With digital tech and web developer skills in short supply across industry sectors, businesses in the UK are increasingly looking further afield, in some cases hiring self-employed workers in places like Canada, the US, Australia and Europe. But are they aware of the risks this could pose?
Web developers, software engineers and other workers with digital skills are in short supply for a variety of reasons. Firstly, Brexit led to some workers opting to leave the UK, returning to their homes in the EU or elsewhere.
The restrictions imposed during the pandemic led to many businesses increasing their online presence and investing in website development. Research carried out by IBM has recently revealed that there is less focus on training software engineers in the UK compared to countries such as Spain and Germany, which means there are fewer skills to go round.
For startups and other small businesses seeking to hire workers with digital tech or web developer skills, it is becoming increasingly difficult to compete with larger companies that can typically offer better remuneration and reward packages. Some are choosing to widen the net by employing workers who are permanently based overseas. However, relying on remote workers based overseas could have unintended tax consequences as well as bringing additional employment-related risks.
Companies in the UK are able to claim R&D tax relief to help offset their investment in innovation activities. However, the government is refocusing support towards innovation in the UK, meaning future restrictions on previously allowable overseas costs. In addition there is the recently introduced PAYE/NIC cap, which links the level of repayable R&D tax credit to PAYE/NIC incurred by the company.
For example, a UK-based business investing in a new website with eCommerce functionality, or a manufacturer developing a new AI system to help improve process efficiency, could find that their R&D tax relief claims are significantly restricted if the majority of the work was carried out by a worker based overseas. The business will need to consider the cost vs benefit, weighing up cheaper or more available labour against increased R&D tax relief.
Permanent establishment
There are a number of other factors that employers need to consider before choosing to hire workers based overseas. One of the key areas of risk relates to the rules regarding ‘permanent establishment’. These rules vary from country to country. Depending on where the remote worker is based and what they are doing, they could inadvertently create a presence for the UK company in the overseas jurisdiction.
This is especially likely to occur if the individual is carrying out sales or management duties, for example. If a permanent establishment is created, then the company is likely to be liable for local corporate and sales taxes and have additional reporting obligations.
It is also important for employers to consider local ‘withholding tax’ and the social security obligations of workers based overseas. Overseas jurisdictions would normally require a UK-based employer to run a payroll locally, in order to report and pay local taxes and make social security contributions on behalf of their employee who lives and works there. The employer may also have reporting obligations in the UK if the overseas employee visited the UK for work. From an employer’s perspective, this can lead to increased costs and bring an additional administrative burden.
Close examination of the social security system in the country where the remote worker is based is essential. This will help to determine whether the employer and the employee are required to make any contributions. In situations where the remote working arrangement is permanent, both the employer and employee are likely to be liable for social security contributions, payable in the country concerned.
Local employment laws
Other areas of risk for employers relate to local employment laws and it is important to ensure that workers have obtained the relevant work permits. This could seem an obvious matter, however, employers should check that remote workers have the right documentation in place, and they are compliant with local immigration rules. Failing to do this could bring serious financial and reputational repercussions. The employment contracts of remote workers based overseas may also need to be revised to reflect local laws.
Data protection is another key area of risk for employers when employing workers based overseas. Many non-EU countries have not been recognised under an ‘adequacy notice’, which means that local laws don’t meet an acceptable standard of data protection.
For example, data protection laws in the US do not currently meet this standard. The UK has adopted European data protection laws, which means that employers choosing to hire remote workers based in non-EU countries may need to implement additional data protection controls, for example preventing the cross-border transmission of personal data.
Although more planning and consideration is often required when recruiting skilled workers based overseas, startups and other small businesses shouldn’t rule it out. In the battle for talent, they should reach out to the widest possible employment pool in order to find people with the right skills to meet their needs and build a stronger and more resilient business.