You’ve Found the Right Person. Now the Tax Reality Hits.

Your agency is based in Shoreditch. You’ve been growing steadily for three years. You’ve got a retainer book of £420k, a team of seven, and you’re finally ready to hire that senior designer you’ve been chasing. There’s just one complication: they live in Barcelona.

They’re perfect for the role. They’ve worked with UK agencies before. They’re happy to be paid in pounds. They’ll work UK hours. You think it’s just a matter of adding them to your payroll and sending over a laptop.

It is not that simple.

Hiring a remote employee in Spain for your UK agency triggers Spanish tax law, Spanish social security obligations, and a real risk of creating a permanent establishment in Spain. Get this wrong and you could face back-tax bills, penalties, and a complex mess that takes months to unwind.

This is not about expanding your agency into Spain. It’s about hiring one person. The tax implications are very different.

Let’s work through what you actually need to do.

The Core Problem: Where Does the Work Happen?

UK tax law says you pay tax where the work is physically performed. If your employee sits in Barcelona and does their job from a flat in Gràcia, the work happens in Spain. HMRC and the Spanish tax authority (Agencia Tributaria) both agree on this point.

That means:

  • The employee’s salary is subject to Spanish income tax, not UK income tax.
  • Social security contributions are due in Spain, not the UK.
  • Your agency may need to register as an employer in Spain.
  • You may create a permanent establishment in Spain, exposing your agency’s profits to Spanish corporation tax.

Each of these points needs a proper answer before you make the hire.

Spanish Income Tax and Social Security

Spain taxes residents on their worldwide income. If your employee lives in Spain more than 183 days per year, they are a Spanish tax resident. Their salary from your UK agency is taxable in Spain.

The employee will need to file a Spanish tax return (Modelo 100) each year. They will pay Spanish income tax at progressive rates from 19% up to 47%, depending on their earnings and the region they live in. Catalonia, where Barcelona sits, has its own regional rates that can push the top rate higher.

Social security in Spain is called Seguridad Social. As the employer, you must register with the Spanish social security system, obtain an employer registration number (Código de Cuenta de Cotización), and make monthly contributions. The total contribution is roughly 36% of gross salary. You pay around 29.9% as the employer. The employee pays roughly 6.35%.

For a senior designer on a gross salary of £55,000, your employer social security cost in Spain would be approximately £16,400 per year. That is on top of the salary itself.

Can You Keep Them on UK Payroll?

No. Not if they live and work in Spain.

UK PAYE applies to employees who are physically present and working in the UK. If your employee is in Spain, you cannot operate UK PAYE for them. If you try, HMRC will not collect the tax. The Spanish tax authority will.

You have two options:

  • Option 1: Register as an employer in Spain, run a Spanish payroll, and handle Spanish social security. This is the compliant route.
  • Option 2: Engage the employee through a Professional Employer Organisation (PEO) or Employer of Record (EOR) that has a legal entity in Spain. The EOR becomes the legal employer. You pay them a fee. They handle all Spanish compliance.

For most agencies hiring one person, Option 2 is the more practical route. It avoids you having to register a Spanish branch, open a Spanish bank account, and navigate Spanish employment law directly. The cost is typically 15-25% of gross salary on top of the salary itself.

The Permanent Establishment Risk

This is the one that keeps tax advisors awake at night.

A permanent establishment (PE) is a fixed place of business through which your agency carries on its business. If your employee works from home in Barcelona, that home can be deemed your agency’s PE in Spain.

If a PE exists, Spain can tax the profits attributable to that PE. That means a portion of your agency’s overall profits could become taxable in Spain at 25% corporation tax.

The risk is real. The OECD model tax treaty and the UK-Spain Double Taxation Treaty both define a PE as including a place of management, a branch, an office, or a workshop. A home office used regularly by an employee can qualify.

Mitigation steps include:

  • Ensuring the employee does not have authority to conclude contracts on your behalf.
  • Keeping central management and control in the UK.
  • Limiting the employee’s role to tasks that are preparatory or auxiliary.
  • Using an EOR structure, which reduces the PE risk because the EOR is the legal employer.

Even with these steps, the risk is not zero. If your agency generates significant profits and the Spanish tax authority takes an interest, they may argue that a PE exists. This is a specialist area. You need advice specific to your situation.

UK Reporting Obligations Don’t Disappear

Even though your employee is in Spain, you still have UK obligations.

You must report the employee on your RTI (Real Time Information) submissions to HMRC. You will show zero UK tax and zero UK NI because the employee is not subject to UK PAYE. You will also need to complete a P46(Car) form if you provide a company car.

If the employee holds shares in your agency, you may need to report share awards or options to HMRC under the Employment Related Securities rules. Spanish reporting rules may also apply.

Your agency’s corporation tax return (CT600) must disclose any foreign operations, including employees based overseas. HMRC will want to understand whether a PE exists and whether any profits are attributable to it.

If your agency is part of a group, there may be additional transfer pricing considerations. You must ensure that the salary paid to the Spanish employee is at arm’s length and properly documented.

What About Double Taxation?

The UK-Spain Double Taxation Treaty ensures that your employee does not pay tax twice on the same income. If they pay Spanish tax on their salary, they can claim credit against any UK tax liability. Since they will not have a UK tax liability if they are non-UK resident, this is usually straightforward.

For your agency, the treaty provides that profits of a UK enterprise are only taxable in the UK unless the enterprise has a PE in Spain. If a PE exists, Spain can tax the profits attributable to it, but the UK will give double tax relief.

The treaty also contains a tie-breaker clause for individuals who are resident in both countries. This is rare but worth knowing about.

Practical Steps Before You Hire

Here is the sequence of actions you should take:

  • Step 1: Confirm the employee’s residency status. If they have lived in Spain for less than 183 days in the current tax year, they may still be UK resident. Check the Statutory Residence Test.
  • Step 2: Decide between direct employment and an EOR. For one employee, an EOR is usually cheaper and less risky than setting up your own Spanish entity.
  • Step 3: If using an EOR, choose a reputable provider with experience in Spain. Ask for their tax opinion on PE risk.
  • Step 4: If employing directly, register with the Spanish tax authority (Hacienda) and social security. You will need a Spanish tax ID (NIF), a Spanish bank account, and a Spanish payroll system.
  • Step 5: Draft an employment contract that complies with Spanish employment law. Spanish law is more protective of employees than UK law. Fixed-term contracts are restricted. Notice periods are longer. Termination costs are higher.
  • Step 6: Review your agency’s corporate structure. If you plan to hire more remote employees in other countries, consider a holding company structure or a group structure that centralises international employment.
  • Step 7: Notify your insurers. Employer’s liability insurance may not cover employees based overseas. You may need separate cover.
  • Step 8: Update your data protection policies. The employee’s personal data will be processed in Spain, which is an EU member state. GDPR applies. You may need a Data Protection Officer or a representative in the EU.

What If the Employee Later Moves Back to the UK?

This happens more often than you might think. Someone moves to Spain for a year, decides they miss London, and moves back.

If the employee returns to the UK and works from here, they become UK resident again. You switch them back to UK payroll. Their Spanish social security contributions stop. You close your Spanish registration.

The tricky part is the timing. If the employee moves back mid-tax-year, you need to determine their residency status for both the UK and Spain. The tie-breaker rules in the treaty apply. You may need to file a part-year tax return in Spain.

If the employee has been in Spain for less than two years, the social security position is governed by EU regulations (or the UK-Spain Social Security Agreement post-Brexit). Short-term postings may allow the employee to remain in the UK social security system for up to 24 months under an A1 certificate. This simplifies things significantly.

If the employee is staying long-term, you need the full Spanish setup.

Common Mistakes Agencies Make

I have seen agencies take shortcuts that cost them later. Here are the most common:

  • Treating the employee as a contractor. If the worker is genuinely an employee in substance, calling them a contractor does not change the tax position. Spain has its own version of IR35. The risk of reclassification is high.
  • Paying via UK payroll and hoping nobody notices. HMRC and the Spanish tax authority share information under the Common Reporting Standard and the OECD’s automatic exchange of information framework. They will notice.
  • Ignoring the PE risk. Even if you use an EOR, the PE risk does not completely disappear. Document why you believe no PE exists and keep that file ready.
  • Assuming Spanish employment law is the same as UK law. It is not. Spanish employees have stronger protections. You cannot fire them easily. You cannot impose unpaid leave. You must provide written contracts in Spanish.
  • Not budgeting for the extra cost. Between employer social security, EOR fees, and professional advice, the total cost of hiring a Spanish employee can be 30-50% above their gross salary. Factor this into your budget from day one.

Is It Worth It?

For many agencies, the answer is yes. The talent pool in Spain is strong, particularly for creative and digital roles. Barcelona and Madrid have thriving tech and agency scenes. The cost of living is lower than London, which can make salary negotiations more favourable.

But you need to go in with your eyes open. Hiring a remote employee in Spain is not a low-effort arrangement. It requires proper setup, ongoing compliance, and a willingness to engage with a foreign tax system.

If you only need the person for a short-term project, consider engaging them as a contractor through their own Spanish limited company (an autónomo). That shifts the compliance burden to them. But get a proper contract in place and confirm their IR35 status under Spanish rules.

If the role is permanent, the EOR route is usually the cleanest option for a single hire.

If you plan to build a team in Spain, consider setting up a Spanish subsidiary. The upfront cost is higher, but it gives you more control and can be more cost-effective at scale.

Our ICAEW qualified team works with agencies facing exactly these decisions. We can help you model the costs, assess the PE risk, and choose the right structure for your situation. If you are considering a remote hire in Spain, get in touch before you make the offer.

One employee in Barcelona does not have to be a headache. But ignoring the tax implications will turn it into one. Get the advice first, hire second.