There is currently a deficit of skills, especially around web development and digital technology, affecting multiple industries and sectors. Because of this, many UK-based companies are now employing remote workers in foreign countries such as America, Amsterdam, and Spain.
What caused this lack of skilled workers?
There are several factors creating the high demand and low supply of web developers, software engineers and other digitally skilled workers.
One factor is Brexit, and the end of free movement whereby the increase in EU citizens coming to the UK to work has not kept pace with overall employment growth in recent years. Another factor was the restrictions put in place because of Covid-19, which lead to a surge in companies wanting to bolster their online presence and invest in website development.
UK smaller spotlight
Research from IBM also shows that the UK has a smaller spotlight on software engineer training in relation to places such as Spain or Germany, resulting in a lower availability of skilled workers.
Is there an immediate solution for the shortage of skills?
For SMEs, it is becoming more challenging to hire and retain employees who have skills in digital technology and web development.
The competition between them and larger companies is becoming untenable as they cannot match the rewards and remuneration packages on offer. Because of this, companies are now deciding to hire permanent workers who are based overseas, as opposed to trying to get them to emigrate to the UK. While this appears to be a fast, immediate solution, there could be unintended further employment and tax ramifications.
Support available from the Government
R&D Tax Relief
Research and development tax relief is open to businesses in the UK to help offset their investment into these pursuits. But the Government is concentrating its aid to innovation within the UK meaning that restrictions may be put in place on overseas costs, even if it was previously accepted.
They have also implemented a PAYE/NIC cap, which links the level of repayable research and development tax credit to PAYE/NIC incurred by the business.
Example: A UK Company
For instance, a UK company investing in e-commerce functionality on their website or improving process efficiency by developing a new AI system, could find their research and development tax relief claims are notably restricted if the bulk of the work was carried out by an overseas based worker.
The company will need to analyse the costs and benefits, comparing research and development tax relief versus cheaper workers and larger recruitment pools.
What must be taken into consideration?
Employers must assess several factors before deciding to hire internationally located employees. The rules governing ‘permanent establishment’ are a key area of risk.
These regulations differ country to country. Depending on where the remote employee is based and their function, they could unintentionally create a presence for the UK business in the overseas jurisdiction. This is more likely to happen if the worker oversees something like management or sales. If a permanent establishment is created, then the business is likely to have increased reporting commitments and possibly be accountable for local sales and corporate taxes.
Local taxes – Crouching taxes, hidden costs
It would also be important for companies to consider local ‘withholding tax’ and the social security obligations of internationally based employees.
International jurisdictions would normally require a UK-based business to run a payroll locally, in order to report and pay local taxes and make social security contributions on behalf of their employee who lives and works there.
The company might also have reporting obligations in the UK if the overseas employee visited the UK for work. From the perspective of a business, this may lead to increased administrative burden and greater costs.
It is vital to investigate the social security system in the country where the remote employee is situated. This will aid in determining if the business and the worker are required to make any contributions
Both the business and worker are likely to be accountable for social security payments to the country in question, if it is a permanent remote working arrangement.
Local employment laws
Firms also need to be careful of local employment laws, it is vital they certify that their employees are in possession of any necessary work permits.
While it may seem apparent, companies that fail to ensure their employees have the correct documentation and are abiding by their country’s immigration rules open the door to severe reputational and financial ramifications. Employment contracts of internationally based employees might also have to be rewritten to cover local laws.
The protection of data is another huge risk for businesses when hiring internationally based employees. A lot of non-EU countries are not recognised under an ‘adequacy notice’, meaning their local laws do not meet an acceptable standard of data protection. For example America’s data protection laws do not meet this standard.
The UK has adopted European data protection laws, which means that businesses hiring remote employees based in non-EU territories could have to enforce additional data protection controls, such as preventing the cross-border transmission of personal data.
Should you be employing talented workers globally?
While employing talented workers globally requires additional consideration and organisation, SMEs should not discount it.
Those that plan ahead and manage the complexities will have a distinct advantage in the global talent skirmish, finding workers with the exact skills they need to remain effective and grow.