Lindsey Wicks highlights some of the issues likely to be raised as part of the OTS review, including the workplace test, transfer of assets charges, household expenses, cycle-to-work schemes and remote working overseas.
One of the final reviews by the Office of Tax Simplification (OTS) is of hybrid and distance working. Its call for evidence closed last month. The scope of the review is incredibly wide. It considers not only the increasing trend for working from home in the UK and hybrid working arrangements, but also remote working across borders. In terms of the cross-border issues, the OTS has focused the scope by excluding formal expatriate assignments, looking instead to the trend for ‘work-from-anywhere’ policies. The review also extends beyond employment to self-employment.
The call for evidence provides two key definitions:
- Hybrid working is where the terms of engagement require workers to spend some of their contracted hours in their employer’s workspace, but allow flexibility for where they work for the remainder of their contracted hours.
- Distance/home working is where the terms of engagement allow a worker to perform their duties in an agreed location of their choosing (usually their home). With distance/home working, either there is no requirement to work from an employer’s workspace, or no employer workspace is available.
Working from home
The current rules can be complex. The availability of reliefs and exemptions can depend on whether an item is supplied by the employer or reimbursed by the employer alongside the nature of the working arrangements.
Equipment to facilitate home working, such as a desk, computer, paper, printer ink, etc, can be provided tax-free by the employer. However, there is a potential transfer of assets charge if the employee leaves and the employer does not collect the equipment. Is this practical and economic?
The exemption does not extend to reimbursement of employee costs if they purchase these items themselves or where the employee contracts for the supplies and the employer pays on their behalf. However, tax-free reimbursement is possible if the employee is obliged to incur the expenses as the employment holder and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
An employer can make a tax-free reimbursement of any reasonable additional household expenses that the employee incurs in carrying out the duties of the employment at home under homeworking arrangements. As a simplification, HMRC also permits employers to pay £6 per week or £26 per month to an employee working regularly at home without the employer having to justify the amount paid.
During the COVID-19 pandemic, the government allowed employees to claim tax relief for this amount if it wasn’t reimbursed by their employer. However, it is generally difficult to meet the requirements to claim a deduction for general household expenses as, once again, the employee must be obliged to incur the expenses as the employment holder and the amount must be incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
Therefore, there is inequality between those with employers who reimburse costs and those who don’t receive reimbursement. Even when relief could be claimed, there was an economic imbalance between those receiving tax-free reimbursement and the benefit of claiming tax relief at the employee’s marginal rate.
The OTS highlights that one of the key issues to be covered by the review is how accommodation, travel and other expenses work in a hybrid world, including who will pay and whether the permanent workplace rules make sense. There have been many cases surrounding the permanent workplace rules. Identifying the workplace becomes more challenging as work locations become fluid. The rules concerning whether a workplace is temporary consider whether the duties of the employment are performed to a significant extent at the place. HMRC’s Employment Income Manual states: “You should treat duties as performed to a significant extent at any workplace if the employee spends 40% or more of his or her working time at that place.” What happens if an employer introduces a homeworking policy, but an employee starts spending two days a week back in their former office?
There are also benefits that are reliant on commuting. For example, the cycle-to-work scheme is subject to the condition that the equipment is used mainly for qualifying journeys (ie, journeys between the employee’s home and workplace or between workplaces). Homeworking and hybrid working make this condition difficult to meet.
The OTS will be considering the tax rules that can trip up employers. This could apply to UK businesses with employees working remotely overseas, or to overseas businesses with employees choosing the UK as their work location in circumstances where it is not a formal overseas assignment.
The issues include:
- tax, social security, tax residence, the potential for double taxation and practical considerations such as requirements to register, deduct, and pay over tax in different jurisdictions;
- the risks of creating a permanent establishment or skewing the transfer pricing profile if significant people functions are undertaken in different places or if the people concerned are involved in the development, enhancement, maintenance, protection, and exploitation of intangibles;
- the implications for share schemes and pension schemes; and
- how existing provisions for expatriates might apply (eg, short term business visitor rules, overseas workday relief, and modified payroll).
VAT might not be on the radar of the business, but having employees working in different locations might change the VAT position. While the chances of creating a fixed establishment for VAT purposes are likely to be remote, businesses could be caught out by the use and enjoyment rules. The use and enjoyment rules make sure that taxation takes place where the services are consumed.
A common example could be a mobile phone contract for an employee who then uses that phone in the EU rather than the UK. Whether VAT is due in the EU country, instead of (or possibly as well as) the UK, would be down to the EU country’s rules on use and enjoyment. This is unique to each country. On the flip side, where a UK company supplies services to a non-UK business, these services may ordinarily fall outside the scope of UK VAT. However, if the business customer’s employee uses their mobile phone contract in the UK, UK VAT may become chargeable.
There are plenty of non-tax business implications in areas such as employment law, regulatory requirements, and immigration law. These would be managed in a formal expatriate assignment. How do employers control and monitor this when a homeworker decides to work from an overseas location? The considerations include:
- Do local employment laws apply to the remote working arrangements, and could they override any intended laws governing the contractual relationship?
- What is the position on statutory employment rights?
- Do local requirements necessitate a separate local legal entity to be the employer?
- Do you need an ‘employer of record’?
- Are there restrictions on the type of roles that workers can perform in that location?
- What are the immigration rules for that jurisdiction?
- If there is a breach of the immigration rules, what are the implications for the employer
- What are the local data protection laws and are systems robust enough to protect against a data breach?
- Do any mandatory local health and safety rules apply?
- Does the jurisdiction require the mandatory reimbursement of certain expenses?
While the OTS indicates that it will be mindful of visas, rights to work and employment law, it has to draw the line somewhere. Many of the issues above fall within the remit of the Department for Business, Energy and Industrial Strategy (BEIS). While BEIS has produced a comprehensive set of guides on the visa requirements for British citizens travelling for business to countries in the EEA and Switzerland, these do not cover the other issues and are aimed at the worker rather than the employer.
No easy solution
I don’t envy the OTS the task of reviewing this area. Coming up with sensible suggestions for improving the domestic rules – particularly the workplace test – will be challenging enough. In terms of the cross-border issues, it would be wonderful to see the review shine a light on business-friendly jurisdictions and practices, in the hope that others might follow suit.
About the author
Lindsey Wicks, Technical Editor, ICAEW