permanent establishment (PE) would be subject to UK tax on the profits attributable to the PE only.
The existence of a PE is typically determined by the ability of the UK representatives to conclude contracts on behalf of the company. Where the UK worker is required to refer back to overseas office for decision making then any UK presence is unlikely to amount to a PE.
Contract terms such as paid leave, notice and redundancy pay are peculiar to employment. The provision of own equipment, own premises and the ability to arrange a substitute are characteristic of self-employment.
Coman & Co cannot provide an opinion about the extent to which a person can be regarded as self-employed. The determinants of self-employment, have been established though various case laws.
A worker who is self-employed would be responsible for their own taxes. The determinants of UK residency for the purpose of establishing liability to UK tax have by contrast been enacted.
Following from the above, a worker who is employed can either be subject to the tax regime of the host country or to that of the UK.
A requirement to operate UK PAYE arises where the UK operations give rise to an ‘economic employer.’ UK payroll will be run for an employee whose work gives economic benefit to the UK branch or function of the business. By extension, if the fruits of the worker’s labour are enjoyed by a foreign entity then UK PAYE is not needed.
The rules on what determines a PE, or an economic employer are lengthy and complex and for the sake of brevity have not been summarised here. Each case should be considered on its own merits.
The following checklist is a rough form of the UK tax position for foreign business:
|A worker who is not UK resident will probably not cause any liability to UK tax. The residency of a person is measured mainly by physical presence.|
|A UK worker who is self-employed is responsible for reporting their own tax liability to HMRC. A self-employed person is generally principal rather than agent. This means that the person profits from their own decision making.|
|By contrast, a UK resident who concludes contracts on behalf of the foreign business, creates for that entity a liability to UK corporation tax.|
|A worker who is employed but whose work does not bring any benefit to the UK economy can remain on foreign payroll.|
|UK PAYE has to be operated for employees whose work brings benefit to the UK.|
Length of stay is often a key indicator as to whether an economic employer has arisen. HMRC have indicated that an employee resident for less than 60 days will not generally be regarded to have had the time to generate enough benefit to the UK required to gain status as a UK employee.