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| CURRENT SECTION :: Overseas Guides | |
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Introduction Historically when you first entered the world of contracting in the UK, one of the first pieces of advice, or instructions, that you would receive would be – “you must form a limited company”. The reason for this is that, pre-IR35, if you contracted through any format other than a limited company, you could have been deemed to be an employee of the agency or even of the end-client company. The legislation that created this possibility was contained in a 1988 piece of UK tax legislation. Alternatively, if you were contracting short-term or if you couldn't be bothered with the hassle of your own limited company, you may have been given the option of joining a “composite” or “umbrella” company. However, if you decide to undertake a contract overseas, you may find that as you phone around for tax or administrative advice, you are being pointed in a number of different directions, each one of which is claimed by its proponent to be “simply the best”. In this short article I will look at some of the options offered to you and some of the attractions / pitfalls of each one. I will also try to describe that often the best route for you to follow will vary from country to country, or even within the one country, depending on your own circumstances. The options you may be offered The various options that may be offered to you are as follows: - i) continue to use your own UK limited company ii) set-up your own limited company in the foreign country iii) register as self-employed in the foreign country iv) become an employee of a foreign registered management company v) become an employee of an “offshore” foreign management company vi) become an employee of a UK registered management company I shall now look at each one in turn. Continuing to use your own UK limited company This option is often the favourite of the UK contractor as it is the solution he has been using for a number of years and he is comfortable with the mechanics of running his own company. Furthermore, many recruitment agencies in their naivety will often be happy for you to continue operating in this manner, probably on the basis of “if it ain't broke – don't fix it!”. However there are many reasons why it is not wise to continue to use your own UK company when you are overseas. Let us look at some of them: - a) Corporate tax residence A company is generally deemed to be tax resident in the location where it's physical control and management is exercised. Since the control and management of the UK one-man company is generally retained by the controlling director, (i.e. the contractor himself), then it naturally follows that should the director be physically located in, say, Brussels, then the Belgian authorities would have a pretty good case if they decided to assess the UK company as though it were a Belgian company. The implications of this for the contractor can be quite severe. For one thing, the contractor as an employee of the (so-called) Belgian tax resident entity would automatically be liable to Belgian taxes and social security at source on any payments made to him by the company. Also, any profits made by the company (including those paid as dividends to the contractor) would be liable to Belgian corporate taxes. Needless to say, Belgian income and corporate taxes and social security are significantly higher than their UK equivalents. And since the contractor would almost certainly not have pre-declared his status to the Belgian authorities penalties and interest would probably be added to any assessment. Therefore this approach could prove very costly to the contractor. b) Labour-hiring or labour-leasing Most European countries have legislation which restricts or forbids the right of employers to “lease” its employees, “hire-out” its employees, or place its employees at the disposal of third-parties, without having pre-obtained a license to do so. In some countries (France - unless you set up a “temporary labour activity”; Belgium due to bureaucratic burdens) it is impossible to obtain such a license. In others (Germany – up to £20,000 in legal and other fees) the cost is prohibitive. Now it is reasonably clear that the contractor working through his own UK company would be contravening the labour-hiring laws, as his company would be putting him at the disposal of another employer (the agency, or the client). Therefore this condition alone ought to be enough to dissuade the average contractor from deciding to operate through his own company. c) IR35 Strange as it may seem the simple decision to move overseas does not automatically exempt the contractor from the burdens imposed by IR35, where the contractor continues to work through his own UK company. IR 35 applies to UK personal service companies, and does not distinguish between those operations in the UK or operating outside the UK. So, if your goal in going overseas is to escape IR35, the best plan is to ditch your UK company before you move overseas! Setting up your own limited company in the foreign country Often the contractor may believe that the best approach to structuring his overseas contract is to replicate the approach he used in the UK, and simply to set-up his own incorporated company in the foreign country where his contract will be based. There are several reasons why this is not a good idea: - a) It may not be legal Not every country has historically been as laid back as the UK in allowing individuals to restructure themselves overnight and repackage their employment as a service from company to company! In fact in some countries the concept of the one-man service company does not exist (e.g. some Scandinavian countries) whereas in others (e.g. Spain, Italy) the concept is generally “looked through” by the social security authorities and the contractual arrangement is re-categorised and assessed as employment. Believe it or not the logic of outlawing such arrangements has generally been to protect employees from unscrupulous employers denying them their rights, rather than a pathetic attempt to redefine the tax burden on an entrepreneurial sector of the labour force (a la IR35)! b) The complications of foreign legislation Do you remember when you first set up your own UK limited company? Do you remember thinking how complicated it all was? Well, try and take that experience into a foreign country and try it all over again. At least in the UK you knew about PAYE, had an idea about national insurance, had heard of the horrors of the VAT-man, and spoke the same language as the legislation was written in! Even more than that, you probably had some chance back then of understanding what you were being told by your accountant / professional adviser! So maybe you'd find setting up in a foreign country an even more frightening prospect! Registering as self-employed in the foreign country This is an option which offers some possibilities in certain specific situations, but also suffers from some of the pitfalls pointed out in the previous section. Usually if you are advised to register as self-employed in the foreign country it will be through the medium of a (friendly?) management company, which will often be UK based. Therefore the complications of dealing with a foreign accountant may be avoided. However you have, as always, to watch out for the pitfalls, and the legality of what you are doing comes to the forefront as usual. Again you may find that being a contractor and claiming you are self-employed are not mutually compatible. Most countries have some sort of legislation similar to what we have seen with IR35, and therefore spending all your time in one place for the reward of a regular income would be deemed to be “employment” rather than “self-employment”. Furthermore, one of the most popular destinations for UK contractors, The Netherlands, has specific legislation which insists that all foreign contract staff must be payrolled by a Dutch registered wage-tax company, therefore self-employment is a strictly “no-go” solution. Other European countries are rumoured to be thinking of going down the same route as the Dutch. Becoming an employee of a foreign registered management company This is an option which must be considered in certain specific situations, and it is also one which can offer some benefits in other situations. However like every other choice placed on your table, it is not a solution which should be walked into without a bit of thought, and it is not a solution which should be accepted across the board as you move from country to country. The most obvious situation where this is the preferred solution is where work-permit or visa considerations must be taken into account. For the UK national, working anywhere in the European Community does not require a work permit. However if you want to accept that lucrative offer to contract in Switzerland, then there will usually (although I have heard of exceptions) be no alternative other than to source a Swiss-based management company who will sponsor your work permit application. In such a situation you will of course be subject to Swiss taxes and social security from day one! By the same token, if you are a non-EC citizen, then you would need to use, say, a Belgian based management company if you wanted to undertake a contract in Belgium! In other situations there will be tax allowances or breaks available to employees of a local employer which are not available to the employee of the foreign employer, and these things must be taken into account when weighing up the optimum solution for the contractor going overseas. However it must be said that more often than not the one over-riding factor which will decide against the foreign management company (where there is an option) will be the burden of foreign social security, especially employer's social security, which can wipe-out one-third of the contractors income in certain situations! Becoming an employee of an “offshore” foreign management company I won't go on at great length about when one should and should not decide to operate through an offshore company, as the subject probably deserves an article to itself! However, suffice to say that if you are an EC-citizen and you are contracting in the EC, there is no foreseeable situation where setting up though an offshore company should be considered. The offshore option is in fact likely only to be offered as part of a solution which involves some form of tax evasion! However if your contract is outside the EC, especially in the Middle or Far East, then there are situations where it is definitely beneficial to consider the offshore option, as social security charges can immediately be avoided if you have a non-EC employer. Becoming an employee of a UK registered management company One of the more popular solutions offered by the UK professional adviser is that the contractor should become an employee of a UK registered management company during his contract career overseas. Several advantages are presented in support of this solution: - a) Remaining in the UK national insurance system. UK national insurance is amongst the lowest in Europe, with only Ireland and Denmark of the EC countries having significantly lower social security exposure than that experienced in the UK. By remaining an employee of a UK employer, the UK contractor can generally (but not automatically!) obtain certificate E101/E102, which allows him to voluntarily be subject to UK national insurance for the first two years of his employment overseas. The financial advantages of remaining in the UK system are significant, when you consider that employer's social security in the UK is 12.2% of income, whereas in Europe it often reaches as much as 35% of income! b) Not subject to foreign taxes at source In a number of countries (not all) there is no obligation on a foreign employer to deduct local tax at source from its employees. This can lead to a cash flow advantage where the contractor spends less than 183 days in the country. Furthermore the contractor can be gaining interest on the money that is being held back for payment of the tax, which sometimes won't be due for six months after the end of the relevant tax year. c) Simplification of the contractor's UK tax position By remaining in the employment of a UK company the contractor's position with the UK tax authorities is clear, and obtaining UK tax-free status at the appropriate time can be organised by the employer on behalf of the contractor. d) Generous UK tax breaks for employees working overseas The UK tax system allows relatively generous tax-free allowances for expenditure incurred while working overseas, including travel costs, accommodation and subsistence. e) No corporate residence complications Unlike the contractor working for his own UK one-man company, the employee of the UK management company will not be assessed as an employee of a local company. The management company will generally be owned, controlled and managed in the UK, thereby ensuring its status as a UK tax resident company. Having said all this, I should again re-emphasise that no solution, including the UK management company, is the best solution in every situation, and the contractor's overall position must always be taken into account in deciding the best option. Destination, length of contract, marital status, level of contract income and whether you've been overseas before will all influence the choice of solution for you. So the best piece of advice is generally “look before you leap!”. Global Kprovides tax planning and solutions to contractors taking up a contract assignment in a foreign location. For further information on the tax implications of your proposed assignment, please visit Global K. The author accepts no responsibility for any loss which may be suffered by anyone taking action based on advice given or solutions offered in the contents of this article. Personal professional advice should always be sought by anyone deciding to undertake a contract overseas. Previous Page
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