Tax Matters for UK Employers and Their Remote Workers in Spain
With the rise in remote work, many UK employees choose to work from abroad, especially from Spain, drawn by the warmer climate and lifestyle benefits. This trend presents complex tax, payroll, and compliance issues for UK employers, particularly given Spain’s stringent tax and social security regulations. How should UK employers adapt to these challenges? Here’s what companies need to know to stay compliant and support their remote workers effectively.
There is a rise in UK remote workers in Spain. We must remain compliant in the United Kingdom (UK) and Spain. It is possible for UK workers to move to Spain on a Digital Nomad Visa, allowing them to stay up to five years. That way, they can live and work in Spain for a UK employer.
Trends and Statistics
Remote work has surged since 2020, with recent studies indicating that over 15% of the UK workforce has worked from abroad for extended periods. According to Spain’s National Statistics Institute, Spain welcomed over 1.2 million new residents in 2023, a significant portion of whom are foreign nationals, including remote workers. This growth underscores the urgent need for businesses to align with tax regulations abroad, especially for employees residing in Spain for over 183 days annually.
Determining Spanish Tax Residency
According to the Spanish tax authorities, individuals who spend more than 183 days in Spain within a calendar year become tax residents, regardless of whether their employment contract is with a foreign company. Spanish tax residency typically results in an obligation to pay taxes on worldwide income in Spain, creating a need for employers and employees to review tax withholding arrangements.
For UK employees, becoming a tax resident in Spain means they must declare and pay taxes on their UK income, including salaries. Employers should proactively support these employees to ensure they understand the requirements and potential tax credits available.
Utilising the UK-Spain Double Tax Treaty
The UK and Spain have a double tax treaty that can prevent double taxation on income. The treaty generally allows taxes paid in the UK to be credited against taxes due in Spain on the same income. For employers, this means rethinking payroll processes and possibly shifting employees to a gross salary model.
Employers should assist employees in understanding the foreign tax credit process under the treaty to avoid duplication of tax obligations. The treaty can be complex, so a dedicated tax advisor is often necessary to clearly understand credit claims and treaty provisions.
Adjusting Payroll to Reflect Local Tax and Social Security Obligations
Gross Salary Payments: When an employee moves to Spain and becomes a tax resident, UK employers often cease UK payroll tax withholding to avoid double taxation, paying the employee their gross salary. This allows employees to handle Spanish tax directly, though guidance from tax professionals is critical.
Handling Social Security Contributions: Spain requires contributions to its social security system, which UK companies must address. Employers have a few options:
Non-Resident Payroll in Spain: Large companies may establish a Spanish payroll to manage contributions.
Employer of Record (EOR): Using an EOR allows UK employers to meet local social security requirements without setting up a legal entity.
Employee Self-Payment: Some employees can opt to pay social security directly, though this can add administrative complexity.
HMRC Form P85 (Pay wages gross to the employee)
Form P85 is important for employees moving from the UK to Spain as it helps in officially notifying HM Revenue and Customs (HMRC) of the change in residency. When a UK employee relocates abroad for work, submitting Form P85 can:
End UK Taxation on Worldwide Income: Filing a P85 indicates the employee’s departure from the UK, which can help end their UK tax liability on worldwide income if they become non-resident for tax purposes.
Apply for Tax Refunds: If too much tax was paid before leaving the UK, the P85 form can initiate a process to reclaim overpaid income tax for the tax year in which the employee left.
Confirm Residency Status: The P85 form also helps HMRC establish the employee’s residency status, which is vital in determining tax obligations on income earned abroad.
While the employee may continue to work for a UK-based employer, submitting Form P85 can streamline the transition of tax residency from the UK to Spain.
Establishing Work Policies and Compliance Measures
Many UK companies are developing comprehensive remote work policies to address the growing trend of employees working abroad. These policies typically cover:
Residency Status Checks: Ensuring employees understand tax residency implications.
Compliance with Tax and Social Security: Clarifying obligations in Spain and outlining available employer support.
Travel Duration Limits: Employers may restrict international remote work to a set number of days per year to minimize compliance burdens.
Temporary Work Arrangements: For employees staying in Spain for under 183 days, UK employers might still opt to withhold UK taxes. However, in cases of extended stays, companies often need a formal approach that includes adjusting payroll processes and compliance measures.
Permanent Establishment and Legal Risks for UK Employers
One of the primary concerns for UK employers with remote employees in Spain is the potential for a “permanent establishment” (PE) to be created, exposing the company to corporate tax in Spain. If employees in Spain perform substantial business functions or decision-making roles, this can trigger PE status.
To avoid this, companies often restrict the type of work employees can perform while abroad or limit their duration in specific roles. Legal and tax advice is crucial here, especially for companies with multiple remote employees in Spain.
Three Examples from Large UK Companies
Technology Company Case Study: A UK-based tech firm with an employee working remotely from Barcelona managed compliance by using an Employer of Record. This minimized tax and social security issues while allowing the employee to work as a local contractor under the Spanish system.
Finance Sector Approach: A UK finance firm, facing permanent establishment risks with employees in Madrid restricted remote work to under 90 days per year. Employees staying beyond this period needed to switch to a local entity within the company’s Spanish subsidiary.
Healthcare Industry Scenario: A large healthcare provider allowed employees to work remotely from Spain but required self-payment for social security through Spain’s TGSS portal. Employees received gross salary payments, simplifying tax obligations under the UK-Spain tax treaty.
FAQs on Remote Work and Tax Compliance in Spain
Will the UK tax still apply to my salary if I become a Spanish tax resident? No, UK tax generally does not apply if you’re a tax resident in Spain and qualify under the UK-Spain double tax treaty. However, declaring and paying taxes in Spain will be necessary.
What happens if my UK employer doesn’t pay Spanish social security? In that case, you may need to register with the TGSS to pay contributions directly, though this can vary by company policy.
Can I use the Beckham Law as a Spanish citizen returning from the UK? If you meet specific criteria like the 10-year absence rule, the Beckham Law could offer a flat tax rate on Spanish income.
How can my employer help with Spanish tax filing? Many employers provide access to tax advisors to guide employees on local filing requirements and to leverage the double tax treaty.
What is a permanent establishment, and why does it matter? A permanent establishment could mean your employer owes corporate taxes in Spain, which most companies avoid by limiting remote work activities.
Remote workers must ensure they get personal tax advice for the United Kingdom (UK) and Spain before working remotely in Spain.