Office of Tax Simplification report on hybrid and distance working

• United Kingdom

• Employment law
• Tax planning and consultancy

18-01-2023

The Office of Tax Simplification (OTS) has published its report on the tax implications of hybrid and distance working.

Following the UK government’s announcement of the closure of the OTS in the 23 September 2022 mini-budget, the OTS had a shortened timetable to complete the report, before ceasing work at the end of 2022. The consultation therefore ran for only two months rather than the usual three, from 31 August to 28 October 2022.

Given the abbreviated timetable, the OTS report reflects calls from businesses and others for change and improvements, rather than including its own recommendations. The report considers employers of all sizes, both UK and overseas, and their employees, but does not comment on hybrid working by self-employed individuals, due to lack of evidence received in relation to this issue.

In this briefing, we summarise the main issues discussed in the report, which concentrates on two areas:

• hybrid working, where employees spend some of their working time in their employer's workplace and some of their time elsewhere (typically at home, but sometimes in a different country from their normal location); and
• overseas distance or remote working, where the employee works permanently in a different country to the business location.

Domestic issues

The main issues raised by the OTS’ respondents in relation to UK-based hybrid working related to expenses.

The report notes that travel expense deductions have been based on the principle that commuting costs are not a tax-deductible expense, whereas costs of travelling to a temporary workplace are a deductible expense. However, given that hybrid working involves two or more workplaces, one of which might also function as a home, the report questions whether the costs of travelling between a home-based workplace and an office workplace should also be tax deductible, noting the suggestion of some hybrid workers that they need the encouragement of tax relief to make the trip into the office.

The report discusses the complexities of employees claiming tax relief on home working costs, including the differences in treatment for employer-incurred costs and reimbursed costs. The OTS’ respondents all thought it preferable to remove these differences, with the logic for the distinction widely seen as unclear by both employers and employees.

Some respondents suggested the government should consider offering a general employment allowance, which would allow a set amount to cover home working costs and travel from home to business locations. This could be offered to all employees and dealt with by the PAYE system, using the tax code where the allowance was not paid by employers.

The prevailing view of respondents was that the government should clarify, by way of guidance, how travel and home working expenses apply to domestic hybrid working arrangements.  

International issues

Taxable presence and permanent establishment

The report considers the trend towards large employers allowing staff to work temporarily overseas for limited periods, and instances of employees wanting to live permanently overseas whilst working for UK businesses.

Respondents (particularly large businesses and partnerships) mainly focused on the risk of creating a taxable presence for the business (a permanent establishment) as a result of employees working overseas. The administration of such permanent establishments was seen as a significant burden, especially for partnerships, although businesses believed the tax due would be negligible.

For short-term stays attached to holidays, businesses hoped that easements could prevent the creation of a permanent establishment. They recognised that HMRC may see this as a compliance risk and suggested a ‘safe list’ of jurisdictions if needed.

For employees who were not clearly within the scope of creating a permanent establishment, respondents asked for consideration to be given to how concepts such as fixed place of business may relate to a home office or a hotel room, and whether back-office functions, including HR and communications, could be recognised as ‘preparatory and auxiliary’ (and therefore not create a permanent establishment) in these circumstances.

Some multinationals, which had attempted to negate the ongoing reporting burden of a new permanent establishment based on employees living permanently abroad by employing them locally, then re-charging the UK business, hoped that the UK could in future provide safe-harbour guidance on transfer pricing implications to streamline the potential compliance implications.

Income tax, payroll and social security

The tax residence implications of overseas working were generally well understood by the OTS’ respondents, given the UK’s statutory residence test, wide tax treaty network and clear government guidance. However, respondents saw social security as more complex, especially given the low number of social security agreements the UK has with other states and the requirement under those we do have for the employee to be ‘posted’ overseas by the employer in order to remain in the home social security system.

Businesses called on the government to look to expand its network of social security agreements and to update existing agreements to clarify the position for multi-state and hybrid workers. Where individuals come to the UK from non-agreement countries, respondents called for HMRC to adopt a clear position in guidance that they will not pursue UK social security where an individual chooses to work in the UK for a short (defined) period of time.

Short-term visitors

Many respondents suggested that, for employees coming to the UK for short-term visits, the government could implement a policy that time spent working in the UK under a set threshold, possibly 60 days or less, would not trigger tax, PAYE, social security or a permanent establishment. This would reduce the administrative burden for employers and employees and encourage people to come to the UK for a short period of time.

Collating and simplifying guidance

Respondents also proposed that HMRC should improve its guidance on, amongst other things, the application of the various social security rules that apply to cross-border workers, when the various PAYE schemes designed to ease double tax and payroll compliance for employers who have globally mobile employees can be utilised in relation to hybrid workers, and when an overseas employer will be responsible for operating PAYE. In addition, they called for the government to provide guidance aimed at both employees and employers which is clear and easily accessible and which brings together all the different areas that need to be considered when employees are working remotely overseas or work remotely in the UK for an overseas employer. 

Comment

Although understandable given the shortened timeframe available to the OTS, it is disappointing the OTS did not include its own recommendations in its report. However, the report usefully illustrates the key areas of concern for employers and employees grappling with the tax issues presented by the rapidly changing working environment in the post-pandemic world.

A striking feature of the report is the breadth of the respondents’ calls for improvement to the clarity of HMRC’s guidance in relation to many of the tax issues discussed. These requests underline the complexity of the existing rules, which can easily catch out unwary employers and employees.

Contacts

If you would like to discuss the tax implications of hybrid and distance working for your business, please do not hesitate to get in touch with any of the following Eversheds Sutherland contacts.