The reintroduction of a national lockdown in the UK, along with the wider impact of the coronavirus pandemic has led to many workers moving into long-term remote working patterns. This throws up a number of tax implications as well as the issue of balancing productivity gains against the loss of face-to-face communication between employees.
An article by Deutsche Bank Research came up with the interesting concept of a work-from-home tax of 5% of salary to pass on financial savings for those working remotely as a top-up to incomes of those workers displaced by the shift. Such a tax would no doubt trigger strong views from all sides of the debate. What though of the tax consequences under existing rules where a private equity firm sees a permanent change in the location of its workforce?
Business and tax issues triggered by remote working arrangements
Impact at the portfolio level
Employers may find themselves with a disparate workforce operating cross border where they will need to manage the tax implications, in addition to other issues such as information security / data protection, immigration and employment law to name a few.
The type of arrangements we often see range from employees working temporarily abroad to be close to family or friends to permanent arrangements to working abroad one or two days a week on a regular basis or even a permanent move abroad, such as to follow a spouse posted to work in another country.
From the tax perspective, the principal issues break down into managing any new payroll tax obligations as well as the corporate tax residence.
- Payroll taxes - it is important to keep on top of local payroll withholding obligations triggered by the number of days and permanence in a particular place. Social security should not be forgotten either as it applies different tests to determine where someone is resident and, as costs vary based on jurisdiction, working in a different location can significantly increase both employee and employer costs.
- Permanent establishment risk – this must be tracked closely to avoid the risk of creating a permanent establishment/branch, or taxable presence, in another country where employees are working abroad. The risk increases where senior employees are making strategic decisions or routinely negotiating contracts in another territory.
Tax residence - workers should be mindful of their own personal tax position through the number of days spent in one territory, which could change their tax residence or trigger double tax on their employment income as well as any wider income or investments. Management incentive plans and bonuses could also be impacted.
Social security - social security contributions need monitoring in terms of where to make payments and whether agreements exist to mitigate payments in more than one country. The UK’s departure from the European Union potentially restricts the availability of the previous EU agreements in place for detached workers (eg seconded/assigned) and leaves some uncertainty that needs close attention.
Impact at the private equity fund level
In our experience:
- private equity houses tend to be lean businesses often with one or two people covering in-house accounting, finance and tax;
- the private equity partners will typically be very international in background;
- and partners act with a great deal of autonomy, especially in the smaller businesses.
The consequence of these three factors is that during lockdown we have seen a number of private equity partners and employees relocate or go back to their home countries without always having full consideration of the immigration / payroll / tax issues and in some cases without having informed their firms.
From a tax planning perspective, this can put advisers and in-house teams on the back foot in terms of having to rectify issues rather than advising clients and executives in advance. Whilst this in itself is not a new phenomenon, the pandemic has exacerbated it.
Issues are similar to those at the portfolio level above, namely managing overseas corporate residence, as well as the administrative costs of cross border payroll implications.
It will be important for those responsible for tax at the private equity house to ensure they understand where these individuals are carrying out their duties so that the UK and international tax risks for the business can be fully considered. There may also be an impact on the tax reporting information that the private equity house and its advisers needs to produce where individuals have altered their residence status, for example to cover additional jurisdictions.
For partners of private equity firms who have relocated their families and spent considerable periods working overseas during the year, the dual-tax residence issues and risks of creating an overseas permanent establishment for the partnership has implications both for the individual and the business. Even if the individual is treated as non-UK resident under the UK Statutory Residence Test (see link for a tool as assess this), in most cases the trading profits allocated from the UK partnership remain taxable in the UK and a treaty claim may be required in the jurisdiction of the individual’s residence to avoid double taxation.
The tax treatment of any existing and future carried interest entitlements in the UK and the foreign jurisdiction will need to be reviewed from a personal tax perspective. Each country will have its own view on the taxation of carried interest and some treat it as employment income - this can be a complex issue which should be considered in advance of carried interest arising, especially where multiple jurisdictions are involved.