Why HR and finance need to join forces

As the world emerges from the impact of the pandemic and returns to some sort of business as usual, governments are beginning to count the cost of unavoidable but significant drains on the public purse. With economies suffering, it is no surprise that many policymakers and regulators are already talking about how to begin rebalancing the books. Taxation is one of the most obvious ways to start that process, and with remote working now becoming commonplace globally, it presents both a dilemma and an opportunity for governments.

Clearly, governments want to support employers and employees as they adapt the way they work, but the desire to plug holes in public finances is going to be a top priority for most authorities. HR compliance is becoming a topic that finance directors will need to pay careful attention to. This places importance on HR and finance professionals working together to protect their organisations from compliance issues.

However, this relationship should be seen as not just a defensive measure, but also a mechanism for organisations to drive greater efficiencies and productivity in how they operate and engage with customers. This is why location-based compliance is going to become the hot trend in the coming year. It is not just about good governance, it’s also about strategic competitive advantages that HR and finance can identify together.

In the US, the Supreme Court has seen several states disputing whether they have the right to tax non-residents’ income while they have been working remotely. Switzerland has been working hard to secure agreements with its neighbouring countries on the taxation of remote working. Not every country has woken up to this ‘opportunity’ yet, but the warning signs are clear.

The much bigger headache for the CFO and the chief human resources officer is that the rules around remote working are still being defined. With uncertainty, there is a danger that companies fall foul of local variations in tax and employment law. For example, only recently did the UK and the EU agree that employees from this country travelling in Europe will have to comply with Schengen rules. This means that they can only be in continental Europe for 90 out of 180 days. Both personal and professional time counts towards this total, so finance and HR need to be confident that they have a complete picture when responding to potential questions from auditors.

Another possible concern is permanent establishment. If an employee works remotely for long enough in another jurisdiction, it could mean that a company ends up being seen as having an entity in that country and becomes liable to taxation. Similarly, the European Posted Workers Directive changed in the past year, bringing new requirements for compliance with it.

In a remote and flexible working world, the potential for employees to create compliance concerns inadvertently increases. As such, finance and HR must define the most accurate picture of the employee footprint if they are to be confident that they are in compliance with ever-evolving regulations.

The worry is that HR professionals are telling us that they don’t have access to the right data. In our most recent annual survey, only 20% of HR respondents globally, and 30% in the UK, are absolutely confident that they have the right information to hand about the business. This is a problem.

In the same survey, employees admitted that they are not reporting their remote working properly: two thirds of global respondents have not reported to HR all the days that they have worked outside of the state or country, even though 61% knew the rules around reporting their workplace. HR and finance must work together to build a single view of key operational and footprint information across the business. If the business does not have a clear picture, there could be clear financial consequences. It could lead to fines or travel bans for individuals.

There is a great opportunity for finance and HR to deliver value to the business. Flexible working could enable companies to save money on office space and give greater access to talent irrespective of location. Employees choosing to work remotely from lower-cost locations could also have their salaries adjusted to reflect the cost of living and the reduction in commuting requirements.

However, looking at such savings purely from a finance perspective could be risky, as such changes will have a real impact on employees. Reducing office space could affect employees who either prefer office work or do not have home office capabilities. Equally, employees could feel that they are being penalised if they face salary reductions. Enforcing such changes purely for financial efficiencies could have a dramatic impact on culture and collaboration. Therefore, HR and finance must work together closely to conduct a cost-benefit analysis and decide what is right for the business and its employees.

Compliance is rarely seen as an exciting topic. Most people try to avoid dealing with it because it is so complex and the potential for mistakes is huge. As a new way of working emerges, and companies get used to operating in a post-Brexit Europe, UK finance chiefs must pay close attention to HR compliance issues. This is a huge challenge, but also a great opportunity for HR and finance to form a strategic partnership. If they work closely, it could deliver significant benefits around cost savings on salaries, efficiencies in recruitment and deployment of staff, as well as ensuring full compliance. 

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals. Further reading on collaboration between HR and Finance is available through the articles below.