Contractors' Questions: Can I use my limited company to work outside of the UK?

Note: This article discusses the validity and viability of using a UK limited company while working abroad. It does not discuss the issue of tax residency, nor that of tax liability.





Expert's Answer, provided by Matt Walters at Capital Consulting, specialists in international tax planning for contractors:





As is often the case with tax matters, there is no straightforward answer to this question: it depends on a number of factors. The most important factor to consider when thinking about using your UK limited company abroad is that it is perhaps neither the most compliant nor indeed the most advantageous way to work.



Contractors continue using their limited companies for reasons ranging from bad advice to unwillingness to change the way they work. It is important to note, however, that while valid and advantageous in the UK, contractor-owned limited companies are viewed very differently abroad.



The key to any question regarding overseas taxation is that tax should be paid where money is earned: in other words, you cannot simply choose to continue paying tax in the UK, be it as an individual or as a limited company.



Let me clarify a few common misconceptions surrounding this subject:



- Yes, but I called HMRC, and they said I should pay tax in the UK.



HMRC, while the ultimate authority on UK taxation, should not be expected to know anything about foreign taxation and foreign tax liabilities. Also, in many cases, it is the question that is wrong, not the answer: if you ask HMRC if you should pay tax on income put through your Ltd company, they are entirely correct, and it is not their place to inform you whether this structure is compliant in the country where you are working.



- Yes, but what if I work for less than 183 days?



This is perhaps the most common argument: the 183-day rule, in the vast majority of cases, does not apply to contractors working through their Limited Company. If you start a contract in a foreign country, you are liable for income tax on that income in that country from day one: tax is due where money is earned. (For more information, please consult my previous article on tax residency).



- Yes, but my friend did it and he told me it was alright.



Lucky him! It is only a question of luck: there are people who have worked in this manner and have never been challenged. On the other hand, there are many who have been challenged by the local tax authorities and made to pay not only back-tax and social security, but also high fines and charges.



- Yes, but I don't know what to do to be compliant: I've only ever worked in the UK.



In short: ask an expert. Compliance is not difficult to attain in most cases, and there are any number of experts available to help. Try a local accountant, or a payroll or management company: in many cases, while there is of course a vested interest for them, they will give a certain amount of free advice as to what is compliant and what isn't. If challenged, ignorance is never a good enough excuse.



- Yes, but my accountant told me that this is the best way to work.



In a similar manner to the HMRC, many accountants are specialists in UK tax law, but not in international matters. Make sure not only that you are asking the right questions, but also that you are asking the right person.



Conclusion



The UK's interpretation of a limited company, and the flexibility afforded to contractors in terms of remuneration (dividends, etc) is quite unique, and most European countries will not allow an identical setup to be used. In Germany, for example, the one-man limited company is not recognised, and any income derived via such a structure will be subjected to individual taxation. In Holland, on the other hand, the structure is recognised, however in order to work through it, it must be registered for Dutch wage tax, and therefore be incorporated in Holland. This is, of course, not free and when it comes to being paid you will not be able to use the dividend model available in the UK.



In many countries, the simple fact of working in-country as the director or majority shareholder of a limited company means that the company itself is deemed to have a permanent establishment in that country, by which token it becomes immediately liable for corporation tax. In most cases, the setup and running of a UK limited company in a compliant manner while abroad is simply not time- or cost-effective.



While the UK limited company route is not a compliant option in many cases, this is not to say that there are no interesting structures available. The trap to avoid when taking a contract abroad is that of assuming that, because a solution is valid and attractive in one country, a similar logic will apply in the next. Instead, it is useful to obtain advice from a professional who will outline each country's individual advantageous tax structures.