Working from home, becoming the new normal?
Due to the current situation and the UK entering into the “new normal”, more and more people are starting to work from home more frequently. One of the issues that arises from this however is the potential creation of a Permanent Establishment for a non-resident entity.
A Permanent Establishment is created under the following conditions:
- Where there is a fixed place of business in the UK through which the business is operated;
- Where there is an agent acting on behalf of the business which habitually concludes contracts in the name of that business.
For there to be a fixed place of business, the following three features must be present:
- There must be a geographical place of business
- That place must be fixed
- The non-resident’s business must be carried on through that place.
An employee working from home will not usually create a permanent establishment however if the work that is being done by the employee is considered as trade such as closing contracts and/or making strategic decisions for the company this can be seen to create a permanent establishment. Each case is judged individually by HMRC and more guidance has recently been released stating that the rules allow flexibility due to Covid-19.
That being said, the case is different for self-employed individuals, as the work being carried out will constitute as trade. However, each case is judged individually by HMRC depending on facts presented.
As well as the potential of creating a Permanent Establishment, other aspects need to be considered when making the decision to allow your employees to work from home such as whether it is practical for the employee to work from home. For example if the equipment the employee needs to be able to work isn’t readily available for them or cannot be moved from the original workplace to the home it would not be practical for the employee to work from home.
Also, in some countries an employee may incur extra income tax to be paid if they are in a different jurisdiction from where they usually work. Following on from this point, social security may be an issue, but only if the home of the employee is in a different country from the one in which they usually work.
If you have any questions, please do reach out to your usual BDO representative.