Freelancer’s Question: What is foreign income? It might be obvious to some, but I’ve tried to find the definition of ‘foreign income’ on .Gov but it’s not there, and it’s never defined!  

I’m a UK resident and sole trader. I’ve been freelancing remotely for various North American companies.

On my self-assessment form, is such activity ‘foreign income’ or ‘UK income’? If it helps to know I carry out the work here in the UK, not in the US. But I invoice in dollars for the work and the clients pay directly into my UK bank account, so I receive pounds. Any help here — or tips on how to make my working/tax arrangements more efficient, would be appreciated. 

Expert’s Answer: Foreign income is anything from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign.

From this definition I have provided, you can see that income from your US clients is classed as foreign income and so you should declare it in the ‘foreign income’ section of your self-assessment tax return.

SUFFERING FOREIGN TAX, ON YOUR FOREIGN INCOME…

As a UK tax resident, HMRC assesses your worldwide income and levies UK tax upon it. If it has suffered foreign tax on the way to you, then you can normally claim tax relief so that you do not end up paying income tax twice on the same income.

Unless you are not domiciled in the UK but are resident in the UK, you cannot escape the above assessment and process. Be aware, a non-domiciled person is one whose father was not born in the UK. This status won’t apply to you (based on what you say) unless you have taken steps to shed your UK domicile in exchange for a domicile elsewhere. Non-domiciled persons pay UK tax only on foreign income that they remit to the UK.

Further from your question, I deduce that you are not only UK tax resident but that you are UK domiciled too. As such, you are subject to UK taxation on your worldwide income — that is, income sourced both in the UK and abroad.

YOUR UK TAX POSITION: QUICK REVIEW

Elsewhere in the outline of your circumstances, you say that you currently pay your taxes as a self-employed person, which means that you bear UK income tax and self-employed National Insurance Contributions (NICs) on your total income beyond your personal allowance.

In terms of efficiency, you should look to see if you are claiming all the business expenses to which you may be entitled. For example, if you use part of your home exclusively for the purposes of your business, then you should be able to claim fairly apportioned costs of running your household. As a general rule here, any expense “wholly and necessarily” for your business can be claimed for tax purposes.

Beyond such small areas of tax relief, there are no special concessions, I’m afraid, for a self-employed person like you with foreign income.

EXPLORE IF SOLE TRADER STRUCTURE ISN’T DOING THE BUSINESS FOR YOU ANYMORE

What you might like to consider is, rather than being self-employed, whether you might be better off, tax-wise (i.e. your tax burden might be lower), if you formed a limited company instead, to service your American clientele as a UK freelancer.

But definitely a UK limited company because, since foreign dividends will be taxed exactly the same way as UK dividends, it would not help for you to have a foreign company. My recommendation is that you compare the taxes and NICs you would pay by this method – as a director of your own limited company — compared with your present taxes and the dent in your take-home pay which those taxes cause currently.

However, let’s assume you do ‘go limited.’ One thing to watch out for is if the services that you provide are personal services that demand your time and attention in which case you would likely be caught by IR35. In that instance, you would suffer PAYE income tax and employment-level NICs, in what would be a much more taxing situation for you than if the services were provided on an outside IR35 basis.

LIFE AS A LIMITED COMPANY COULD BE LESS TAXING

As a limited company, though, one key tax-saving area that you could potentially use is Business Asset Disposal Relief. Formerly called Entrepreneurs’ Relief, BADR is a relevant consideration if you sell, liquidate, or otherwise dispose of your business.

Assuming you qualify for it, BADR could see your Capital Gain Tax bill limited to 10% — instead of the normal rates (of 20% for higher rate taxpayers). The relief you can currently claim in your lifetime is £1,000,000. Assuming that you were able to build reserves in your business by not withdrawing dividends of that amount, then the saving in CGT would be close to £100,000! 

So rather than staying as you are as a sole trader, a limited company may give you added flexibility. And ironically, it is flexibility which probably keeps the government and specifically HMRC from defining ‘foreign income’ – much better for the UK’s revenue-hungry tax collection agents not to have everything in statute but to instead be down to their own interpretations!

Good luck with declaring your foreign income to the Revenue, and we hope this has answered your question.

The expert was chartered accountant Kevin Austin, managing director of overseas working specialists Access Financial.

19th April 2022