With more and more people working from home during the pandemic, many have pondered both whether this shift will endure after Covid eases and what the implications of this might be.  While many have pondered what impact this might have on towns and cities if people move out of cities and into quieter (and ostensibly cheaper) locations as location is no longer a factor in their work.

Research from the University of Leeds goes one step further and explores the implications if the work (and possibly the workers) leave the country entirely.

While trends such as offshoring and digital nomadism have both been around for a little while now, the study examines the fiscal implications if the move towards remote working for 40-50% of the workforce during Covid may prompt managers to look overseas for workers on a permanent basis.

Fiscal cliff

The authors highlight that while work may be performed in a country, so long as workers are physically based elsewhere, the country will lose out on income tax revenue.  When assessing the possible impact on the UK economy, they suggest it could result in up to £32 billion being lost in personal income tax revenue.

The consequences of work being moved offshore would also have an obvious impact on purchase taxes, such as VAT, and potentially even corporate income tax.

“The acceleration of digitalization and the spread of remote working internationally as a result of the pandemic poses very significant challenges to personal income taxes,” the researchers say.  “New mobile workers are likely to be at top of the income distribution, and even a small number could result in significant revenue losses to the UK, of between £6 billion and £32 billion.”

Moving jobs

The researchers suggest that around 31% of jobs in the UK could be performed remotely.  Of the £187 billion or so paid in income tax in a typical year, some 66% is paid by either higher rate taxpayers or additional rate taxpayers, who the authors believe are most likely to be among those working from home.

This group is also, the researchers argue, most likely to be internationally mobile, and the loss to income tax could be anywhere between 2% and 10%.  This risk is heightened by the likely competition internationally on measures such as income tax and employment rules.

“The likely effect will be a tightening of employment rules, introduction of new tax avoidance rules, and increased personal income taxes competition with countries fighting to attract new mobile workers,” the researchers say.

“The impact of these labor changes is likely to be more significant in countries like the UK, which relies heavily on income tax—especially from a small number of high-income—and now potentially mobile—taxpayers.  How big these challenges are and how countries will react to them will be a key issue in the coming years.”

When social security contributions are added to income tax, the researchers believe the potential losses could amount to around £32.5 billion per year.  It’s an issue that they believe warrants discussions internationally alongside those that happened recently around corporation tax.

“This crisis has the potential for much wider economic and societal ramifications than the challenges to corporation tax,” they conclude. “The challenges of adapting our tax systems to a digital economy are far from over; indeed, they have just started.”