OTS report highlights tax changes for a modern working world

The OTS has released its final report. The report considers UK hybrid and distance working arrangements as well as those spanning cross-border, concentrating on two key definitions that were set out in its call for evidence.

• Hybrid working is where the terms of engagement require workers to spend some of their contracted hours in their employer’s workplace but allows 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.

These work patterns have become more prevalent since the COVID-19 pandemic forced businesses to find technological solutions to allow employees to work from home where possible. The population working from home at least some of the time is far larger than historically. Respondents to the call for evidence expect home working arrangements to increase in frequency.

Findings in the report include confusion from individuals and employers over the tax treatment of expenses incurred while home working. For cross-border situations, the difficulty in navigating multiple subjective tests and paper-based administration were highlighted as creating complexity and delay.

Responses from businesses emphasise that while offering flexibility involves far more administration and compliance, they see it as key for attracting and retaining the top talent. This, they report, is a decisive factor for employees in the current “war for talent”. They remark that easements could be extended to allow for something akin to a “digital nomad visa”; this could allow people to work temporarily from the UK without triggering PAYE, social security, and permanent establishment (PE) obligations.

In the absence of changing legislation or providing easements which, the report suggests, would come at a cost to the Exchequer, respondents highlighted that current guidance should be clarified and compiled. This would allow taxpayers to understand the various tax and non-tax aspects more easily.

While the OTS reports on recommendations for policy and administrative changes made by respondents, due to time constraints it does not make any recommendations of its own. As decided in the mini-budget of 23 September 2022, the OTS is being wound down at the end of 2022. This report adds to the significant legacy of recommendations made by the OTS that HMRC and HMT still need to consider and act upon.

Working arrangements in the UK

Findings in this section of the report centred on the varying treatment of expenses under working arrangements. This also includes how tax incentives could be widened to benefit employees.

Recommendations made by respondents included:

• aligning the tax treatment of household expenses, despite different methods of payment (eg, paid by employer, paid by employee, reimbursement by employer);
• making commuting costs tax deductible for hybrid workers, to help incentivise workers back to offices and town centres;
• relaxing conditions for the cycle to work scheme so that it can apply where less than 50% of use is for journeys between home and the workplace;
• removing of the requirement for returning employer provided equipment, as the cost of retrieval was often disproportionate to the value of the equipment; and
• redefining “temporary workplace” to include a statutory percentage test.

Cross-border employees

The report’s second area of focus was employees working in different countries from their employer, including on a temporary basis.

The OTS reports that some, particularly large, employers allow employees to work from a different country for a certain number of days. While this perk is currently showing low take-up, at least among respondents, it is viewed as a progressive part of employers’ workplace packages. Respondents expect use of such perks to increase.

The administration of short-term cross-border working is highlighted as onerous for businesses, requiring consideration of different countries’ payroll, income tax, social security and PE rules. In some cases, current guidance is not sufficient or relies on subjective tests that employers find hard to operate. It was unclear to many, for instance, at what point a UK PAYE obligation is created for an employee staying short term in the UK.

For employees working short term in the UK, respondents called for making existing easements that allow employees to spend up to a certain number of workdays in the UK without triggering any PAYE, social security or PE obligations clearer. This would increase the attractiveness for employers to allow employees to work from the UK on a short-term basis and contribute to the UK economy.

Employers are also more frequently employing individuals who are permanently based abroad through choice, or those who work regularly between two countries.

Here, tax administration was flagged as a large obstacle, with participants pointing to errors and delays from HMRC’s largely paper-based system. Recommendations from respondents included:

• allowing s690 and Appendix 5 requests to be operated from the date an application is made instead of requiring HMRC approval;
• better digital integration of social security forms and applications, to reduce errors;
• improvement on the slow turnaround times for social security certificates and NT code requests; and
• aligning the treatment of employees choosing to work overseas with the treatment of those posted overseas for social security purposes, including obtaining an A1 certificate.

Across the board there was a call for movement away from the various subjective tests to objective tests and thresholds. Respondents felt these would be easier to automate for employers. A decision-based tool such as the Check Employment Status for Tax tool could help businesses assess and record their treatment of employees.

Implications for business entities

The final section concentrates on the corporate tax and partnership implications of employees choosing to work in jurisdictions where the business entity does not have a business presence.

The potential creation of a PE abroad was seen as carrying a disproportionate burden, particularly for shorter stays. This pushed businesses to implement thresholds on days worked and limits on the types of work that can be undertaken abroad. Instead, a day test for permanence could be used for corporates with employees working remotely in the UK, the report suggested.

Respondents felt they would benefit from additional clarity from HMRC on when a PE would be created in certain circumstances. These circumstances include an individual choosing to work from a UK home office, whether temporary accommodation can create a PE, or where several employees choose to work from the same country at the same or different times during a tax year. The UK’s corporate residence criteria, bringing a company into the UK corporation tax net if it is managed and controlled from the UK, was also seen to potentially discourage smaller companies from engaging UK-based senior personnel.

Final thoughts

In a post COVID-19 era, many employees value liberation from the traditional working models of the past. The OTS’s report highlights that many of our UK and international tax rules have failed to keep pace with this change.

However, respondents felt that the UK could take a lead position in championing for international rules to be updated to reflect modern and emerging work patterns, and to put the UK at the forefront of a more flexible working landscape.

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