Contractors' Questions: Do I have to pay UK tax when working abroad?
I am currently contracting in Switzerland and have found out about tax liabilities which are not well-known by most contractors or publicised by the agents abroad. So now I have become liable for more tax when back in the UK. The HMRC rule is very hard to avoid as many contracts are short-term and do not cover the required 'Full Tax Year'. To raise the awareness for contractors, can you clarify the situation?
Expert's Answer, provided by Matt Walters at Capital Consulting, specialists in international tax planning for contractors:
The issue of your UK tax liability while working abroad is indeed an important one, and is very much dependant on your personal circumstances.
There are two key points: your tax residency and the tax rates in the country you are working in.
i) Tax residency:
You only have a liability for UK tax on your foreign-earned income if you remain UK tax-resident. As defined by HMRC's IR20, you may only lose your UK tax-residency if working out of the country for more than one whole tax
On a 6-month contract, therefore, you will need to pay local tax as well as,
potentially, UK tax. This brings us neatly on to.
ii) Tax avoidance treaties:
As long as the UK has a double taxation avoidance treaty with the country where you are working (as is usually the case), you will only be liable for top-up tax in the UK if the foreign tax is less. If the foreign tax is higher or identical, there will be no top-up tax in the UK.
The key to understanding international taxation is in the understanding of where your liabilities lie. In most cases these can be broken down into two categories: where you are working ("local") and where you are tax-resident
("home"), in that order).
The 'local' liability is that tax is due where money is earned: if you are on contract in France, you must pay income tax on the French-earned income in France. This takes precedence over any other liability, and you cannot
choose to pay it elsewhere without written authorisation from the local authorities stating that you are not liable for tax.
The 'home' liability is the liability you have towards any country where you are tax-resident. In most cases, you will be liable for income tax on your worldwide income. By virtue of international double taxation avoidance treaties, however, you may usually deduct any tax paid in a foreign country from your 'home' tax bill.
i) Mr X, a UK tax-resident, decides to take a 6-month contract in Belgium. Upon his return to the UK, he declares to the UK authorities the amount earned and the taxes paid in Belgium. Strictly speaking, due to his not leaving the UK for more than the whole tax year and therefore remaining
UK tax-resident, he is liable for UK income tax on the whole amount earned.
However, given that he has paid more tax in Belgium than he would have had he remained in the UK, he has no further tax to pay.
ii) Two years later, beginning in March, Mr X decides to take an 18-month contract in Holland. At the end of the contract, and despite having paid less tax in Holland than he would have in the UK, he has no further tax to pay, as he was non-tax resident in the UK in the interim.
iii) Two years after his return to the UK, Mr X decides to take a contract in Switzerland for 8 months. Upon his return, he is liable for income tax on the income that he earned minus whatever taxes he can prove he paid to the local authorities in the meanwhile. The amount of extra tax, if any, due to the UK will be dependant on the Canton where he lived and the tax rates he was subject to.
As we have seen, there are as many situations as there are individuals: there is simply no quick-and-easy formula for how your tax liability will lie. The best advice that anyone can give to a contractor is to always get professional advice before taking a contract. This advice should be taken not only from the local accountant, but also from someone who understands how cross-border tax legislations interact, and the potential liabilities
that are created by accepting a contract in a different country.
Capital Consulting also offer free Country Guides in our Overseas section.