22nd October 2020
A Double Tax Treaty (DTT) works to ensure that where two jurisdictions can tax the same thing, the resulting tax position is ‘fair’. However, no DTT could have foreseen the impact of COVID-19, and there can be some unexpected results for those who are required to work from home by their employer and decided to do so outside the UK.
For those who: work in the UK for a UK employer; have been working from home (perhaps since March); or who have left the UK for their second jurisdiction to work for an extended period, it’s important to look carefully at their UK tax position versus the second jurisdiction’s tax position to ensure they are taxed correctly.
At first glance, it seems so simple. They work for a UK employer who deducts UK Income Tax at source under PAYE rules. However, when factoring in an extended period abroad, the terms of the relevant DTT that would usually avoid any cross border issues suddenly don’t help, meaning there is a need to understand how the DTT applies to ensure things are right first time and they don’t suffer unnecessary tax, penalties and/or interest in both jurisdictions.
Take the simple example of Ms. Smith, originally from Country Y (which has a DTT with the UK) but who has lived in the UK for a few years working for City Ltd. In March 2020, she was told to work from home and she decided to return to Country Y to carry out those duties, remaining there since. As it’s now well past 5 October 2020, she has been in Country Y for over 183 days in the 2020/21 tax year and is now treated as a ‘resident’ in Country Y under their own rules. She continues to satisfy the UK’s residence tests.
Despite being a resident in both the UK and Country Y for 2020/21, she is still treated as a UK resident for the purposes of the DTT. However, where the DTT would normally result in her UK earnings being taxable only in the UK, because she has been in Country Y for at least 183 days this special relief cannot apply and so she is taxable in Country Y on the proportion of her earnings that relates to the time she has worked in Country Y.
The lesson here is to make sure you liaise with suitable tax advisors to avoid pitfalls. Your employer may also have payroll reporting responsibilities in Country Y, and in some countries there is no de-minimis and payroll reporting is required from day one.
If you have any questions about DTT, please contact James Walker or your usual haysmacintyre contact.