United Kingdom: Office of Tax Simplification publishes report on hybrid and remote working

Key takeaways

Some of the main points from the report are:

• Given the government's directive for the OTS to conclude its work by the end of 2022, the report does not contain any recommendations from the OTS.  It highlights the experience of businesses and collates suggestions for changes. 
• The tax implications relating to domestic hybrid working can be complex and can be misunderstood, particularly by employees.  HM Revenue and Customs (HMRC) was urged to review the application of expense rules, particularly in relation to travel.
• Although cross-border remote working currently applies to a small percentage of employees, businesses expect demand to grow.
• Unsurprisingly, a significant concern for companies is the permanent establishment (PE) risk associated with an internationally mobile workforce.

• A common theme was to streamline processes, particularly when it comes to liaising with HMRC, in order to reduce the significant compliance burden.

In more detail

Corporate Tax

Whilst businesses recognize that longer-term multinational cooperation on PE risks would come through the Organisation for Economic Co-operation and Development (OECD), additional guidance and a pragmatic approach from HMRC in the meantime would be appreciated by businesses.  Particular issues of uncertainty are:

1. What does permanence mean?  Could someone adding a few days to their UK holiday to work in the UK create a PE risk or could there be some de minimis?
2. In what circumstances could a home office or temporary accommodation (such as a hotel room) be a fixed place of business?
3. Are back-office, non-revenue generating roles preparatory and auxiliary such that they will not create a PE?
4. What impact, if any, would it have if several non-revenue generating employees happened to be in the UK, either concurrently or consecutively?

Income Tax / Social Security

• Companies would value a pay as you earn (PAYE) safe harbor, where they would not be liable for PAYE withholding if an employee was in the UK below a threshold period of time, e.g., 60 days.
• The number of social security agreements is lower than the double treaty network, creating gaps, and even the existing agreements do not cover employees working in multiple countries at the same time. 
• The EU has recently issued guidance that confirms that it is not important who initiates the cross-border working, provided it is agreed by the employer (formally or informally).  Therefore, the fact that it is initiated by the employee should not stop an employee from obtaining an A1, evidencing that they are paying social security in their home country.  If the cross-border working is supposed to last longer than 24 months, the posted worker rules will not apply and the multi-state worker rules should be considered.  The OTS understands that HMRC has agreed to adopt a similar position and so we await formal guidance on this.

Domestic Hybrid Working

• Companies requested clear guidance from HMRC on the tax implications of hybrid working.  No doubt, employees would also find this helpful too.
• One significant area of focus for hybrid workers is whether travel expenses are tax-deductible or not.  Employees may believe that they are tax-deductible, but the rules and guidance relating to expenses mean that they are usually not tax-deductible.
• Companies were also keen for the distinction in tax treatment between employer-incurred costs and reimbursed costs for home office working equipment to be removed.  Companies often find it practically difficult to track and recover home office working equipment and doing so may outweigh the value of the equipment, thereby impacting the tax treatment.
• Certain benefits are linked to employees having a permanent workplace, e.g., cycle-to-work schemes, and so it was questioned whether such conditionality was necessary or whether it excluded those who perform hybrid work from participating in such schemes.
• Guidance on whether renting flexible working space for employees is a taxable benefit and whether that could be considered a permanent workplace.