The number of countries introducing special visas for globally remote workers continues to increase. Spain and Sri Lanka are the most recent countries planning to introduce such a visa. As a result, UK employers are likely to see an increase in the number of people requesting to work remotely from overseas.
Employers who are managing globally remote workers will know the complexity that can be involved. We set out some of the challenges in a previous article.
Self-employment – a possible solution?
One question that is sometimes asked is whether employers can simply move globally remote workers onto a self-employed contract. The logic to this is understandable. The thinking is that the problems of non-UK tax, overseas payroll and employment rights may be circumvented by simply making an employee self-employed when they go to work remotely overseas.
The UK employer can pay the contractor gross and stipulate that the contractor be responsible for the settlement of all taxes overseas.
Unfortunately, it is really not this straightforward. Moving someone from an employment contract to a self-employment contract may, in many cases, create more problems. We outline the considerations below.
Employment law
When an individual becomes self-employed, it normally means that they lose employment rights. However, the UK and most countries have some protections in the law to ensure that employees are not miscategorised. The question of employment status arises. That is, under the relevant law, can the individual legitimately be engaged as a contractor or will they be deemed an employee?
The rationale behind laws and rules on employment status is partly to stop unscrupulous employers from engaging contractors (thereby circumventing the need to provide employment rights such as holiday pay, sick pay, pension rights, maternity leave etc.) who are, in substance, employees.
The rules for employment status vary from country to country but they often include similar tests. For example, rules will often look at the degree of control the engager has over the individual, the degree to which an individual is integrated within an organisation, whether the individual is in business on their own account and has other clients, the financial risk involved for the contractor etc.
So, the risk to any UK employer who makes an employee self-employed is that, at some point, the contractor may claim (either in the UK or under the rules of the country in which they are living and working) that they have in fact been an employee all along, despite the self-employed contract.
I have seen this happen in practice and, in these cases, substantial pre-court settlements were paid out to contractors in order to compensate them for employment rights that were deemed to have been lost.
Therefore, employment status should be considered carefully in all cases but particularly where an individual was formerly an employee. The obvious question in such cases is – what has changed? What factors have changed to make a former employee self-employed?
This is not to say that a switch from employment to self-employment is not possible. In some cases, circumstances may mean that such a switch is legitimate. For example, a former employee may leave employment and take up a new and separate role with their former employer but on terms which are those of a self-employment rather than an employment. I have seen this work in practice where individuals return to work with their former employer on an ad hoc basis, undertaking defined projects for a fee. However, simply deeming someone to be self-employed by offering them a self-employment contract (however well drafted) is likely to present issues.
Overseas payroll
The matter of employment status does not end with employment rights. If the individual is, in reality, deemed to be an employee in the country in which they are living and working, UK employers may find that they trigger other obligations.
For example, ‘self-employed’ workers living and working indefinitely in an EU country for a UK engager and who are subsequently deemed to be employees, will almost certainly trigger a social security obligation for the UK engager. That is, the UK engaging company will need to register to operate a payroll in the overseas country and operate employer and employee social security (as well as potential tax withholding, depending on the country).
What is worse, countries can demand back payment of social security in such cases, leading to demands from the UK employer running into substantial sums. Under the EU Mutual Assistance Recovery Directive, EU tax authorities have the right to recover social security from UK engagers in this way, even post-Brexit. In one case, I have seen the Swedish authorities recover over 6 years’ worth of Swedish social security payments from a UK University.
Outside the EU, being deemed an employee may also mean that other compliance obligations are triggered. In Canada and India, for example, mandatory registration of the deemed foreign employer would be required.
The overseas authority accepts self-employment – is that ok?
It is true that some tax authorities (though not many) globally have a relaxed attitude towards employment status and may rely solely on the terms of a contract to determine employment status, rather than looking at the substance of the relationship between the engager and the individual. However, even in such cases, there are still potential issues:
- If the non-UK resident individual performs any non-incidental duties in the UK for the UK engager, then the UK engager may have a PAYE and NIC obligation in respect of those duties where that individual is deemed to be ‘employed’ under UK employment status rules. Even where an individual is deemed to be self-employed overseas, they may be deemed employees under UK employment status rules. For historic failures, HMRC can look back by four tax years for PAYE and 6 tax years for NIC.
- Even where an individual is deemed to be self-employed in a country overseas, they may unintentionally (depending on the circumstances) trigger a corporate presence in the overseas country for their UK engager.
So, my final words on this are that self-employment may be an option for globally remote workers and may work in certain cases. However, it is far from the ‘quick fix’ solution that it may seem. In particular, any switch from employment to self-employment should be treated with great caution.
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com
The number of countries introducing special visas for globally remote workers continues to increase. Spain and Sri Lanka are the most recent countries planning to introduce such a visa. As a result, UK employers are likely to see an increase in the number of people requesting to work remotely from overseas.
Employers who are managing globally remote workers will know the complexity that can be involved. We set out some of the challenges in a previous article.
Self-employment – a possible solution?
One question that is sometimes asked is whether employers can simply move globally remote workers onto a self-employed contract. The logic to this is understandable. The thinking is that the problems of non-UK tax, overseas payroll and employment rights may be circumvented by simply making an employee self-employed when they go to work remotely overseas.
The UK employer can pay the contractor gross and stipulate that the contractor be responsible for the settlement of all taxes overseas.
Unfortunately, it is really not this straightforward. Moving someone from an employment contract to a self-employment contract may, in many cases, create more problems. We outline the considerations below.
Employment law
When an individual becomes self-employed, it normally means that they lose employment rights. However, the UK and most countries have some protections in the law to ensure that employees are not miscategorised. The question of employment status arises. That is, under the relevant law, can the individual legitimately be engaged as a contractor or will they be deemed an employee?
The rationale behind laws and rules on employment status is partly to stop unscrupulous employers from engaging contractors (thereby circumventing the need to provide employment rights such as holiday pay, sick pay, pension rights, maternity leave etc.) who are, in substance, employees.
The rules for employment status vary from country to country but they often include similar tests. For example, rules will often look at the degree of control the engager has over the individual, the degree to which an individual is integrated within an organisation, whether the individual is in business on their own account and has other clients, the financial risk involved for the contractor etc.
So, the risk to any UK employer who makes an employee self-employed is that, at some point, the contractor may claim (either in the UK or under the rules of the country in which they are living and working) that they have in fact been an employee all along, despite the self-employed contract.
I have seen this happen in practice and, in these cases, substantial pre-court settlements were paid out to contractors in order to compensate them for employment rights that were deemed to have been lost.
Therefore, employment status should be considered carefully in all cases but particularly where an individual was formerly an employee. The obvious question in such cases is – what has changed? What factors have changed to make a former employee self-employed?
This is not to say that a switch from employment to self-employment is not possible. In some cases, circumstances may mean that such a switch is legitimate. For example, a former employee may leave employment and take up a new and separate role with their former employer but on terms which are those of a self-employment rather than an employment. I have seen this work in practice where individuals return to work with their former employer on an ad hoc basis, undertaking defined projects for a fee. However, simply deeming someone to be self-employed by offering them a self-employment contract (however well drafted) is likely to present issues.
Overseas payroll
The matter of employment status does not end with employment rights. If the individual is, in reality, deemed to be an employee in the country in which they are living and working, UK employers may find that they trigger other obligations.
For example, ‘self-employed’ workers living and working indefinitely in an EU country for a UK engager and who are subsequently deemed to be employees, will almost certainly trigger a social security obligation for the UK engager. That is, the UK engaging company will need to register to operate a payroll in the overseas country and operate employer and employee social security (as well as potential tax withholding, depending on the country).
What is worse, countries can demand back payment of social security in such cases, leading to demands from the UK employer running into substantial sums. Under the EU Mutual Assistance Recovery Directive, EU tax authorities have the right to recover social security from UK engagers in this way, even post-Brexit. In one case, I have seen the Swedish authorities recover over 6 years’ worth of Swedish social security payments from a UK University.
Outside the EU, being deemed an employee may also mean that other compliance obligations are triggered. In Canada and India, for example, mandatory registration of the deemed foreign employer would be required.
The overseas authority accepts self-employment – is that ok?
It is true that some tax authorities (though not many) globally have a relaxed attitude towards employment status and may rely solely on the terms of a contract to determine employment status, rather than looking at the substance of the relationship between the engager and the individual. However, even in such cases, there are still potential issues:
- If the non-UK resident individual performs any non-incidental duties in the UK for the UK engager, then the UK engager may have a PAYE and NIC obligation in respect of those duties where that individual is deemed to be ‘employed’ under UK employment status rules. Even where an individual is deemed to be self-employed overseas, they may be deemed employees under UK employment status rules. For historic failures, HMRC can look back by four tax years for PAYE and 6 tax years for NIC.
- Even where an individual is deemed to be self-employed in a country overseas, they may unintentionally (depending on the circumstances) trigger a corporate presence in the overseas country for their UK engager.
So, my final words on this are that self-employment may be an option for globally remote workers and may work in certain cases. However, it is far from the ‘quick fix’ solution that it may seem. In particular, any switch from employment to self-employment should be treated with great caution.
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com