Managers can find it extremely attractive to ‘employ’ foreign staff resident abroad. The Internet makes striking up relationships with those seeking 'employment' easy. Many countries in South America and the Far East have high skill staff looking for jobs and these prospective ‘employees’ come at a fraction of the cost of someone in the UK. UK firms are highly interested in the idea of paying foreign workers to do work on their behalf from their homes in Kuala Lumpur or Belgrade or Bratislava. It’s particularly attractive for companies seeking workers with skills in data processing, IT support, telesales, product support, software and web technologies.
The issue then is how a British firm gains the services of workers in countries like Indonesia, China and even Eastern Europe? How does a British firm offshore its activities?
As UK Employees
Fundamentally, UK firms can't employ foreign workers directly. Even a worker living in Paris but commuting on Eurostar to London on Monday and back on Friday would need a UK address and a UK National Insurance Number. They would not be a foreign worker working abroad. They'd be a migrant worker employed in the UK.
Nonetheless, conceptually, a UK firm could issue a UK employment contract to a worker in Bratislava and call them an employee - even though the concept would be rather meaningless.
Because such foreign ‘employees’ will never visit the UK, there is possibly no UK tax liability either for the company or the ‘employees’ despite the fact that their efforts will generate income for the British ‘employer’.
Under this arrangement it seems possible to run monthly payroll and pay these foreign workers as if they are employees on an NT (No Tax) code. They are then paid gross. We are aware of some UK firms doing this. The UK’s taxation authority, HMRC, may issue NT codes to enable this practice but guidance from HMRC is confusing and ambiguous. HMRC suggests that it would need to assess whether the worker was an employee – even though the status of employee is meaningless for a worker in another country. Any assessment about employment would be under the local laws. And one of the most basic tests of employee status is that they are under management control – difficult when the employee is 5,000km away with no local supervision. This suggests that they'd always likely be considered a worker or self employed.
The closing comment from HMRC in a recent call was that this is not something that it gets involved in.
If a foreign worker were to be ’employed’ in this way, they have no locally enforceable employment rights and contractually are in a vacuum. They are neither employed here nor in their own country. They are effectively self-employed in their own country and are likely liable to pay tax for themselves and perhaps also for their distant ’employer’ (see below on taxation liability).
But the tax liabilities falling on the UK ‘employer’ remain unclear. Even if an NT code is issued, there may still be National Insurance liability with both employer and employee paying NI. The case would need to be put to an International Caseworker at HMRC to be determined.
This approach is legally unstable and will only lead to confusion. We don’t recommend that firms consider this option.
Many consulting firms operating globally engage consultants for contracts of varying duration in various locations. In such cases the parties (the ‘employer’ and the consultant) can sign an associate agreement. The associate enters the country in which the work is to be done under a short-term visitor visa (if not where they reside) and doesn't declare intention to work. The associate is self-employed and behaves as a sole-trader. The status of sole trader is well defined in the UK but the definitions's not so clear in other countries.
In reality the contract is signed under the laws of England and Wales (or Scotland etc.) and the worker has no local right of redress - they would have to come to the UK to petition a UK court. Nonetheless, it’s what many firms do. The parties build trust between them and the arrangement works – until there’s a dispute of course. It works well when associate and company have something the other wants and hence there is high mutual respect.
The associate agreement can point out to the associate that they are liable for tax wherever they are resident and it is for them to make whatever arrangements needed to pay this liability.
Under this arrangement the ‘employer’ pays against associate’s invoices.
There are four further (and more legitimate and robust) ways to engage foreign workers.
As Branch Office Employees
The first of the formal methods of employing foreign workers is for the UK company to open a Branch Office. A Branch Office is a way of registering a presence without actually starting a local company. Often a local accountant provides the facilities for the Branch Office such as a local address.
In this case, the Branch Office registers with the local tax authorities and pays the local workers from the accounts of that Branch Office. The UK company transfers enough funds monthly to the Branch Office and that Branch Office settles any local tax liabilities. The most common way this is done is to employ a local accountant who administers funds and settles tax liabilities.
The employees are employed with employment contracts under the employment laws of the country in which the Branch Office is registered (usually where the employees live).
As Employees of a Subsidiary
The second way is for the UK company to set up a local subsidiary. The worker is then employed by and has an employment contract with that local company. The local company trades ‘at arms length’ invoicing the UK company as if it were its customer – its only customer.
The local company then employs the local workers. They enjoy employment protection under the laws of the local country.
This is a clean way of employing locals whist retaining operational control but it is possibly carries the biggest administration overhead since someone has to manage the firm.
As Employees in Their Own Company
Alternatively, the local workers could form themselves into a local company and enter a business-to-business agreement with the UK company. This would apply too if there was only one worker - depending on the local law, they may be able to be a sole-trader. Trade would be at arms length but here the local company would be responsible for its own administration and accounting to local tax authorities.
In this case the UK company would loose operational control. The downside is that the owners of both companies would expect their firms to make profits - so profit would be taken twice.
This is possibly the lowest cost route for any UK company to employ local workers. There is no employment tax liability, though there may be customs and other duties normal when a company buys goods and services from countries where tariffs are in place.
As Employees of an Umbrella Organisation
The final option is to have them employed by a local firm with which the UK company has a relationship.
'Umbrella' companies exist in many countries - for example FESCO in China. These organisations facilitate the employment relationship. The umbrella company employs the worker. The umbrella company then invoices the UK company. The umbrella company, of course, charges a percentage of the workers’ pay for its services. There are many issues in employing umbrella companies that should be investigated - specifically about intellectual property and confidentiality - before choosing this option.
The alternative is to reach an arrangement with a friendly company, such as a dealer or agent, or even a client. Again the worker is an employee of the friendly company and the friendly company invoices the UK company and adds some fee for the facility.
Whether the umbrella or friendly company approach is in line with organisational strategy remains to be determined – this depends substantially on the relationship between UK company and umbrella/friend. There can be huge risks to the worker’s effort if that relationship is strained.
Both these approaches have benefits and risks and need to be investigated in full considering the country involved. The attractiveness of the approach will depend on the terms and conditions agreed with the umbrella organisation. By employing the foreign worker through a separate entity, the UK company has no control over them.
Before deciding which route to take, there are a number of issues to be considered and upon which a decision about the right approach rests.
One of the key reasons a firm forms in the first place and brings workers into the firm as employees is that their day to day work can then be controlled. Today, many employees seek to work from home. Managers are often disinclined to offer those employees the opportunity to work from home because this control is weakened. Work is done by home-workers but the quality and integrity of that work depends on the skills and knowledge of the worker and the tools they use. Similar issues apply when engaging foreign workers abroad.
In an effort to force quality and integrity into work done, firms often transfer technology and methods to sub-contractors and demand that these are used. But it still leaves the issue of control: a priority to the UK firm may not be a priority to a remote worker or their local employer. And a firm using remote workers abroad with no lawful contractual arrangement has no opportunity to close the activity and seize the resources and work done.
Workers with little or no interest in a firm are unlikely to be committed to it. They will stay and continue to perform for as long as they need the money from the firm. It's an economic arrangement.
Most firms need more than that. They need employees who will go the extra mile, who can be relied on to still be there in three, six or twelve months' time and who will develop with the firm. This needs mutual respect and that only really comes from granting the worker an employment contract. Employment contracts then extend to psychological contracts, with heightened commitment. For foreign workers, that must be with a foreign entity such as a local subsidiary or branch office.
It may also be that an financial arrangement such as granting a shareholding in the UK parent firm may further cement that commitment. Various arrangements are available to limit the power of such shareholders whilst letting them participate in the firm's success. Arguably also, engagement is independent of the economic contract between worker and UK company - ultimately commitment is built through trust. Trust is built through actions.
Under European law, enshrined in the UK's Copyright, Designs and Patents Act 1988, workers with the status of employee will automatically transfer rights in the work produced to the firm as employer. It's normal to put a 'transfer of inventions' clause in a UK employment contract, but this is just to inform the employee.
Elsewhere there is unlikely to be such clarity nor such automatic transfer of rights.
This is significant. It means that work done is not necessarily owned by the firm letting the contract for the work - despite the firm paying the worker for their efforts. Under local laws, such payment may only buy a licence to use the work. A worker could claim rights over the work at some later date, causing major risk and problem for the firm when it comes to sell the product within which the work is embedded. There have been many large payments made to buy rights in such instances. A local 'transfer of inventions' agreement may be used and a lawyer in the country where the worker is resident will be able to advise.
The Employment Rights Act 1996 grants employers the right to expect that all employees will regard their business affairs as confidential. Any leakage of information by an employee could be met in the UK with an injunction to prevent further disclosure.
This redress is not necessarily available to those employed in a local firm or in a branch office. And it's certainly not available to any firm casually asking a worker abroad to complete work. Any firm getting work done abroad will need to be sure that any information that it supplies to enable the work will not in turn be passed to a third party.
It's very common (and logical) for foreign workers to build expertise in a particular market. Firms should take care when passing information to foreign workers - it may appear in another firm's products!
One of the biggest worries that UK firms have when having work done abroad is that somehow the firm will be liable for some unknown taxation. There will be a liability in the UK for Corporation Tax and this may of course be as a result of profits earned on the foreign workers' efforts. But there may likely also be a tax liability in the foreign country in which the workers are resident, though the local tax authorities may have trouble getting paid since they can't pursue a UK firm from India or the like.
Some countries operate a withholding tax. Withholding taxes are proxies for corporation tax. Because the foreign tax authorities know that the UK enterprise will make profits from effort in the foreign country, and because they know they are unable to tax a firm in the UK, they will tax monies flowing in to the foreign workers at a lower flat rate, like 10%. This simulates or aims to recognise revenue and calculate a tax on the effective net profit of a local enterprise.
If one assumes a similar arrangement in all countries, various tax liabilities associated with employment will exist. The local tax authorities will want to have the worker pay national insurance. If the worker earns income (from whatever source) the local tax authority will want to have the worker pay income tax. And if a firm is formed, the local tax authority will likely want to receive a tax on its profits.
We recommend that any firm considering seeking to gain the services of foreign workers make appropriate local enquiries to understand the local tax liabilities of each party.
It seems that the safest approach to gaining effort from foreign workers from a tax perspective is to trade at arms' length and to buy and sell goods and services through a business-to-business agreement. In this case there may be VAT and tariffs due but at least such trade is well understood and the tax liabilities are known by many accountants.
Typically a country’s taxation authorities want to take tax ‘at source’ – rather than chase individual taxpayers after monies have been paid through invoices or payroll. This means that employment and social taxes are typically collected though a local employer. Anyone wanting to work in a country will therefore need to be employed by a registered local entity.
This potentially means that someone working for a UK firm and being paid from the UK, then posted to a foreign country, and working in a branch office in that country, could find themselves being taxed twice. UK HMRC would expect their tax revenues and so would the local tax authority.
There are double taxation agreements between countries to overcome this circumstance. For someone employed in the UK but working remotely, it would be unfair if they found that they were taxed in the UK and in the local country too. A double taxation agreement between governments allows tax to be taken once.
It is for the employee and their employer to make contact with the tax authorities in each country and to invoke the facilities of the treaty to ensure that they pay tax in one country only.
Typically social taxes have two components – a part paid by the employee and a part paid by the employer.
Any registered entity – such as a subsidiary or a branch office of a UK firm – will be expected to pay social security taxes in the local country for each employee. There is some suggestion that where there is no locally registered entity, some countries expect to collect the employer’s part from any locally engaged workers.
This reinforces the need to legitimise the legal position of anyone working locally – determining that they are either employee or self-employed. Workers employed under a UK contract and given an NT code to enable payroll could find themselves subject to National Insurance payments in the UK and social tax liability in the country in which they are employed.
HMRC will issue a Portable Document A1 for those who are self employed to signify that the worker remains in the UK National Insurance scheme. Portable Document A1 (also knowl as E101) is used in the EU to show where national insurance/social taxes are paid. Some foreign businesses demand sight of workers' A1/E101 before letting them on their site.
When a worker is an employee, he or she comes under a 'contract of service'. This is made under the laws of the country in which he or she works.
When a worker is self-employed (and hence is a sole trader), a 'contract for services' is needed. The difference between this and a business-to-business agreement typically struck between companies is subtle, focussing on defining the worker's status. Companies registered with the local Chamber of Commerce and tax authorities have special status. In the UK, such companies would be granted limited liability and being registered at Companies House. Sole traders have a lesser status.
The key clauses that any contract with a foreign sole-trader should include are a choice of law clause, an arbitration clause, a clause covering liabilities and indemnities for tax and a schedule covering the deliverables and invoicing arrangements.
Many countries require that employees pay pension contributions as they earn. Some have mandatory schemes that seek payment from both employer and employee, rather like the new UK scheme of Workplace Pensions. Foreign workers as associates or sole traders would look after their own arrangements and pay in to pensions from their own accounts. Those in subsidiaries and branch offices would pay via their local employers and would benefit from the employers' contribution too.
Whilst this blog has focussed on gaining effort from workers abroad, the discussion would be incomplete without a note about what are termed 'posted workers'. A posted worker is someone who is under an employment contract in the UK. By mutual arrangement between employee and employer, the employee agrees to be 'posted' or 'seconded' abroad. The time period and the conditions under which this posting occurs is for discussion but the essence is that the employee would remain under their existing (if modified) UK employment contract. Posting in this way is intended to be temporary. The terms of the posting are usually set out in a letter amending the UK employment contract.
A worker who is subject to (for example) a Tier 2 visa enabling them to work in the UK may elect to return to their home country. The conditions of the visa would likely then be breached after a period of absnce from the UK. If they were interested in striking up a relationship with the firm that sponsored their Tier 2 visa, they would need to do that in one of the ways discussed above. It would be wrong to use the posted worker approach.
Many countries require foreign workers to have a Work Permit. In this case, they must be employed by a local entity. Some companies cause further complexity by having the employee sign an employment contract under the host country laws whilst maintaining their UK contract of employment - this is a poor arrangement.
We are also aware of EU nationals who visit the UK for a couple of weeks a year and have been treated as posted workers. They are given a UK employment contract and an address at the UK company headquarters (as if a residence) such that they can get a National Insurance number. These 'employees' then work at home in their own country. They pay income tax and National Insurance as if resident in the UK. In one case, the local tax authorities where they lived also taxed the worker as if self-employed. Such practice by UK companies is highly unfair to the worker.
Securing the effort of workers in countries like China can be very attractive. But it is not as simple as putting them on payroll and paying them monthly as if employed in the UK.
Our advice is clear – if intent on ‘employing’ workers abroad, get specialist advice. What’s best in one country may not be best in another and the money flows involved can be very complicated. TimelessTime can investigate what's needed country by country. Call us and we’ll advise an approach and the next actions you'll likely need to take.
- In the UK it is simple to trade as a sole-trader or to form a company. This is not the case in many developing countries. Often it is impossible to form a company without significant capital, professional qualifications relevant to the business or involvement of a benefactor from an upper caste or class in local society.
- Abroad, often the local Chamber of Commerce accredits and approves the setting up of a company, branch office or sole-trader. Chambers of Commerce often take the role of Companies House in the UK.
- FESCO - Beijing Foreign Enterprise Human Resources Service Co.