To PEO or not to PEO: are Professional Employer Organizations as favourable in the UK as the US?
Professional employment organizations (PEOs) have long been a preferred employee management option for small to medium-sized US businesses. They work by streamlining the administration of HR functions including payroll, compliance and compensation, which can mount when managing employees across several US states. This allows businesses to provide employees with access to better, more affordable benefits and frees up time for more strategic activities, while retaining all key important HR decisions.
Although this may be a favourable structure in the US, PEOs and other similar solutions are not necessarily the ideal option when looking to expand to the UK. When it comes to PEOs and UK expansion, there are five key issues US businesses should be aware of:
1. Offering UK stock options to recruit, incentivise and retain employees
Making use of HM Revenue & Customs’ flagship enterprise management incentives (EMI) scheme and its favourable income tax, social security and capital gains benefits, is a key attraction for businesses expanding into the UK. EMI qualifying conditions require businesses to look at control of their company, including factors such as the working time of employees. Managing tax on stock options in the UK when PEOs are added into the mix, will therefore require careful planning.
2. Accessing talent in a competitive UK environment
The UK is arguably one of the easiest places in the world to start a business, with fewer regulations than many other countries. Given the competitive environment that exists for talent, a US business new to the UK might confuse employees with co-employment relationships where pay cheques and benefits are being issued by another company. Having an outside PEO influence on your company culture, and loss of control over essential processes, can lead to resistance from employees. Losing company culture may also weaken bonds between your new office and your GHQ.
3. General Data Privacy Regulation (GDPR) requirements
The EU’s GDPR has far reaching requirements for companies based in the US where the operations rely on the free flow of personal data between the EU and the UK. Data subject to GDPR restrictions can include customer names, addresses and credit card details, as well as HR and finance data. Keeping employees’ personal data secure and maintaining control of how that might be transferred to and from the US, especially when using PEOs, needs to be considered. Taking advice on this issue and how you track and transfer data should be managed carefully.
4. Taking advantage of UK research and development (R&D) tax credits
The UK R&D tax credits are some of the most generous in the world, and for innovative companies with qualifying costs, a hugely beneficial relief to support growth. Money spent on staff is the main category most businesses claim relief on. If those staff costs end up falling into the externally provided worker rules because they’re via a PEO, a lower rate of tax relief is given and with further specific rules on their inclusion in the R&D claim.
5. UK tax regulation requirements
Some businesses make use of a PEO and do not form a UK branch or company in the hope of steering clear of UK tax and reporting requirements. However, it’s worth being aware that a permanent establishment (PE) tends to be defined by UK legislation and the relevant tax treaty. This is either where a company has a) a fixed place of business in a territory through which the business is carried on, or b) an agent acting on behalf of the company, and habitually exercises in a territory, authority to do business on behalf of the company. If your co-employed workers are going to hold themselves out as employees of the company, negotiate or bind the company to contracts, these threshold tests will probably be tripped. So, while PEOs are often ‘marketed’ by some providers as a way of avoiding a taxable presence in the UK, they are only likely to achieve that in a limited number of circumstances.
While PEOs may be initially attractive to US companies expanding to the UK by offering a one-stop solution for employment, it’s crucial to understand that not all cross-border employment concerns will be addressed. Moreover, some vital benefits of doing business in the UK, might be in jeopardy without clear planning.
If you would like to discuss the options available on your expansion to the UK from the US, please contact our Head of North America, Tom Moore.