Nomad employees: new HMRC guidance

HMRC has published new guidance providing a number of examples involving employees of overseas entities working temporarily in the UK and considering whether the permanence condition of the fixed place of business permanent establishment (PE) test might be met in those scenarios. Whilst a welcome development, the guidance published in the International Manual at INTM264435 is ultimately limited in scope and businesses with employees working occasionally in the UK may still need to consider their position on a case by case basis. In addition, even where a fixed place of business PE is not established, the position regarding dependent agent PEs will separately need to be considered.

Background

One of the most pressing issues facing businesses today is how to ensure that the international tax rules do not adversely impact on the recruitment and retention of internationally mobile employees (nomad employees). At present, those rules give rise to a number of challenges that can adversely impact on recruitment and retention due to the lack of clarity and certainty over the application of the rules to modern working practices. These can range from scenarios involving employees who wish to work remotely from home in a different jurisdiction, employees who use the offices of an affiliated business in a different jurisdiction or simply employees who wish to work temporarily in a different jurisdiction, perhaps simply extending a period of holiday or family visit in a location with a period of work. The challenges may be further multiplied in the case of individuals who wish to work from a range of jurisdictions.

The issue has been recognised at an international level with both the OECD and the UN Tax Committee currently in discussions over how best to address these challenges. One particular concern is around the recognition of a PE in the jurisdiction where the employee carries out their activities for the entity where this is not the normal place of business of the entity. The existence of a PE in that jurisdiction would, in principle, give taxing rights to that jurisdiction over the profits arising from the activities of that PE.

HMRC guidance

HMRC’s view is that, since this is an international issue, it requires an internationally agreed solution rather than a purely domestic approach. Nevertheless, HMRC has recently published guidance at INTM264435, including worked examples of how it considers the current rules would work in practice in a number of different scenarios.

In general, the international tax rules recognise two types of PE:

• Fixed place of business PE
• Dependent agent PE.

HMRC’s new guidance focusses on the question whether employees working on an occasional basis in a different jurisdiction might give rise to a fixed place of business PE. Based on the OECD guidance, a fixed place of business PE will need to have the following characteristics:

• there must be a place of business, normally premises or a site;
• the place of business must be fixed, that is it must be established at a distinct place and have a certain degree of permanence, and
• the business must be carried on through this fixed place of business, normally by the personnel of the enterprise.

The examples, in general, consider whether the UK activities of an employee of an overseas business might have the necessary degree of permanence to amount to a fixed place of business PE, without considering either the other aspects of the test for a fixed place of business PE or whether the activities might give rise to a dependent agent PE.

Example 1: Juan, who works for a foreign entity in State D, comes to Brighton on holiday and stays on to work here for a total of 40 calendar days including his holiday, using the office of a UK affiliate company as a base. He enjoys the experience so much he decides to do the same thing six months later.

HMRC confirm that, in this scenario, Juan’s presence would not create a fixed place of business PE because the permanence test would not be met. However, if the arrangement was expected to be an annual occurrence for Juan and/or his successors or colleagues in his team, HMRC consider that there is a possibility that the cumulative time spent in the UK could trigger a PE. This example is helpful in confirming that work days being tagged on to holiday will not create a UK PE provided UK presence is ad hoc, rather than amounting to a committed and sustained presence in the UK.

Example 2: Francine, a French national with an English partner, joins a French company on a permanent contract which permits her to spend a fixed three-month period each year working in the UK.

In contrast to Example 1, HMRC consider that Francine’s presence would meet the permanence test for a fixed place of business PE because the cumulative time she is anticipated to spend in the UK over the coming few years is significant and her presence in the UK is fixed and so not random or sporadic. Whether a UK PE would be created would depend on the wider facts and circumstances, such as the nature of the activities carried out by Francine and whether the actual location used by Francine is ‘at the disposal’ of the business. Generally, example 2 indicates that HMRC take the view that having a contractual entitlement to spend a fixed amount of time in the UK and this being expected over a number of years is enough to potentially meet the permanence test.

Example 3: Alexei, Luca and Sara all work for a foreign entity in State C. They come to the UK on holiday for the same part of the year with their families, staying at different addresses. They are all permitted to stay on an additional 30 days to work in the UK by their employer, using the office of a UK affiliate company as a base.

HMRC confirm that, under such an arrangement, the employees’ presence would not create a fixed place of business PE because the permanence test would not be met. This example is helpful in confirming that ad hoc presence (as in Example 1) will not give rise to a PE, even where the ad hoc presence takes place at the offices of an affiliated business.

Example 4: Company T has a team of staff in its Zurich office. Over the course of nine months, six staff are permitted to spend six weeks each, in turn, at an affiliate company’s office in London working on a project.

HMRC consider that this scenario would meet the permanence test for a fixed place of business PE because the changing identity of the visiting personnel doesn’t affect the continuity of Company T’s presence in the UK. Ultimately, the test is whether the business has a PE in the UK, and the fact that each individual may not spend a significant time in the UK does not prevent a PE arising where there is continuity and permanence of presence through the company’s staff generally.

Example 5: Jasmine, who works for a company based in the UK, is seconded to cover six months of maternity leave for a related foreign company in State E. She does this remotely from her UK office and her home in London.

HMRC consider that this situation will not automatically be exempted from triggering a fixed place of business PE of that related foreign company in the UK and the facts will have to be examined as usual in determining if a PE is triggered. The example is instructive in suggesting that sustained presence of even one individual in the UK for a six month period could in HMRC’s view meet permanence requirements. Of course, as the example notes, this is only part of the exercise in establishing a PE and other factors would need to be considered such as whether the related company in State E has a location at their disposal in these particular circumstances or whether activities might be viewed as preparatory or auxiliary in nature.

Comments

The publication of these examples by HMRC is certainly to be welcomed and goes some way to providing comfort that the permanence condition of the fixed establishment PE test will not be met in a number of commonly encountered scenarios involving employees working in the UK on an ad hoc basis.

However, this is only one element of the test for determining whether a fixed place of business PE is created and it would be helpful if HMRC’s guidance could be widened to cover other elements, especially the application of the “at the business’ disposal” condition to scenarios involving employees working from home or from hotels.

Obviously, the guidance does not assist in relation to the activities of employees of a UK company temporarily working in other jurisdictions, where the existence of a PE would depend on the approach of that other jurisdiction. Although most jurisdictions apply the same broad rules, there is not currently a single, consistent approach in all jurisdictions and this can lead to difficulties for businesses with employees who are internationally mobile. This is why, ultimately, international consensus is needed to address the problem.

Finally, as the guidance notes, the examples do not consider the question whether the activities of any of the employees in the above scenarios might give rise to a dependent agent PE and further examples involving the application of the dependent agent PE tests to temporary and ad hoc working arrangements would also be helpful. The guidance also does not address the personal and payroll tax considerations where individuals come to the UK to work whilst employed by a foreign entity, which will need to be considered separately when analysing the position of nomad employees.