Home-based headache?
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
5 July 2021
Justine Riccomini explores the key issues in determining whether remote working in the UK by employees for a non-UK-resident entity creates a ‘PAYE presence’ headache for the employer.
Background
Many column inches are currently being devoted to speculating on whether employees who work for non-UK-resident entities are creating an unwanted permanent establishment in the UK by working remotely. Existing uncertainties are arising more frequently since the start of lockdown because what some employees thought was going to be an arrangement which would last for a few short weeks is still happening, 15 months later. Does this remote working arrangement represent a “PAYE presence”, though?
This question is becoming more urgent as hybrid working arrangements have emerged from the Covid pandemic. If those employees can physically work from home more in the future than they did, what potential problems might this create for the employer?
What is a ‘PAYE Presence’?
If HMRC can establish that a non-resident business with a “trading presence” in the UK which involves employees who are either already resident in the UK for tax purposes or working in the UK if they are foreign nationals, this fact pattern confers PAYE obligations on that business, subject to collection of any PAYE being practicable. For what generally constitutes a trading presence, see FL Smidth & Co v Greenwood (1921) 8 TC 193.
We now know that e-commerce and remote working practices can facilitate an employee being physically present in the UK, working from their own home, but without creating a “trading presence” in the UK in the generally understood meaning of the phrase – i.e. having an office, agency or other base of operations. It really comes down to what the employee’s role is and how much importance is placed on the decisions they take on behalf of the business (if any).
This conundrum is further exacerbated by HMRC’s statement in the PAYE Manual at 81610: “We would not regard an overseas employer as having a tax presence in the UK simply because there are employees in the UK”. HMRC goes on to explain that sales staff in the UK who are travelling from home to visit customers and potential customers do not establish a PAYE presence at the employee’s private address. HMRC clearly states that they would need to be capable of deeming there to be a branch or agency, office or establishment in existence. So, unless the salesman’s home address is also a registered office of the business, it seems there is nowhere for HMRC to send correspondence to. This interpretation was brought about by the House of Lords decision in Clark (Inspector of Taxes) v Oceanic Contractors Incorporated (1978-1983) TC 56 TC 183 which is considered to be the leading authority on the application of jurisdictional boundaries for PAYE.
Does a permanent establishment automatically confer a PAYE presence?
It may be that even though the non-UK resident employer is deemed to be operating part of its business inside the UK and be deemed to have a permanent establishment here, that this still doesn’t attract PAYE on the emoluments received by that worker/those workers. This is because the collection of said tax may produce significant practical difficulties. If the employer has no address in the UK (unless the employee’s home address is also classified as the employer’s registered office) then HMRC simply has no power to enforce collection from that address.
Has anything changed?
With the new ways of working, however, has the meaning of “PAYE presence” changed? Do the definition and guidance need to be updated?
At present, the employee who is working from home for a non-UK resident employer without creating a “PAYE presence” through a permanent establishment should be declaring all their income under self-assessment, unless for some reason the employer wished to set up a modified PAYE scheme, which is largely an unnecessary additional layer of bureaucracy.
Technically speaking, from a tax and NICs perspective, nothing has changed in the tax and NICs legislation – but more businesses and employees may be affected through no fault of their own because their employees required to work from home.
What about NICs?
The terminology for NICs purposes is slightly different – rather than discussing the “trading presence”, the NICs legislation refers to a “place of business” even though there is no actual definition of this set out in the legislation itself. However, the general meaning is very similar and from an employment taxes point of view, the NICs legislation mirrors the tax legislation – so you would have difficulty getting a cigarette paper between them for the purposes of denying that a liability to NICs exists if one is deemed to exist for PAYE. Further detail is contained in the National Insurance Manual at 33510.
Readers of the above will no doubt gather that there is rather a heavy emphasis on subjectivity – and employers are finding it difficult to decide whether they have inadvertently created a “trading presence”, a permanent establishment, a “PAYE presence” or indeed a “place of business” in the UK. Certainty is needed.
Suffice to say, then, that clarification is currently being sought on this from HMRC to give businesses the certainty they need in these uncertain times combined with new ways of working.