‘Stealth’ expats fail to keep HMRC in the loop

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The number of people informing the UK tax office they have moved out of the country has dropped sharply, with tax experts pointing to “stealth” relocations as a factor behind the change.

The fall comes in spite of the rise in a “work from anywhere” culture since the pandemic, data showed.

A freedom of information request revealed the number of P85 forms completed by people telling HM Revenue & Customs they had left the country either permanently or to work abroad for at least one full tax year slumped by 43 per cent between 2019-20 and 2022-23.

As well as telling HMRC that a person has left or is leaving the UK, P85 forms are used to reclaim tax on their UK employment.

The FOI revealed that in the 2019-20 tax year 58,425 such forms were submitted online to HMRC. But since then, there had been a steady decline in the number of forms sent, with 46,083 submitted during 2020-21, 33,136 in 2021-22 and 33,179 in 2022-23.

Jay Sanghrajka, international tax partner at Price Bailey, the accountancy firm which made the FOI, said there could be various reasons behind the fall, including a decline in formal overseas secondments organised by employers.

But he said: “What we are seeing instead [of overseas secondments] is a surge in informal arrangements in which directors or staff work abroad, often without the knowledge of their employers.

“Whereas overseas workers might get away with not reporting short-term stints, we are increasingly seeing employees who are based more or less permanently abroad. This can trigger all sorts of tax, social security and other legal consequences for both individuals and employers.”

Many of these expats were likely to be self-employed people or contractors whose physical presence would not usually be required at a UK workplace, he said.

John Williams, a tax director at accountancy firm Moore Kingston Smith, said the issue of employees relocating without telling their employers “continues to crop up among the employers we speak to”.

“Since the pandemic, there’s been a new craze of individuals wanting to work remotely overseas for their UK employers. And employers have often found out about it after they’ve gone and done it,” he said.

“They don’t tell their bosses because they think their bosses might say ‘no’ or they know that they will say ‘no’, but they think ‘I’ve got a laptop. I can work from anywhere’ and they put a blurred background on their screen so no one can see the palm trees.”

He added the decline in P85 forms “was definitely related” to this trend, as employees making undisclosed relocations would often not be aware of the various procedures they would need to complete, such as the forms.

People often mistakenly thought that as long as they were paying tax in the UK they would not need to pay tax in the country they had moved to, Williams said. But in the worst case they could end up facing tax charges in two countries.

Simply by working from abroad, an employee or director can create a de facto business branch for tax purposes in the overseas country. This is known as a “permanent establishment” and means some of the business’s profits are potentially liable for tax in the country in which the individual is working, as well as in the UK.

Alongside the business tax risks, individuals might expose themselves to income and social security taxes on earnings generated while working abroad.

Sandy Bhogal, partner and global co-chair of tax at law firm Gibson Dunn, said: “There are some ‘stealth relocations’ going on, but I also think a number of employees and their employer don’t understand the rules and so think they are compliant when they are not.

“Covid made relocating almost consequence-free, as a number of tax authorities worldwide took a temporarily relaxed approach. And that mindset has remained to an extent.”

But other tax experts said the P85 form may not be the best way of assessing whether there had been an increase in remote working abroad — either above board or on the quiet.

Rather than people leaving the UK for extended periods of time, the “new equilibrium” was individuals “with the ability to do so travelling back and forth,” said Will Johnstone, tax director at another accountancy firm, MHA. Such individuals would not typically fill in a P85 form, he said.

HMRC said P85 forms were not mandatory for everyone who moves abroad, but allowed people to claim back tax from their UK employment and inform the authority about UK income they would receive after leaving.