Living my best nomadic life
Pre-pandemic, the idea of lounging on a deck chair on a sun-drenched beach, tapping away on a laptop, with the freedom to explore exciting far-flung places at the same time as earning a living, was a pipedream for most people. Three years on, ‘how to be a Digital Nomad’ produces over 42,000,000 results on Google.
The implications of adopting a digitally nomadic lifestyle feature in the last report published by the Office of Tax Simplification (OTS) on hybrid and distance working. The report followed a review, undertaken in the autumn of 2022, bringing together evidence gathered by the OTS on trends amongst the increasing numbers of people deciding to work in different ways, including across borders.
The report also considered whether the tax and social security rules are flexible enough to cope in the changing environment and whether, and how, improvements might be made.
In relation to cross-border working trends, employees may contend they can ‘work from anywhere’ thanks to improved technology, but amongst its respondents the OTS did not find any business that permitted complete flexibility. Of the larger employers, a relatively small proportion (up to 10%) of their employees appear to be taking up the opportunity to work overseas on a short-term basis (typically 10-30 days per year), with more long-term or permanent work patterns involving residence in a country different from the business location, even less common.
As regards the Digital Nomad lifestyle – working online while moving across borders on a regular basis – it is interesting that the OTS found little data on how many people are taking up this approach, or how quickly the population is growing.
For most organisations the OTS spoke to, the expectation was that employee demand for cross-border working would continue to evolve, particularly because of the need for employers to remain competitive within the relevant sector. Employers were also cognisant of the need to keep abreast of legislative developments, predominantly in the areas of tax and immigration, which might make some countries more, or less, attractive for cross border working, or which might affect their risk profile.
Specifically in relation to tax breaks, the OTS referred to ‘Digital Nomad visas’ which commonly give individuals a year of residence without incurring any personal tax liabilities (if services are not provided in the country), and which are of increasing interest to businesses seeking to attract people to locations.
Increasing opportunities for cross-border working is not without its challenges, for both businesses and employees, and the OTS report focuses on some particular areas of concern.
These include social security contributions where the network of reciprocal agreements with other countries is less well developed than the tax treaty network for income tax purposes. For example, deciding in which country employer or employee social security is due may not be at all clear-cut if employees work in a different state to where they live, or work in a different state to their employer. Recognising that social security is connected to a variety of benefits such as state pensions, healthcare and child support, the OTS report noted the advantages of paying social security in only one country, thereby maintaining a continuous social security record, rather than collecting a number of pots of contributions in multiple places. Unsurprisingly there is a call in the report for greater clarity and updated guidance from HMRC on cross-border social security issues.
Another very important focus of concern in the OTS report relates to the risks, through employees working overseas, of creating a permanent establishment for the employer / partnership thereby bringing business profits into charge in that territory. Although businesses thought the tax due was likely to be negligible in these circumstances, the administrative burden of registering was seen as a significant one. The OTS found that some employers were alive to the potential problems and sought to mitigate the risk of creating a permanent establishment by permitting only short stays in a different country, or else limiting the type of work that could be undertaken or restricting those with certain roles from working overseas.
Again, there is a call for clarification from HMRC on the application of the permanent establishment tests in cross-border scenarios as well as a proposal for international rules to be updated to reflect more modern ways of working. It was thought that the UK should take the lead and champion this work with the OECD.
The OTS report provides a useful, high-level review of the risks and complexities involved in cross-border working and offers both policy makers and Digital Nomads much food for thought.