Contractor’s Question: What does a contractor who is going to be working with an organisation in the UK, but where they live overseas, need to be aware of, from a compliance, tax, and efficiency perspective?
Expert’s Answer: Since you have not said where you are living and how long you have been living there, for the purposes of my answer I will assume that you have been out of the UK for more than an entire tax year for work, so you are no longer a tax resident in the UK.
The situation if this is not the case will be addressed too. Please further note that the guidance herein cannot be specific to where you live however, as that was not included in your form submission to ContractorUK.
Compliance
Allowing for the above assumptions, it is likely that you already have the legal right to work where you live. The entitlement might be through acquiring new citizenship, permanent residence, or one of the short-term nomad visas that are becoming quite common. Or it could because you have married a partner, entitling you to live/work in this non-UK country.
The question as to whether or not working for a UK client requires a right to work is moot. Still, the safe assumption is that taking employment no matter where the client is located, is gainful employment, and you should check this with the host country’s immigration to be sure you are not falling foul of the law. Be aware that in some countries, the authorities do not allow voluntary work without permission. My advice is, if unsure, to check yourself or seek expert advice.
Leaving the UK? Form P85
When you left the UK, it would have been required of you to inform HMRC by completing and submitting Form P85. This form advises the UK taxman that you are departing the UK and are on your way to non-UK tax residence. You can complete Form P85 online or by post. You can find out more about the form on HMRC’s website.
Once you establish that you have lost your UK tax residence, you must be mindful of HMRC’s statutory residence requirements.
Available online, the requirements are pretty complicated. In short, if you return to the UK too often and have many ties to the country, you could again find yourself a tax resident in the UK and become subject to the UK’s worldwide taxing rules, meaning that HMRC would tax you as you had never left the UK! So be very careful, as it’s likely that is NOT your intention!
Tax
As you are not in the UK but your end-client organisation is, then the position is that your taxes and social security are due in the country where you live and work.
HMRC has no claim on your tax. Be on guard to the fact that I have seen UK employers insist that former tax-resident offshore workers ARE placed on their UK payroll, with a view to them suffering UK PAYE and NICs. Should this insistence get extended to you, the way to avoid having to go along with it is to obtain an NT Coding from HMRC, and then give it to your employer. (N.B. The P85 form is the route to obtaining an NT Coding).
A bit of background for you. Where tax authorities have competing claims on your money, they refer to the Double Tax Treaties that states agree. The main objective of these agreements is that people do not avoid paying their tax but also that it is paid in the correct state — and that the same income is not unfairly taxed twice.
Efficiency
By ‘efficiency’, I imagine you mean simplicity and paying the least tax legally permissible!
These two goals are sometimes opposed. Indeed, one way to avoid the most complexity is to take steps that your taxes are due only in the host country and not also in the UK, which is a recipe for aggravation and a signpost that you need professional tax help!
On the understanding you are NOT tax resident in the UK, then IR35 and the Off-Payroll Rules do not apply to you.
This is because if the worker has no UK tax liability because they are not a UK tax resident and the worker carries out the work abroad, there is no tax or NIC loss to the Treasury, so the Off-Payroll Rules and IR35 do not apply.
But it is not clear from your question whether you will be a) employed, b) self-employed or c) operating through your limited company, while working from overseas for the UK outfit.
Three status scenarios
Let me take each status in turn.
If a), whereby you have an employment contract with the UK outfit, they may specify that you take care of your tax and social security. Alternatively, they may be set up as a foreign employer and be able to handle your legal deductions. In either case, in most countries, the employment law of the host country will apply, and your employer must respect them. If not, you could take them to the employment court where you live.
If b), and your contract is as an independent contractor, you might use a limited company or register as a self-employed person with the local tax administration — which is not usually a painful affair, and an accountant can guide you.
You may have to sign up with the local commercial register, and you will have to pay tax and social security, depending on where you live. You may also have to register for VAT, but that varies if you are not billing locally.
If c), and your using a limited company, unfortunately you have the most complicated arrangement of the three!
Conversely, it could actually be the most tax and social security-efficient, depending on where you are.
Getting messy, aware, and taxing
But if you are using a UK limited company in your situation, things start to get messy when you will (almost certainly) have to register for VAT. That VAT-registration is actually dependant on wherever you are located, and you similarly need to be aware of creating a ‘permanent establishment.’ That’s because a permanent establishment has the impact of you paying company income tax on your foreign company. It would be the least hassle, and least taxing, if you did not attempt this without considering all the ramifications — you can only really do that by taking expert advice.
Finally, I mentioned addressing the situation if actually, you continue to be a UK tax resident. Well, if that’s the case, you will be subject to income tax in the UK and where you live. So you will have to refer to the double tax treaty between the two countries to learn where you will pay the taxes under international law. There are always provisions to ensure you do not suffer tax twice on the same income. Nonetheless, you’ll quickly see that this leads to complexity and so again, you should strongly consider enlisting professional advice to ensure you get your liabilities right.
The expert was Kevin Austin, managing director of overseas contracting advisory Access Financial.
Tuesday 8th Nov 2022