P85 form: Contractors, fill it in if leaving the UK for a long overseas gig

The typical nature of an actively working contractor is to switch from contract to contract, which means changing locations on a regular basis, sometimes involving relocating overseas and often that means an P85 form is required, writes Keith Tully, a director of Real Business Rescue.

Along with the logistics involved of a long-distance contract, one of your first considerations before taking the role should be researching your tax obligations to HMRC, following your departure from the UK.

On leaving the UK for an overseas contract, you will be required to notify HMRC in order to determine your tax status and confirm the finer details of your residency in the UK. This will be determined by your employment status, the length of your contract and the duration of your stay.

The staple piece of paperwork in such an instance is the P85 form for income tax. Being familiar with the requirements of this form when leaving the UK to pursue an overseas contract is first and foremost to getting your tax right, and heading off any nasty surprises later on.

Getting your income right if you’re off -- Am I required to complete a P85 form?

You will be required to submit a P85 form for income tax on leaving the UK if you are either:

• Leaving the UK to live abroad permanently
• Working abroad full-time for one full tax year (which runs from April 6th to April 5th)

If you’re working abroad for less than one full tax year, you are not required to submit a P85 form. You won’t have to inform HMRC if you are taking a business trip overseas or a holiday shorter than this timeframe.

The P85 will help determine your tax status and whether you will be classed as a UK resident or a non-UK resident for tax purposes. If you are eligible for a tax refund, HMRC will calculate this based on your submission of the P85 form.

If you’re classed as a non-UK resident, you will only be required to pay UK tax on your UK earned income, such as earnings from property. If you are classed as a UK resident, you will be subject to pay UK tax on your foreign income. You are classed as a non-resident if you work abroad full-time for a minimum of one full tax year. Furthermore, to be classed as a non-resident, your visits to the UK should be less than 183 days in total incurred by the likes of Christmas or summer visits.

When submitting your tax return, you will be required to update your residential status in the UK and other countries. This can be done by completing the supplementary page SA109 on your self-assessment tax return.

Double Taxation Agreement – How am I protected?

The UK has tax treaties in place with selected countries, such as the often-asked about Double Taxation Agreement to ensure that you are not taxed twice. If you have been double-taxed, once by the UK and once by the country you’re residing in, you may eligible for a partial or full refund if there is a double taxation agreement in place. A double taxation agreement sets out the following:

• Whether you qualify for partial or full tax relief before you are taxed
• Whether you qualify for a refund after being taxed

Double taxation agreements are currently in place between the UK and many countries across the globe to determine a country’s tax rights over the income of an overseas UK contractor. The agreement sets out which country you will be taxed by, the amount of tax and how much tax relief you will receive. This excludes relief on gains from selling residential property in the UK.

The double taxation agreement will rule which country will be responsible for taxing your income. If you are required to pay both countries of residence, you will pay the higher tax rate which will offset the remaining tax payable to the second location you are domiciled in.

There are a series of ‘tie-breaker’ tests which determine which country will take tax precedence. This includes the following:

• In which country is your permanent home?
• In which country do you have stronger economic ties?
• In which country do you have a habitual abode?
• In which country are you a national?
• If any of the above tests fail to determine an answer, both countries are expected to reach a mutual agreement

If you are a dual resident and there is a dual tax agreement in place between the UK and your country of residence, you may be able to claim partial or full relief. You may be able to claim relief on bank interest, royalties, work pension, annuities and dividends, however, special rules apply.

National Insurance Contributions and Social Security – What about my NHS access?

If you are self-employed on a contract abroad for up to two years, you may be able to continue making National Insurance Contributions to protect your state pension and eligibility for benefits. Your eligibility will be determined by your location, for example, if you are in an EU or EEA country and the duration of your working visit.

If the country you’re going to has a bilateral social security agreement with the UK, any NICs  that you’ve paid can count towards accessing benefits in the country that you’re moving to as part of the reciprocal agreement. If you’re planning to work abroad for up to two years on a temporary basis, keeping on track of your NICs can mean maintaining access to selected benefits, allowances and selected pensions. If you move abroad permanently, you will no longer have automatic access to NHS services so it’s vital to check the healthcare system of your new country of residence.

Final considerations - Who else should I speak to before I leave?

Completion of a P85 form is required to notify HMRC that you’re leaving the UK. In addition to this, inform your local council that you are leaving the UK in order to stop council tax payments. If you are a limited company contractor, you should review the status of your UK limited company in the UK to ensure that you are not incurring any ongoing, unattended costs while working abroad. It’s vital to seek advice before accepting an overseas role in order to structure the most tax-efficient way of working.