Lucie Mitchell investigates whether the pandemic will lead to more digital nomadism and what the tax barriers might be.
The pandemic triggered a dramatic rise in remote workers, and this trend has continued as more and more employees have decided to take advantage of being able to work flexibly from anywhere. At the same time, the number of digital nomads – people who travel from country to country working remotely from any internet-connected location – has also
increased significantly in the last two years.
“While the term has been around for over two decades, the trend for digital nomads has really taken off in the past few years, especially accelerated after the pandemic by those wanting to resume travel but work at the same time,” comments Matt Wilson, co-CEO and co-founder of global employment partner Omnipresent. “Nowadays, digital nomadism isn’t reserved for entrepreneurial backpackers; it’s a flexible working style that people from all walks of life aspire to.”
Several countries are now attempting to attract this demographic, by promoting digital nomad visas.
“A number of countries have more recently appealed directly to the digital nomad population by offering short-term work visas,” says Lee McIntyre-Hamilton, tax partner at Keystone Law. “Countries such as Bermuda, Barbados, Malta, Croatia and dozens of others have introduced visas which enable individuals to work temporarily in those territories.
“Where those countries, like Bermuda, have no income tax, there is an added bonus for digital nomads,” he continues. “Where countries normally levy tax then, assuming the digital nomad is not resident in any other country, they will normally be subject to income tax on employment income of the country that they are living and working temporarily. However, in many countries, they may be able to take advantage of special tax regimes aimed at foreign nationals.”
Many countries offer tax credits that help digital nomads and remote workers reduce their taxes, adds Wilson. “For example, individuals who have to pay taxes to the foreign country where they’re currently living and working may be able to deduct those payments from their tax obligations in their home country.”
This increase of digital nomads does raise the question as to whether it will have an impact on the UK talent pool and their employers, with the potential for digital nomad visas becoming a ‘brain drain’ on the UK.
According to McIntyre-Hamilton, the added pressure on UK employers is inevitable, given the fact that it has never been easier for employees to work remotely overseas. “Where foreign countries make it easier for employees to work in those countries, it will inevitably put a greater pressure on UK employers to both retain and attract new talent.
However, the picture is not as bleak as it may seem. From a tax and employer compliance perspective, there are two key reasons for this. First, globally, there are very few employers who offer a completely flexible ‘work from anywhere’ policy, because employer compliance obligations, associated with employees working remotely overseas or becoming digital
nomads, are immense. Therefore, UK employers are not out of step with their overseas competitors.
“Second, the UK has an attractive tax landscape for employees who are seconded to the UK on a temporary basis. Furthermore, foreign nationals working in the UK are normally able to claim tax relief on their non-UK workdays for their first three tax years of residence. Together, these tax reliefs alone can substantially reduce the cost of employment in the UK for those working in the UK temporarily.”
Yet with more digital nomads working abroad, both UK employers and the UK government do have a part to play in reducing the risk of brain drain.
“Employers can reform their employment policies to adapt to emerging global working practices, such as introducing additional policies that enable employees to work remotely overseas for a limited duration each year,” suggests McIntyre-Hamilton. “They could also look for new ways to engage talent overseas, such as taking on certain employees on a self- employed basis to work from home in their home country.”
He believes the government could be doing more too. “They could be simplifying the tax reliefs available to globally remote workers, digital nomads and temporary secondees to the UK and then raising their profile. For example, Spain and the Netherlands have done a great job at marketing their respective tax reliefs so that they are familiar to many in the international employment community. The tax benefits of working in the UK are much less well known.
“The UK could also introduce our own version of visas for digital nomads. Whilst this won’t solve the problem, it will attract at least some new talent to the UK and raise the profile of the UK as a country which is open to foreign talent and is moving with the times.”
The Office of Tax Simplification is currently reviewing tax laws, which will look at factors such as the tax and social security implications for those working across international borders. The review could change how hybrid workers and digital nomads are taxed. It was also hoped that the plans to repeal IR35 working rules, announced by Kwasi Kwarteng
in his mini budget in September, could help to address brain drain by making it easier to hire contractors and retain UK talent. However, the new chancellor Jeremy Hunt has since scrapped these plans.
“The Off-payroll working rules have had a very damaging effect on contractors, UK plc and the UK economy as a whole,” remarks Dave Chaplin, CEO of tax compliance firm IR35 Shield.
“Before the roll-out, we saw many contractors turn their backs on medium and large UK firms and offer their services remotely to overseas clients. The brain drain began then and that drain of talent will continue as the UK’s flexible talent is voting with their feet, moving abroad, working for overseas clients, and thriving. UK plc will continue to be denied access to the best talent and the UK government is missing out on collecting taxes from this nomadic group of workers who are paying their taxes elsewhere.”
There are also a multitude of tax and compliance obligations for employers to consider when UK employees work across international borders.
“For example, under overseas tax rules, it is possible for the activities of the employee to unintentionally create a taxable corporate presence in the overseas country where they are living and working,” comments McIntyre-Hamilton. “If triggered, this would require the UK employer to register overseas to file corporate tax returns, pay corporate tax, operate a foreign payroll and fulfill other associated foreign compliance obligations.”
With a whole host of other considerations too, such as immigration, employment law and insurances, it’s critical that employers fully comprehend the laws and tax rules in the areas where the work is being completed.
“Whilst globally remote workers and digital nomads are on the increase, the world’s employer compliance regime has yet to catch-up,” warns McIntyre-Hamilton. “As a result, most global employers are only operating limited globally remote working policies, either allowing employees to work overseas for very short periods or enabling full globally remote working and/or digital nomadism in only limited cases.”