Ross Stupart

The latest quarterly ‘The RSM Real Economy’ report demonstrates nearly two thirds (61%) of businesses are currently finding staff recruitment ‘extremely’ or ‘very’ challenging.

The pandemic fundamentally changed the way many organisations work, and after the initial transition and technology investment, many Scottish businesses have now adopted a hybrid way of working; which opens the doors to hiring the best talent wherever they are based.

However, having talent located in a broader range of territories fulfilling their roles and adding value to the business may provide the business with some additional tax and administrative obligations that need to be considered.

Ross Stupart, tax partner at RSM UK, said: “Employing talent to work from overseas territories may provide the business with an obligation to report and operate payroll taxes in that overseas territory. An overseas employee performing all their duties in the overseas territory will not be liable to UK income taxes and therefore the UK business will not be required to operate UK payroll taxes on the overseas employees earnings. However, the UK business may be obliged to operate a payroll to report and deduct at source income taxes and social security on the overseas employees earnings in the overseas territory; which creates an extra administrative burden.

“Another tax consideration that has to be factored in by the business is whether the presence of the employees overseas will result in some of the UK businesses profits being subject to corporation tax in the overseas territory. This will hinge on whether the overseas employees presence in the overseas territory is considered to result in a permanent establishment of the UK company being created in the overseas territory.”

He added: “During the pandemic, most tax authorities took a relaxed view on working from home creating permanent establishments, acknowledging that in many circumstances this was occurring out of necessity rather than choice. However, now as mobility has opened up and businesses are making conscious choices to locate employees from anywhere globally, the tax authorities will likely start to become more robust on their considerations of whether the presence of employees working from home and adding value to a business from within their territory will give rise to a permanent establishment. Particularly if the business does not practically offer an alternative location for the employee to perform their duties.

“Consideration of the amount of profit that would be reported in the overseas territory as a result of the employees presence raises the transfer pricing question. The quantum of profits taxed and reported in the overseas territory would be linked to the value attributable to the employees role performed from the overseas territory.”

Jude Lean, HR consultant at RSM UK, commented: “Lastly, employing a workforce across lots of different territories means a business could have employees in similar roles obtaining different tax rewards from their employment. This therefore needs to be carefully managed, particularly if the business has managed to create a communicative global workforce. Reward packages may have to be carefully tailored to make the most of tax advantages in a variety of territories whilst at the same time seeking to retain equilibrium in reward packages to avoid demotivating team members.”