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The digital nomad lifestyle is extremely popular for employees working at U.K.-based businesses, but relocating could lead to paying income tax in both countries — in addition to paying social security in their host nation.
Data from RSM UK’s The Real Economy report reveals that “33% of organizations are responding to staffing challenges by allowing employees to work remotely outside of the U.K. in a bid to combat recruitment and retention issues in a tight labor market.”
While this provides greater opportunities for employees seeking a change of scenery, it can result in “increased risks for both employers and employees.”
“These more complex global working arrangements bring increased risks for both employers and employees,” Global Employer Services Partner Joanne Webber stated in the report. “Businesses need to make sure they are managed and monitored properly, to protect both employee and employer. It’s encouraging to see that over a third of our respondents set restrictions on length of time employees can work overseas, and with a further third planning to do this in the next 12 months.”
For companies, the risks extend beyond employee taxation. A sales employee working remotely could inadvertently establish a “permanent establishment” for the company in their host country — triggering local corporation tax obligations. This scenario is particularly concerning for businesses as it could lead to unexpected financial liabilities and compliance issues.
The Telegraph reports that tax rules for digital nomads vary widely across different jurisdictions. In Spain, which consistently ranks as the top destination for digital nomads, employers can obtain a special code exempting employees based outside the U.K. for the entire tax year from local taxes.
However, such exemptions are not universally available, making it important for both employees and employers to understand the specific regulations of the host country.
There is also a need for compliance with local employment laws, immigration standards, and health and safety regulations. Employers must ensure they are aware of these requirements to avoid legal repercussions.
For instance, an individual working abroad might gain protection under the local employment rights of their host country, which could include enhanced rights against dismissal.
RSM suggests that employers need to be mindful of immigration rules. It is a common misconception that individuals may enter a country as a “visitor” and work remotely without first obtaining a work visa. Employers need to undertake a “Right to Work compliance check and may need to make local filings regarding individuals based in that location.”
The report raises the point that, while remote work offers significant benefits in terms of flexibility and employee satisfaction, it also introduces a range of tax, legal, and administrative challenges that must be carefully managed.
Both employees and employers need to be well-informed about the potential tax repercussions and other legal implications of working from abroad to avoid unexpected costs and compliance issues.
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