Contractors' Questions: Any liability from 'tax-free' work?

Contractor's Question: I might have the opportunity for a contract in Bahrain but I'm unsure of the tax implications. It was advertised as 'Tax-Free' work but what happens when I come back to the UK? The contract is for 48 weeks. Understanding any tax issues would help me with negotiations, which have so far revealed I'm looking at anywhere between £140,000 and £180,000 in fees.

Expert's Answer: In cases like these, it is very important to qualify the "tax free" statement. Working in tax havens such as Bahrain may indeed be tax free locally. That is to say that the local authorities will not charge you any tax on your locally-earned income. You may be due an unpleasant surprise when you return home however, due to your tax residency.

Tax residency governs where you must pay tax on your worldwide income. In the case of a UK tax resident working in a country with no tax, it means that the UK authorities will tax you at UK rates on the foreign-earned income.

The question then becomes how you lose your tax residency. In your situation, this may not be possible, as the UK laws for losing tax residency are notoriously complex. The HM Revenue & Customs guidelines, specifically Chapter 6, for tax residency state that to lose your UK tax residency, you must remain outside of the UK for more than one complete tax year. This is the rule other than for visits averaging no more that 91 midnights per tax year. To lose your UK tax residency, your centre of social and economic interests must also be outside of the UK.

As with any tax situation, it will be up to you to prove that you are non-tax resident: you will need to build a case in your favour. To illustrate this, let us take two examples:

Contractor A - leaves the UK with his wife and children, rents his house out, and becomes fully resident elsewhere. As long as he abides by the number of days spent within the UK as per HMRC 6, he will have a very strong case for claiming non tax residency.

Contractor B - leaves the UK on a short-term contract, leaving his family in the UK and returning every weekend for visits. Regardless of the number of days spent in the UK during this period, he will not have a strong case for non tax residency, and will very likely be required to pay tax in the UK.

These two examples are extreme cases of course, but illustrate the principles that you will need to be aware of. Overall, when a job is offered as tax-free, be sure to understand your own tax liabilities by taking advice before accepting the contract so as to avoid any unexpected tax at the end of the year.

The expert was Matt Walters of Capital Consulting.

Wednesday 31st Mar 2010